Is Private Credit The Next 2008? — ft. Steve Eisman

Scott Galloway and Ed Elson are joined by Steve Eisman to discuss what he thinks are the two biggest long term risks to the market. He also explains why the war with Iran isn’t changing his investment strategy, whether the U. S. deficit is truly an existential threat, and what “The Big Short” got right about his story. Steve Eisman is an investment analyst and portfolio manager with decades of experience in financial markets. He is best known for his pivotal role in predicting and profiting from the 2008 subprime mortgage crisis, chronicled in “The Big Short.” Check out our latest Prof G Markets newsletter Follow Prof G Markets on Instagram Follow Ed on Instagram, X and Substack Follow Scott on Instagram Send us your questions or comments by emailing [email protected] Learn more about your ad choices. Visit podcastchoices.com/adchoices

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:01Speaker 00

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• 1:29Scott Galloway?

  Today's number 20. That's the percentage of British people who have come up with a business idea at the pub. True story, Ed. I've been reading a lot about the downsides of alcohol, Ed, and I finally decided to do something about it. I've decided to stop reading.

• 1:47Speaker 04

  Listen to me. Markets are bigger than us. What you have here is a structural change in the world distribution. Cash is trash. Stocks look pretty attractive. Something's going to break. Forget about it.

• 1:56Ed Elson?

  Here's a question. Have you ever come up with a business idea at the pub or at a ball? I feel like you probably have.

• 2:01Scott Galloway?

  God, I've had so many bad business ideas.

• 2:04Ed Elson?

  Is that why you came up with Aardvark?

• 2:06Scott Galloway?

  Oh, you know about Aardvark? That's very impressive.

• 2:10Ed Elson?

  I tried to roast you there. I can't tell if it landed.

• 2:15Scott Galloway?

  What did you about coming up with a bad business idea at a bar?

• 2:17Ed Elson?

  That's right.

• 2:19Scott Galloway?

  Well, here's the thing. I'm getting I'm going to New York to get my physical because I belong to one of these high end concierge places where they bring you a Cobb salad before they have some guy stick two fingers up your ass and tell you to cough, which is worth 120 grand a year right there.

• 2:33Ed Elson?

  Oh, boy. Oh, boy.

• 2:35Scott Galloway?

  Anyway, so I'm getting and I know what they're gonna say. There's gonna come back and say, oh, you know, on the whole, you're pretty good. You need to drink less. I'm like, no, not happening.

• 2:43Ed Elson?

  I feel like you have been drinking a little bit less. In fact, when you and I got a drink, I noticed you did not get a drink.

• 2:49Scott Galloway?

  Yeah, but you're not worth it. You're not worth it. If you had bigger tits, we would have been partying. By the way, speaking of big tits, I think height and men is the next is the new big tits. What do you think?

• 2:59Ed Elson?

  Height in men?

• 3:01Scott Galloway?

  Yeah, 100%.

• 3:02Ed Elson?

  Hasn't it always been?

• 3:03Scott Galloway?

  Not as much. I think that online dating has distilled things down to some anodyne metrics and that people have decided that if you're over six feet, specifically women, that's an attribute. And only I think about, I was reading somewhere, if you're over six feet and make over six figures, that's like 8% of the population.

• 3:23Ed Elson?

  It'll be interesting to see if if height augmentation becomes the new breast augmentation, if people keep on extending their their shins and their limbs. I know a lot of men are putting some, what do you call them in their in their shoes?

• 3:35Scott Galloway?

  Lifts?

• 3:36Ed Elson?

  Lifts. That's right. Would you ever do that? Let's say, I mean, you're already a pretty tall guy, but let's say you were 5'6". Would you wear lifts or would you consider something like that?

• 3:47Scott Galloway?

  Um, I guess. I don't know. Would you?

• 3:53Ed Elson?

  No, I don't think I would. But I'm I'm interested by how more socially acceptable it seems like it's becoming. Maybe I'm getting the completely wrong idea off of social media, which is a total misrepresentation of everything. But I've seen people talk about it online, which makes me think maybe people are actually doing that. I find it a little bit insane, but maybe it isn't.

• 4:16Scott Galloway?

  I don't know. How tall are you, Ed?

• 4:17Ed Elson?

  6'3".

• 4:18Scott Galloway?

  You're taller than me.

• 4:21Scott Galloway?

  Yes, you are. This is what you have to look forward to. I used to be 6'3" and I'm shrinking. You start shrinking as you get older. Your height shrinks, but your prostate gets much, much bigger. And you also develop this incredible ability to grow hair from your nose and your ears. So keep in mind that.

• 4:43Ed Elson?

  That's exciting.

• 4:44Scott Galloway?

  Yeah, yeah.

• 4:45Ed Elson?

  Let's look forward to.

• 4:47Scott Galloway?

  Yeah. What else is going on, Ed?

• 4:48Ed Elson?

  Not, not very much. I'm going to California this week, which will be interesting. And then I'm then we've got South by Southwest, which I didn't realize is literally next week.

• 4:59Scott Galloway?

  Very excited.

• 5:00Ed Elson?

  I was looking at the calendar. I was like, okay, what have I got coming up? We literally have our live show next week. I completely did not really think about that or consider that, but I'm very excited.

• 5:10Scott Galloway?

  I'm excited too. What day is it? Are we on the main stage?

• 5:13Ed Elson?

  Main stage, March 14th, 10 a.m. Be there or be square. It'll be very exciting.

• 5:18Scott Galloway?

  Pounce me out. You're taller than me. Okay.

• 5:22Ed Elson?

  Cue lifts.

• 5:23Scott Galloway?

  All right, let's get into the stories today. What's going on, my brother?

• 5:26Ed Elson?

  Let's do it. Let's do it. We are speaking with a Wall Street legend, Steve Iceman, investment analyst, portfolio manager, and also you know him from the movie The Big Short, where he was played by Steve Carell. Steve, thank you very much for joining us on Profitey Markets.

• 5:42Speaker 06

  Thank you.

