Steve Eisman, of 'The Big Short' fame, weighs in on the next big short

you may know our next guest from the Big Short he was one of the investors who shorted the housing bubble before it crashed more than ten years ago he is now eyeing a few names that he is shorting this time around let's bring in Steve Eisman of Neuberger Berman Steve welcome back to fast money great to have you with us thank you obviously for the big short that was sort of a macro call are there macro shorts in this market or are there big bubbles or they're in efficiencies that you see I don't see a systemic problem but you know the banking system is in is in the best shape of the 30 years I've been analyzing banks is it going to be a recession next year the year after I don't know I mean I think we are we are in a global industrial recession as we speak that's not the same thing as a recession because industrial companies are about 10 to 15 percent of the economy but I think when the industrial companies report it'll be pretty universally weak almost without exception a lot of people have made a lot about how rates have been close to zero or below zero for a very long time are there any sorts of bubbles that are formed around that dynamic or no I mean are there pockets of bubbles I mean QE to me is what I like to call monetary policy for rich people meaning it raises asset prices and a zero impact on the economy it actually has some negative some very negative aspects to it in other words if you're a saver it's not helping you it's hurting you so I don't find QE is helpful to the actual economy it just causes asset prices to go up now is that a bubble I mean the markets not that expensive so it's not that bubblicious but it definitely has closed asset prices to go up okay let's talk about some of your individual ideas I think that all the times that I've spoken to you over the past couple of years you've been short Deutsche Bank are you still short Deutsche Bank still short Deutsche Bank okay three years I'm three years in running yeah what will cause you to take off that short because it has already hit record low after record low after record low the problem Deutsche Bank now suffers from is their shrine trying to shrink themselves to profitability and one thing we have learned time and time and time again post-crisis is that's impossible and so they're gonna shrink and then they're gonna become less profitable and I think the stock goes even lower and then we'll see does it go under I mean this I mean this is all hangs go out of business for funding issues ah there's no funding issues at this time of Deutsche Bank this is purely a profitability problem and is this an idiosyncratic short or do you also see opportunities to short other or have you been short other German banks like I mean Commerce Bank got other German banks other European banks the problem the problem when you take a step back and say like can we boil it down to a paragraph or a sentence like what does a bank do for a living what a bank does for a living is it sells you access to its balance sheet for a price and so if you want to calculate what's the absolute return of a bank it's return on assets the whole balance sheet then you just multiply that by the leverage and you get the our way so our way times l equals R are we simple formula the problem with European banks is that they have sold access to their balance sheets to cheaply for decades and the our ways even gone down post crisis and the leverage has come down for regulatory reasons and that's upon with European don't you Bank is just really the extreme example of what what plagues most European banks all over the continent so with the ECB trying to reflate their do you think that that's hopeless its hopefully hopeless QE in your this way zero rates or negative rates what does that mean I think it means it's created global over capacity because every stock buyback has been done every deals been funded every PE has been funded every venture capital has been funded every startup has been funded and so what you have is global over capacity and deflation so why would anybody think that doing more of the same thing would cause inflation is utterly beyond me I think what the ECB is doing is a perfect example of trying to do the same thing over and over again and expecting a different outcome that's the best definition of insanity that sounds systemically horrendous ultimately and ice and the assumption is that the central banks can continue to print money and therefore it doesn't really matter is that is that really because again that's the funding argument because we have we talked about seventeen trillion and negative yielding assets all the time and keep funding because I mean take a look at Japan Japan's debt to government debt to GDP is 240 percent we're at I figured where we are now hundred twenty five something like that so we got two tons more to go and and whose rates are lower so I mean I don't understand why it chipped completely why Japan's rates are lower than ours I just only know that they are and they have a lot more debt to GDP than we do so you know what causes interest rates to go up in a world with QE is above my paygrade at this point see what do you make if we're just talking about you know zero interest rates QE it's obviously great for people who are risks asset so you think about what's different this time to let's say twenty years ago as far as technology valuations are concerned is that we just saw you know some companies come to public markets and really they were able to be funded by this your interest rate environment and I'm thinking bird that had an eighty billion dollar valuation now it's a fifty okay and then we had we work you know that was originally at forty seven five ten percent it might go to fifteen am I go to zero so my question is is all these companies were funded by this environment they're disintermediating massive companies that are public that are profitable all that sort of stuff is that a bubble are we about to see the reckoning