• 5:46Ed Elson?

  So many people know you as the guy who was played by Steve Carell in The Big Short, one of my favorite movies of all time. You're also known for predicting the 2008 financial crisis and acting on it. So we want to get your views on what's happening in the world right now. We don't have a subprime mortgage crisis.

• 6:07Speaker 06

  Is something going on?

• 6:11Ed Elson?

  That's right. So we've got a lot going on. I guess we'll start with this. Based on what you're seeing today,

• 6:19Ed Elson?

  what are your greatest concerns?

• 6:20Speaker 06

  The war is obviously a great concern to all of us as human beings and Americans. I don't think that the war itself, long-term, is a major, gonna have a major impact on the market. Because at the end of the day. The greatest superpower in the world is is going to defeat Iran. I mean, that's inevitable. The what I think people are probably just beginning to realize today is this is not going to be a two day affair. It should be a two day affair because if Iran was run by a normal government that had the interests of its own people at heart, they'd have surrendered 24 hours ago or 48 hours ago because there's there's no way that they can win.

• 7:04Speaker 06

  They're up against the greatest superpower in the history of the world since the Roman Empire. But this is a regime that is essentially a death cult and doesn't have the same motivations as a normal regime has. They view the death of their own people, the martyrdom of their people as a sign of their own sacredness and righteousness. And therefore, they when when you think that way, you can absorb a lot more pain because you see death as a virtue. So it's going to take longer than a couple of days to decapitate this regime. And I think people are probably just beginning to realize that.

• 7:48Speaker 06

  And that's why the market's down again yesterday after having rallied because they, you know, yesterday they thought, oh, this will be over soon. Today they realize it's not going to be over that soon.

• 7:55Ed Elson?

  Yeah, this seems to be the disagreement among the markets right now. I mean, regardless of what your views are on the war, on the potential regime change or on Iran itself, I mean, the question seems to be, will this mean more certainty or less certainty? And we're seeing that reflected in prices. We're seeing that reflected in the price of oil, which didn't go up dramatically, but it did go up because most of the oil is coming out of the Strait of Hormuz, which is right in the region. And so there's some uncertainty there. I guess my question for you as someone who has seen crashes, who has seen crises, who

• 8:37Ed Elson?

  has predicted one of the greatest moments of uncertainty of all, what does this mean for certainty and for stability going forward?

• 8:48Speaker 06

  Look, my hope long term is that the Iranian regime changes and the Middle East is remade and things are much better. But we're not going to know that for weeks. And but regardless.

• 9:02Speaker 06

  This is not, whatever the eventual resolution here is, is not going to be a long-term impact on the global economy, in my view. Whatever the eventual resolution is going to be.

• 9:14Ed Elson?

  Why is that?

• 9:15Speaker 06

  Because whatever, whatever happens, the Iranian regime will change to some degree or another, and, and things will, will, will settle down. You know, I don't know who's going to run Iran. Nobody knows who's going to run Iran. But it's not, and, so obviously it's not going to be the Ayatollah Khomeini. You know, he can, he can't, he's dead. So whoever runs it is probably going to be somewhat more amenable to the United States. And, and I don't think President Trump is going to allow someone to take over who's not more amenable to the United States. How much more amenable? We don't know, but things will be better. How much better? I don't know. It'll take three to four weeks to sort of sort itself out and, and back, and by that time, all prices will be back down.

• 9:54Ed Elson?

  So in other words, this doesn't change your investment thesis or your investment strategy at large?

• 10:01Speaker 06

  Not by a single dollar.

• 10:03Scott Galloway?

  Part of what I would wrap your thesis in is that it's, the things you're expecting, you're worried about are usually the things that get you. It's the things that people aren't talking about. Are there any risks below the surface that you don't think people are, risks that there's asymmetric downside in terms of the attention they're getting? What are the risks you see that people aren't pricing into the markets right now?

• 10:25Speaker 06

  I think the two biggest long-term risks to the market by far are related to AI and related to private equity and private credit. You know, in terms of AI, the risk that I don't think is realistic is, is some nightmare scenario where you're going to wake up one day and everybody's going to stop buying Nvidia chips. I, I, that's not possible, at least not any time within the next year.

• 10:53Speaker 06

  And the reason why that's not possible is just because, you know, last year, all of AI infrastructure spend was $450 billion. And this year, if you just look at Amazon, Google, Meta, and Microsoft, just those four is $650 billion. I mean, these are crazy numbers. So, and I'm not trying to justify them, but I'm not spending the money, they're spending the money. So when you're going from 450 billion total to just 650 billion, just by four guys, I'm not particularly worried about whether Nvidia is going to have another good quarter. That's, that's not the risk. There are some people out there who think that the entire LLM enterprise is flawed. And I've spoken to them.

• 11:37Speaker 06

  And they may be right in terms of that it's not going to create artificial general intelligence. But I think there's enough evidence out there that everything that's being created by people who are doing AI has value. The question is, how much value? You know, so much money is being spent. Are the returns that these companies are going to generate, are they going to justify those returns? I suspect not. I suspect, and I, and it's way too early to make that prediction because we won't know that for a year. But if I had to stake my life on it, I'd say we'd have some kind of replay where, you know, in the internet bubble, the first generation of internet companies basically failed.

• 12:21Speaker 06

  And it was the second generation of internet companies that, that took us on to glory in terms of the value of the internet. So we could have a situation where, you know, companies like AI and Anthropic fail. And then there's a recession. And then you come out of it. And the companies that emerge afterwards are much stronger and, and, and that's one possible scenario. And the other thing that I worry about greatly is the tremendous growth in private credit that's been created by private equity. And that a lot of that credit is in captive life insurance companies that's, that are owned by private equity. And this is a $2 trillion market.

• 13:04Speaker 06

  All the growth, loan growth in the United States since the great financial crisis has not occurred in the banks. The banks have had very little loan growth for the last 17 years. With only a few exceptions. Almost all the loan growth in the United States has taken place in private credit. Now, we have not had a credit cycle in 17 years. So again, this is, you know, if there's going to be a credit cycle, and there's some pretty good evidence now emerging that we're starting to have one. How bad, I don't know. But whatever problems that will occur, I think will occur in private credit. How bad those problems will be, no one knows. You know, there's no data. You know, one of the difference between talking about private credit now

• 13:48Speaker 06

  versus talking about subprime loans back then was subprime securitizations reported their data to Moody's and S and P every month. So if you spend, I think it costs, when I was running my hedge fund back then, I think it costs us like $10,000 per year, which when you think about it, for a database of that was that important, it was not that expensive. You could literally look at every single securitization that was created in the United States and look at all of the credit data for every single securitization. And there were methods where you could, you could see whether the newer securitizations were doing worse than the older securitizations, which is the way you wanted to look at it. And you could do some real credit analysis to figure out what was going on,

• 14:31Speaker 06

  which is what I and my partners did. In terms of private credit, that market has grown enormously. There's some signs of a couple of bad credits here and there. And that's all I can say, because I don't have any data.

• 14:44Scott Galloway?

  I just want to double click on both those things. Are you saying the risk around AI is the risk to other companies, like we've seen with this quote unquote SaaS apocalypse? Or the risk of overspending or valuations built into these AI companies? How does the risk manifest itself as it relates to AI and valuations?

• 15:00Speaker 06

  That's a pick on OpenAI, just because it's so much fun to pick on OpenAI. Okay, so here's a company that just raised $100 billion. At a valuation of, I think it was $850 billion or 700, I mean, you know, when you start to get to these numbers, it started to lose, it starts to lose me, I'll call it 800 billion dollars. So now you've raised 100 billion dollars, you're losing money, you're going to continue to lose money, at some point, you got to make money. Are you going to generate sufficient level of returns to justify the valuation that you got on your last round? I would suspect probably not, but we won't know that for a year. So, you know, once, once

• 15:43Speaker 06

  that happened, once people start to realize that the returns aren't going to be as good, you will see a slowdown, I think, in the whole AI enterprise. That's the risk.

• 15:52Scott Galloway?

  On the private credit side, does that mean there's opportunity, or you think that there's going to be further erosion of value among the biz dev guys, the Blue Owls, the TPGs, the KKR's of the world?

• 16:04Speaker 06

  Well, they would say that, you know, people are picking on their exposure to software. And what these companies basically did was private equity went out and bought companies, a lot of which was during COVID, when rates were basically zero. About 20% to 25% of the companies that were bought were software-type companies, and they were levered up with private credit from funds, mostly owned by different kinds of private equity companies or business development corporations. And the question is whether or not these are good credits or not. Now, people are freaking out because they think that AI is destroying

• 16:45Speaker 06

  software. I actually don't see any signs of that in terms of the earnings. You know, I was sort of amused when ServiceNow reported about a month ago. You know, so when ServiceNow reported, I tried to go through the numbers as carefully as I could, and they were great. I mean, there was, there was no question, and there was not one number that you could pick on to say, aha, here's the problem. You know, the revenue was over 20%, they beat on revenue, they beat on guidance, they beat on earnings, and the stock was down 10%. So, you know, I've never seen a group that goes down on good news, bad news, and mediocre

• 17:26Speaker 06

  news. It just goes down on news. So, you know, people are freaking out, but at this point...

• 17:37Speaker 06

  They're freaking out on a narrative. There isn't any, we know if you go through the numbers of these companies, there's no real evidence that there's actually a problem, at least not yet.

• 17:47Ed Elson?

  It's really interesting because it seems that there are so many different scary narratives out there that are premised on very different things. Like, for example, the AI bubble narrative was the concern that we're getting too far over our skis, that these valuations are too high, that we're not going to see the returns. That's its own concern. Then there's the concern that AI is so powerful, and this is what we saw in the Citrinie article, that it's going to delete all of these jobs and that it's ultimately going to destroy our economy, which is going to be this sort of self-defeating mechanism. And then there's the other side of this, which is the private credit issue, which I have to say, I, and I think many of us, understand a lot less than the first two.

• 18:31Speaker 06

  You're not alone.

• 18:32Ed Elson?

  Yeah, right. And I think the thing that is striking to me is your point, which is, definitionally, we don't know what is going on because it's private. That's just what it is.

• 18:45Speaker 06

  It's actually worse than that.

• 18:47Ed Elson?

  Okay, please.

• 18:48Speaker 06

  Because everything I've said so far is bad enough, okay? But one of the parts that's worse, which, again, I don't know how to quantify it, is that over the last 10, 12 years, many life insurance companies have been bought by private equity companies now. And then what they have done is they have improved the returns of those companies by having those companies invest in the paper that they themselves generate. Now, in their defense...

• 19:29Speaker 06

  The yields on that paper are higher. The risk isn't necessarily worse. Could be, we don't know. But the other thing that's that has happened is they they run these companies much more aggressively than traditional life insurance companies were run. So normally, when you reinsure, you reinsure part of your book with a third entity and you have an arms-length transaction and you lay off some of the risk onto onto a third-party reinsure. What some of the private equity companies have done is they've reinsured part of their books to their own reinsurers, which sit which sit outside the United States in very, very

• 20:14Speaker 06

  opaque transactions, but which appear, at least appear to me, to pretty dramatically increase the leverage of these companies in pretty hidden ways. So not only do you have private credit, you have private credit sitting in life insurance companies controlled by private equity who have levered those companies even more. That's the the complexity of it. Now, thank God, we haven't had a credit cycle in this country in 17 years. So everything that I'm talking about, in some ways, is academic at this point because nothing bad has happened, which is what the people who run private equity would say. And if you went to Blue Owl and said, and you basically told this story, they would probably say something like, what are you complaining about?

• 20:58Speaker 06

  Nothing bad's happened. Well, nothing's bad happened because we've been very, very fortunate not to have a credit cycle. If we have a credit cycle, and like I said, there are some signs that it's starting to emerge, we'll see what happens.

• 21:13Ed Elson?