of that on the backside because we're seeing that bubble has broken to some degree in that every single IPO and I'm not picking on anybody you know smile direct for example which is what I think it went public at twenty three and we're too close today ten eleven so I think the public's appetite to take private equity out or venture capital out for companies no matter how good their ultimate business models may be but that don't make money I think is at least for the moment is done now what's that gonna mean for for Silicon Valley maybe the meat gods forbid the companies will have to learn how to make money um some of your other shorts that you've spoken publicly about Steve Zillow yes and Tesla yes what is the short I'm still short both of them you're still short both of them what is the short that you are the most excited about I'd say those would be two of them yeah I think Zillow has created for itself perhaps the most dangerous business model that I've seen in a very very very long time because they started house because they're flipping houses and you know this the CEO I think his last name is Barton is without question a great internet investor but I think the example of Zillow is a case of genius is not always transferable this is you know for example you know some people might think I'm a very good investor but my wife doesn't think I'm too bright when I come home and or you could be a great physicist but you can't ride a bike so you could be a great internet platform creator and I grant you Barton is but the business of buying homes flipping them requires making a good investment decision at a very very low margin business and it actually requires managing thousands upon thousands of human beings because the internet is not going to paint the house for you a person has to do that the Internet's not going to pull the carpet out of the house a person has to do that and this is a business the problem with the business is that internet platform companies love to talk about the tamp they wax poetic about the temp title address Lamar and the total Jessel market and when they announced this the CEO went on about the TAM for ten minutes I mean it's like poetry and the problem is there isn't one tam for residential real estate there are thousands of local Tam's and they're all different and the ability to make mistakes and every single one is very very high this is not a business you want to roll out quickly because it's so local you want to learn from your mistakes and this company is doing this so aggressively that it's bound to make a lot of mistakes or either of these Shore Tesla or Zillow are these shorts that you go that you basically the bet is that they go out of business in some way they go bankrupt I think it's not my dad I'm not making that bet I'm not making the bet that test is gonna go out of business I might be in the bed I mean it's rare to make especially in a world of zero rates where everybody gets funded back to make a bet that somebody's gonna go out of business I mean the problem is also when the stock gets too - chances are it goes to 6 before it goes to 0 do you think there's misrepresentation any of these stories in other words the public is not getting a transparent or an accurate read in the in the true you know with respect to Tesla he likes to pull a stick every quarter because there are four things that matter with Tesla there's the deliveries there's the margins is that income and this cash flow and for at least for the last two quarters what he likes to do is tweet that they're doing very very well on the deliveries and the stock tends to go up and then at least last quarter the other three variables are terrible and the stock comes down so I don't know why that's allowed right but that's he's played this game again where he's tweeting how the great the deliveries are we'll see how the rest of the earnings are when you report everybody asks you about what you're short because of Big Short Fame all that stuff right what's your favorite long my favorite long is a company called Motorola Solutions which a little obscure but it's not a small cap stock it makes emergency communication equipment for police firemen etc and what I really like about it is it's very good management they're well incentivize it's an oligopoly slightly regulated business has gotten better over the last couple of years I don't have to worry about China I don't have to worry that much about a recession it's kind of it's it's about as idiosyncratic along as you could imagine Steve great to see you thanks for coming by thank you Steve Eisman Neuberger bourbon or it could be like me and this have no discernible skills whatsoever I mean home here doesn't matter me at least yes anywhere the Deutsche Bank is fascinating we've been talking about it for a while I meet Steve it's when I hear Steve talk he's shorted because it's just a bad Bank and that's good enough reason my concern would be it's not only just a bad Bank you know there's a there's a derivatives book there which could potentially be I hate using the word catastrophic but there could be systems systemic risk a long way will get we're gonna find out but I'm with them a hundred percent on toys Bank even at current levels it's still way too expensive you you you

Channel: CNBC Television

Views: 726,489

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Keywords: Fast Money, CNBC, business news, finance stock, stock market, news channel, news station, breaking news, us news, world news, cable, cable news, finance news, money, money tips, financial news, stock market news, stocks

Id: XDQYMFKbtvY

Length: 12min 2sec (722 seconds)

Published: Tue Oct 15 2019

Reddit Comments

[u/savuporo]

It's funny how the hosts listen to Eisman wide eyed and all questions are super carefully weighed. Like talking to a fickle pagan god quick to anger

tl;dw Tesla section starts at 6:45 edit: well, thats the Zillow section. Tesla starts at 8:50

[u/realistic_skeptic]

Very nice... not related, but love what he says about QE