  It seems as though one of the differences, and this is what we saw in 2008, is that those bad loans were not contained. They sort of extended to every part of the US economy, which is why it was as painful as it was. So far, what we've seen is there is some concern over private credit. I've been reading about it. I've been hearing about it. I've watched the stocks of these companies like Blue Owl, which is kind of the poster child. I've watched it go down. And to me, I sort of look at that and think, well, I guess people kind of know what's going on. So if this means the Blue Owl goes out of business, then then whatever. But I guess the next question becomes, is it bigger than that? Are there ways where this can materialize and affect all of us?

• 21:58Speaker 06

  The reason why the great financial crisis was so bad. I mean, it was bad enough that there were bad subprime mortgage loans and people lost their homes. What made it really bad was that the banks almost were gonna, they were all gonna go bankrupt. And when, when banks go bankrupt, people can't get their money and people can't get their money, it's a freak show. That, that's why the great financial crisis was so bad. In principle here, it won't get as bad because the banks aren't the lenders here. It's the blue owls of the world and the K K Rs and, and the paws of the world. So mostly, um, the people who would be hurt here would be institutional investors. The caveat that I just gave you is that some of this stuff is in life insurance companies

• 22:43Speaker 06

  where, you know, they're individual policy holders. The other caveat is that banks do make a lot of loans to private equity companies. So they help fund them as well. Now, how big that is, is not exactly clear. It's not small, but I don't, I, I don't think the banks, the bank, look, the banks are the best capitalized they've been in our lifetimes. So even if something really bad happened to private equity, I think the banks would be fine. People might get nervous, but I think it'll, it'll be okay. I'm more worried about what's going on in life insurance than I am worried about anything going on in the banks.

• 23:21Ed Elson?

  We'll be right back after the break. And if you're enjoying the show so far, send it to a friend and please follow us if you haven't already.

• 23:30Speaker 00

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• 24:06Speaker 01

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• 25:11Ed Elson?

  We're back with prophecy markets.

• 25:13Scott Galloway?

  One of the most impressive things about what you and your colleagues did was you saw the risks that other people weren't seeing and you figured out the instrument to leverage that alpha, that dislocation. What's the trade here if you think that private credit is riskier than people perceive?

• 25:31Speaker 06

  You know, the problem is that you would try, in theory, you would try and buy credit default swaps on various kinds of credits. The problem with that trade is that that market is far less liquid than it was in 2006 and '07 because of, because the regulators don't like that market very much and they've placed a lot of capital requirements on it. So for example, I don't know if you saw Oracle's credit default swaps have completely blown out. You could think about whatever you want with respect to AI. I don't think Oracle is going bankrupt. The reason why Oracle's credit default swaps have blown out is that the credit default

• 26:16Speaker 06

  swap market is extremely illiquid. So if someone, some hedge fund, you know, like Elliott Associates decides, hey, you know what, let's go pick on Oracle and go buy some credit default swaps, it doesn't take a lot of volume to move that market. So the fact that Oracle's credit default swaps have blown out to some very, very high level right now, certainly Oracle's problem, but it's happened because it's an illiquid market. So, you know, doing what I, doing some version of what I did in the debt markets right now is very, very difficult. The only obvious trade is to keep, would be for someone to keep shorting the blue owls of the world, but you know, those stocks have gotten obliterated.

• 26:59Scott Galloway?

  Curious, in terms of risks that we're not pricing in or that we don't see, well, I'll put forward a thesis and you respond, that it's very difficult to outrun multiple contraction. You can, you can perform really well in a market, but if there's flows out of the market into another market, you can double your earnings, but if the multiple on Brazilian stocks goes from 20 to 10, your stock's flat even after doubling your earnings. What I perceive as a risk, and this is some of my political bias coming through, is that the rule of law and the rules by which companies get to play by seems to be one offs now. It's no longer, you know, a lot of companies are now subject to a certain amount of political risks that they weren't subject to before.

• 27:42Scott Galloway?

  And there's some evidence, I believe, that we're, we're potentially going to exhibit after 17 years of multiple expansion, multiple contraction, in that every company now faces some existential risk around, in the S and P, around what I'll call this multiple contraction. Your thoughts?

• 28:03Speaker 06

  I don't agree. One thing I've come to, to as a conclusion about markets, so for many years I've been doing that, is that they're completely amoral.

• 28:14Speaker 06

  Not immoral, amoral. They're completely different. They don't, everything that you, that you just mentioned is, you would think that they should care about, they don't care about that. What they care about is, are you going to beat the quarter? Are your returns going higher? What are your margins doing? If something President Trump does actually impacts those numbers, then you're going to get multiple contraction. But as long as what happens politically doesn't impact margins, revenue growth, earnings per share growth, market don't care.

• 28:48Ed Elson?

  But what about stability? I mean, I think the argument from, from, I don't know, Fed Fund managers who are taking it out of America is that we just, we don't know what's going to happen here. We want some certainty. We want some stability.

• 29:00Speaker 06

  I think it's nonsense. That's nonsense.

• 29:01Ed Elson?

  Really?

• 29:02Speaker 06

  Nonsense. Like I said, I think the market's very moral. People are talking their political book and, and I don't think the market, I don't think the market cares. I just don't think the market cares. Whether that's good or bad, I just honestly don't think the market cares. I mean, look, I thought in 2007, 8, I thought, I thought people would care what was going on because people were financially being destroyed. Markets didn't care at all. They only cared when profits went down. That's all.

• 29:26Ed Elson?

  Wouldn't tariffs be part of that calculation? I mean, if, if you believe that the tariff policy is going to be reductive to prosperity, and maybe that political biases are causing people to overshoot that and exaggerate it in their calculations, but wouldn't that still be part of the calculus?

• 29:45Speaker 06

  It would be part of the calculus, but at least so far, I think everybody, you know, the funny thing I think about it is, we all went to college. We all took Econ 101. You know, economics is a, as something you learn in college is, is very powerful. You know, they put these graphs up, they put these numbers up, and you basically walk out of thing, well, they gotta be right because, you know, there's so many numbers, how could they possibly be wrong? And, you know, one of the things that we all learned in Econ 101 is tariffs are bad, destroys the economy, you know, yada, yada, yada. And I think that's, and that's why the market went down between, last year, between late February and April

• 30:26Speaker 06

  9th. And then it turned out it wasn't so bad. It wasn't that bad. And so the market went back up. So, you know, until, now, there's some, there's some sectors where it has hurt, you know, like the Staples Group. You know, it hurt. And so that's one of the reasons why Staples performed very poorly last year because they had more they had actual margin compression on their products. But other than a couple of subsectors, it hasn't really seemed to have shown up very much. The US economy still grew last year. The whole, you know, the thing that drove the US economy last year was AI investment.

• 30:57Ed Elson?

  Right.

• 30:58Speaker 06

  And that's what's still driving the US economy. That's why I'm so focused on it. Because if there is a real slowdown, there's no question in my mind, if I, if you could give me a day, and so on this day, it became very, very clear that AI investment was growth was going to get cut in half, I tell you, we're going into recession. That's how much the US economy is dependent upon that, right?

• 31:21Scott Galloway?

  So I'm trying to figure out some potential trades here. If you think that Iran is a bit of a, I don't know, I don't want to say a nothing burger, but isn't going to have nearly the impact we think it might. We've seen energy stocks go up because of the anticipation that the Straits of Hormuz might be more impaired for an extended period of time, taking oil prices up, taking profits of oil companies. Is that a potential short right now? And also, on the flip side, so I agree with you. I look through the numbers of Salesforce, ServiceNow, Adobe. I could see absolutely no evidence of why their stocks were down 3%, much less 30%.

• 31:59Speaker 06

  I'm glad you said that because I thought I was having, I thought I was going crazy.

• 32:03Ed Elson?

  I bought those three names, yeah.

• 32:04Speaker 06

  That was gutsy.

• 32:07Ed Elson?

  It hasn't been, it hasn't been great, but I'm still holding strong.

• 32:11Scott Galloway?

  I'll go to a second tier of why. Everyone's saying, well, these prompts could put the businesses out of business. And I'm like, okay, only 10 to 20% maximum of their total top line revenue goes into technology, meaning that 80% of the value they offer is not the technology that AI theoretically could replace. It's client management, UI, relationships, debugging. So the whole thing, it strikes me as a massive overreaction to.

• 32:41Scott Galloway?

  Fears that if the worst fears play out, it still doesn't, I just can't see anyone strip. I've been using Salesforce at every company I grew.

• 32:50Speaker 06

  And you can't see stripping Salesforce out of your company. You just can't imagine it. It's too difficult.

• 32:55Scott Galloway?

  Yeah, these companies are very good at embedding themselves in your company. And the idea that all of a sudden I'm going to pass some bone with coming up with prompts to replace Salesforce. Anyways, what if, talk to me about the thesis around going long the SaaS companies and going short the energy companies.

• 33:16Speaker 06

  Well, let me first say that I don't trade. I am not a trader. I'm not a medium term trader. I'm not a short term trader. You know, there's certain things that I'm good at and being a trader is not one of them. So, I mean, what I'm better at is picking, you know, long term ideas, both long and short and basically sticking with them. If I was trading, I think energy stocks are, as a trade, will be lower in a couple of months. That I agree with. The software one is, I'm tempted for my own personal portfolio to buy some of these software stocks. I'm too afraid. It's like catching a falling knife.

• 33:58Speaker 06

  You know, these things go down on, like that thing that happened last week, that fantasy story that's, I forget the name of the.

• 34:06Scott Galloway?

  Tetrini.

• 34:07Speaker 06

  Tetrini. That was like, you know, that was like reading Arthur C, an Arthur C Clarke novel, you know, that was no better than that. It was a fantasy story. The person who wrote it just concocted some stuff together and everybody freaked out. But, you know, trying to, the narrative on software stocks is now so bad.

• 34:31Speaker 06

  And the problem with buying them is, it's like I said before, they've gone down on good news, bad news, and mediocre news. So what's the data point that's going to get people to say, wait a second, there's a lot more here in terms of software than just making software. Maybe it's just time, but there's no data point, I think, that you could point to that's going to change the narrative. That's the problem with buying those stocks. But it's tempting to start to think about buying them.

• 35:04Ed Elson?

  Something I've wondered, Steve, is I think a lot of us have watched The Big Short, and a lot of us are moved and inspired by your story. And this is just ubiquitous across all individuals who are interested in the markets, who are investing in the markets. Everyone knows about The Big Short. Something I wonder is, I wonder if your story made everyone want to be the next Steve Iceman?

• 35:34Speaker 06

  So, by the way, so I had a very funny line on TV a few months ago where I said, you know, part of the problem here, I'll just repeat it because it's a good one. I said, I said, you know, part of the problem here is that, is that, you know, I once predicted the end of the world, and I have no interest in predicting it anymore. It was not exactly a pleasant experience, but everybody, people want to predict the end of the world because they want to be me.

• 35:57Ed Elson?

  Yeah.

• 35:58Speaker 06

  And I got news for them all. The role of Steve Iceman is already taken. And, but I think there, and it's funny, but there's truth to this, you know, people want to be the person who predicts the next end of the world. Let me say thank you to all those people. Listen, it wasn't, it wasn't such a pleasant experience the first time around. It was very aggravating and a lot of, very anxiety producing, but for some reason, people just want to predict the end of the world all the time. It's also like, you know, there's this whole thesis out there that

• 36:36Speaker 06

  You know, Bitcoin for a while had this thesis, which unfortunately for Bitcoin doesn't act like that. But the thesis that Bitcoin people had was that, you know, we're all gonna, the whole world's gonna end, you're not gonna be able to buy anything in the store with your dollars. So buy Bitcoin. That was like basically the thesis. And it actually turns out that Bitcoin doesn't act like that at all. It just goes up when NASDAQ goes up and it goes down when NASDAQ goes down. But, you know, that end of the world thesis has been predicted in one form or another for the last 40 years. You know, I remember in the 90s, Pete Peterson was making the same claim.

• 37:17Speaker 06

  And nobody ever steps back and says, wait a second, this claim has been made for 40 years. Why hasn't it happened? And I actually find that more interesting. And I think the reason why it hasn't happened is that, and this is where, you know, where people don't know about the financial system is basically everything. The entire financial system of planet Earth, it's not just that the dollar is the reserve currency of the world. The entire financial system of planet Earth runs on treasuries. You know, you've got a $3 trillion overnight repo market that purely functions on treasuries.

• 37:55Speaker 06

  And so the reason why the dollar hasn't had a demise is because there's no alternative in terms of the financial system to treasuries. If you were to say to me, this product, whatever it is, Chinese bonds, you know, whatever, is a real liquid alternative to treasuries, I would tell you, okay, now I can start worrying about the dollar. But until then, I think that that argument is academic.

• 38:21Ed Elson?

  I think the question then becomes, because you're one of the people who actually, one of the few people who actually did once predict the end of the world and you got it right. And so the question then becomes, what was different about that prediction versus all of the other predictions, which as you point out, are all quite reasonable and compelling? Whether it's what could happen in the private credit markets, whether it's what could happen to the fiat currency and the current system of the hegemony of the dollar and treasuries? I mean, all of these different questions that I'm always reading, I'm like, I wonder which one's gonna be the next 2008.

• 39:01Ed Elson?

  How do you know?

• 39:02Speaker 06

  Well, the difference is that there's no data. You know, so if you want to be one of those people who says that the world's going to end, fiat currency is going to end because governments are spending too much money. That is the beginning, the middle, and end of the argument. There's no other data point. Whereas when you were talking about the subprime crisis, you got monthly data that the consumer was deteriorating. And then, as you dug further, you realize that this paper was owned by systemically important financial institutions literally all over planet Earth.

• 39:45Speaker 06

  So if the paper kept getting worse and worse and worse, there were going to be massive losses all over the place. That was the story, and you could, and you could track it every single month. When you're talking about some of these other theses, whether it's private credit or fiat currency, you know, like going back to private credit again, the only thing I can actually say is that it's a $2 trillion market. It's grown enormously, and there are a couple of credits, Tricolor, First Brands, and this new one in England, MFS, that have gone bad. But in terms of the size of the entire market are still pretty small.

• 40:22Scott Galloway?

  Just along the lines of the deficit, spending $7 trillion a year on $5 trillion in receipts, do you see that as an existential risk? And if so, how does it play out in terms of a potential trade?

• 40:35Speaker 06

  I don't see it as an existential risk at all. I think that US debt to GDP right now is 125%, something like that. Japan's at 240. So, and Japan has had lower rates than we have had for the last 30 years. So, again, I come back to the point that I made before, which is as long as the entire global financial system runs on treasuries and there's no alternative, I don't see the deficit problem as a problem. If, if there was a real alternative so that, you know, major money could go elsewhere... Then I'd be worried.

• 41:18Speaker 06

  But until that happens, I just don't see it as I see as an academic fear. And by the way, the whole frickin' world always wants me to predict the end of the world. It upsets people when they, you know, they bring up these issues and they feel very passionately about them and I sort of poo poo them. People get upset because they're always there, you know, sometimes when I go on television, they're literally like begging for me to predict the end of the world and I can say, no, the world's not going to end. It's sort of funny.

• 41:48Ed Elson?

  It's because we want the clicks, Steve.

• 41:51Speaker 06

  Yeah, I know. I understand. All right, listen, the world's going to end there. Use that.

• 41:55Ed Elson?

  We'll be right back. And for even more markets content, sign up for our newsletter at profitemarkets.com/subscribe.

• 42:14Speaker 01

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• 42:43Speaker 07

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• 43:20Scott Galloway?

  Serum moisturizer or moisturizer serum.

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• 43:47Ed Elson?

  We're back with Prof. Markets. So just looking at 2008 again, some, one of the differences that you point out here is that back in 2008, there was data that was actually indicating that there was a real systemic problem here that was going to be genuinely destructive to the markets and to the economy. Right now, what we have are a lot of narratives. We have these think pieces on Twitter that are portraying kind of compelling stories, but they're not really providing the data saying, look, it's happening in real time.

• 44:17Speaker 06

  What I actually find fascinating, until, you know, whatever correction we're having right now, let's go back to last year when the market was up a lot. You had, what's amazing is you have two counter narratives going on in the market. You had the stock market going up, everybody's rah rah rah rah, NASDAQ AI, et cetera, et cetera, so everything's good. And then you had gold going to $5,000 because fiat currency is going to end. Now, the two cannot, cannot occur. They cannot live, live for very long together. And yet, it's like there were two different worlds of investors, like on two different sitcoms that don't talk to each other, and they were operating completely independently of one another, one basically predicting the end of the world and one basically saying

• 45:02Speaker 06

  everything is fine. And I thought that was, I think, one of the more fascinating things about last year.

• 45:06Ed Elson?

  Hundred percent. And the polarization that we're seeing among investors right now is, is a whole other new paradigm unto itself. But when I look at and read about 2008 and try to understand it, something I don't really understand is, I'm kind of an efficient market hypothesis believer, like I generally believe that.

• 45:27Speaker 06

  I'm not.

• 45:28Ed Elson?

  So I guess this is the question, it's like, how is it that the data was there and no one knew, except for you?

• 45:38Speaker 06

  That's not a fair statement.

• 45:39Ed Elson?

  Okay, sorry.

• 45:40Speaker 06

  Okay.

• 45:42Speaker 06

  I mean, it's sort of a fair statement, but it's not a fair statement. First of all, it's not like I'm the only person who looked at the data. That is definitely not true. I looked at the data, but the entire securitization fixed income world looked at that data like Moses coming down from Sinai with the tablets every month. I mean, that world, that data would come out like mid-month over two days, and that market stopped. Literally, there was no trading done for two days, while people poured over that data like it was the frickin' Rosetta Stone.

• 46:19Speaker 06

  So, the statement that, and here's where I disagree with the efficient market thesis. The information was there. The entire fixed income world had that data. They just interpreted it wrong. Now, they saw the data getting worse. It's not like they said to themselves, "Oh, the data's getting better." The data was not getting better. But they, because they had made so much money in that market for so many years, and they basically had, at the end of the day, you could boil down that entire market down to one assumption. And if that assumption's held, they would have been fined. And that assumption was that housing prices

• 47:04Speaker 06

  have not gone down in the United States on a national basis since World War II. And because housing prices have not gone down on a national basis since World War II, they can't go down on a national basis. That entire market rested on that assumption. So as long as the data got worse,

• 47:23Speaker 06

  as long as housing prices still went up, they figured, "Ah, still there'll be losses, big deal." What they didn't see, because they didn't do forensic investigating of the mortgage market, was that the underwriting standards had deteriorated to such an crazy extent that people were getting loans to buy homes they couldn't even afford the first payment. And that eventually took housing prices down. And so, I think housing prices in the United States went down 20% to 25% from point to point. So when you layer that on top of all the delinquencies and repossessions, that market imploded. But they were not set up intellectually to accept that until it was too late.

• 48:07Ed Elson?

  Would it be fair then to say that where we mess up isn't that we just don't see the data, but when our careers and our livelihoods depend on us interpreting the data incorrectly?

• 48:22Speaker 06

  Yes. I think the hardest thing, one of the hardest things for human, all human beings, me too, to deal with are paradigm shifts. You know, you exist in a paradigm, been around for a very, very long time. Your whole career is based on that paradigm. You've made a lot of money in that paradigm. And then it turns out that the paradigm is either changing because of technology, or maybe the paradigm was actually wrong because it was based on continuously increasing leverage, which is what the financial services industry's paradigm was based on.

• 48:59Speaker 06

  People have, you and beings have tremendously difficult time dealing with paradigm shifts. Tremendous. They don't, it's like, it's like a nightmare. They don't want to deal with it.

• 49:10Scott Galloway?

  Simon, what did the movie get, get wrong? What was, you know, it's, it's a dramatic interpretation, or it's, it's meant to be entertaining. What, what was, what was exaggerated to the upside or the downside? What does, what does the film get wrong?

• 49:26Speaker 06

  I'll tell you what I thought it got wrong, but it turned out that they got right.

• 49:32Speaker 06

  When I watched the movie the first time, and it came out in December, January, December 2014, January 2015, I thought, I thought that what Steve, the character Steve Carell played was great. It was incredible portrayal. He should win an Academy Award, God willing. But that surely I wasn't nearly as angry as he portrayed me today. That, that was my conclusion. And then what happened was, way back in 2010, President Obama had created this Financial Crisis Commission, and I was one of the people interviewed. I had completely

• 50:12Speaker 06

  forgotten about it. And in April of 2015, the Financial Crisis Commission did a data dump. They literally disclosed every single piece of paper that they had. And so I...

• 50:27Speaker 06

  Got a whole, I was able to read the transcript of my interview. And when I finished reading the transcript, I said to myself, no, Steve Carell, he got it right. He got it right.

• 50:38Ed Elson?

  You are that angry.

• 50:38Speaker 06

  I was.

• 50:39Ed Elson?

  Yeah, I've got questions about the movie too. Uh, my favorite scene was the sushi scene. You, uh, Steve Carell playing you, uh, is talking to this guy who's explaining how the whole system works and he's like, one of the worst guys you've ever met. And he's like eating his sushi.

• 50:54Speaker 06

  I feel sorry for that guy. He's not one of the worst guys anybody's ever met. He was just one of the people who managed CDOs. And he had the misfortune of having dinner with me.

• 51:05Ed Elson?

  Well, I love that scene. Uh, I love the way the guy conducts himself. My question is, actually, I have two questions. There's the sushi scene and then there's also the scene, uh, with the real estate brokers. And they're like, you don't understand, he's not, he's not confessing, he's bragging.

• 51:21Speaker 06

  Right.

• 51:23Ed Elson?

  When you look at the markets today, who are the kinds of people who reflect both the sushi CDO guy and also the real estate broker who wasn't confessing, he was bragging?

• 51:34Speaker 06

  That's a great question. Um, I think the private equity guys are the guys who have had it great for the last 15 years. And I think, you know, it may turn out that they're right, that there are no problems. And, you know, their stock prices will go back up. But I think they're all in right now in a bit of a state of shock that people could be questioning what they've been doing for the last 15 years. So, so I, that's who I think that sort of mirrors in a way.

• 52:08Ed Elson?

  Steve Eisen is an investment analyst and portfolio manager with decades of experience in financial markets. He's best known for his pivotal role in predicting and profiting from the 2008 subprime mortgage crisis chronicled in The Big Short. Steve founded and managed Emress Partners, a long short equity fund focused on fundamental analysis. In 2014, he joined Newberg of Berman as managing director and portfolio manager. Currently, Steve Eisen is the host of The Real Eisen Playbook, a weekly financial podcast. Steve, this was a pleasure. We really appreciate your time. Thanks very much. Nice to meet you, Steven.

• 52:38Speaker 06

  Thank you. Real pleasure.

• 52:49Scott Galloway?

  Ed, what did you think?

• 52:50Ed Elson?

  I thought that was fascinating.

• 52:53Ed Elson?

  I think my, I'm always trying to understand, because I wasn't really around in 2008, or I was, but I didn't know what was happening. I was just playing football and playing video games. So I don't really understand that time. But I am always fascinated, like, how did the world get it so wrong? And how is it that this handful of guys were able to get it so right? Steve being one of them, Michael Burry being another. And I am constantly asking myself, like, when is that moment going to occur again? And it's not always clear to me. And so I think what my biggest takeaway is his description that the reason

• 53:36Ed Elson?

  that it happened was because people were so dead set on misinterpreting the data that they didn't even realize that they were misinterpreting it. It was so essential to them for their lives, for their careers, and for their professions to not conclude what probably should have been concluded when they looked at the numbers. And I feel like that's a kind of helpful framework and difference for understanding what the next big misunderstanding, what the next big crash might be. And so I guess my takeaway is I'm now looking for that. I'm looking for the, the areas in which people are intentionally misinterpreting things because they have to. Because if they were to interpret it

• 54:18Ed Elson?

  another way, well, it would be a huge inconvenience to them, to their companies and to their careers.

• 54:24Scott Galloway?

  I do think that the, the war in Iran is about to be a markets nothing burger. I just don't think.

• 54:37Scott Galloway?

  I think there's an opportunity. I think oil is going to be less expensive in a month than it is now. And it strikes me, if you listen to the Trump administration trying to do this improv kabuki dance of trying to find already a way to declare victory and leave as the Republican Party. This is the issue, it appears, that the Republican Party is finally turning on him around. He's already saying, oh, we wanted to do the following things. These are our objectives. It's weird that they, it's clear that they haven't thought through what their objectives are, but they laid out a series of objectives. It's basically, as far as I can tell, giving them a ripcord to just get out. And the result will be, I think, that

• 55:21Scott Galloway?

  energy prices will stabilize. And you already see in the markets that if you look at what's happened in metals, which are kind of a risk off, they've already declined. They spiked, and now they've declined again because it appears that they're not as freaked out.

• 55:37Ed Elson?

  I actually disagree with that. Maybe we'll talk about it in another episode, but I feel like pulling the ripcord, getting out of there, and now what is the big question? That I feel like we're all assuming or we're being maybe overly optimistic that now we've reached stability. We've gotten rid of the boogeyman. We've gotten rid of Hameini. Now we're good. And to be clear, I'm not a geopolitical expert. I'm not a military expert. I don't know. But I do think that there is, I'm a little bit struck by the sense of confidence that investors seem to have that now we're stable. Now it's somewhat solved. And I just don't feel fully convinced of that yet.

• 56:20Scott Galloway?

  I'm not sure it's stable or solved. I just, I think people, whenever they hear war and 20% of oil flows through the Straits of Hormuz, think that oil's going to spike. And if you look at some of these big geopolitical actions, the market's decline is shallower and shallower because every time, they seem to snap back faster than people think they're going to. And it doesn't appear to be, you know, there's always like, okay, it could be World War III. Yeah, it doesn't feel like it unless there's Chinese troops involved or nuclear weapons involved. It doesn't feel like that. And it strikes me that the, I'm not making a judgment whether it's a good or a bad idea,

• 57:01Scott Galloway?

  but the Trump administration is already signaling they want, you know, they're 48 or 72 hours in and they've already signaled that they want to, they want to declare victory and leave, or that's how I read their most recent statements. Which means that, you know, I don't see what would be in Iran's interest to try and destabilize things more at that point. I think they would rather just survive, get through those, hunker down and then, you know, go from, go from there.

• 57:34Ed Elson?

  Well, that to me is the wishful thinking.

• 57:36Scott Galloway?

  For me, that's not wishful thinking. I would like to see the, the empire of Persia reemerge and have it be more neutral or pro-West. I don't, unfortunately, I don't think, I think the incompetence and I'm becoming geopolitical now, but the incompetence demonstrated by the, by the Trump administration without even thinking through the ability to answer why, why now and what's the offer amp. They clearly, they clearly hadn't thought through these issues and they've been forced to answer them real time and we look like, in my opinion, he looks like a fucking idiot. America's lost a lot of credibility. And the real, in my opinion, the opportunity for really productive change here is probably going to come and go as quickly as, as we attacked and then left. I just don't think this is going to have much impact on the market over the medium

• 58:21Scott Galloway?

  and the long term for better for worse. But more importantly, back to me, back to me, Ed. So I know you're wondering what I was doing in oh seven and oh eight.

• 58:29Ed Elson?

  I was, I want to hear this.

• 58:31Scott Galloway?

  Oh, thank you.

• 58:33Scott Galloway?

  It's like we're on a date and you're pretending to be interested in me.

• 58:38Scott Galloway?

  So I was reinventing myself yet again after the dog, after the dog bomb implosion. I'm like, okay, this internet thing maybe isn't working out for me. And I moved to New York and I was a professor making 12,000 a year. And I thought I need to make some money. So I thought, okay, I'm angry. And I just got through a proxy, a proxy fight at my old company, Red Envelope. So that I know I'll be an activist investor. And I raised a bunch of money and I bought a big stake in Gateway Computer, made a little bit of money there. And my capital sponsor was a guy named Phil Falcone and with Harbinger Capital. And Phil was one of the, he's probably the least mentioned of the three or four hedge funds. The guy that got, that got all the mention was a guy named John Paulson.

• 59:20Scott Galloway?

  But basically Phil made, Phil bet a billion dollars on these credit default swaps and he made six or seven billion. And then he was kind of the, you know, the golden boy. He made this huge bet and his AUM went from a billion to 20 billion. And I used to come in and pitch consumer and tech ideas. And he said, I'm going to give you an office here and you can come in one or two days a week and just pitch me and the team on ideas. And then basically the whole world imploded and what was it, oh, eight and oh, nine? And my son had the poor judgment to come marching out of my girlfriend. And I remember like, I remember that was a very stressful time. And I bought, I convinced him to give me 600 million dollars to buy, become the largest

• 1:00:06Scott Galloway?

  shareholder in the New York Times. And I was going to say, okay, you need to divest of all these stupid assets you own. You're on the seventh highest building in America, your headquarters, you know, 70% of the Boston Red Sox, all these shitty little newspapers, about.com, and we're going to double down on digital. And I thought the thing was under price of 15. And within like four months of making this massive purchase and going on the board, basically forcing my way on the board, the stock was at three bucks a share.

• 1:00:30Scott Galloway?

  And I managed to lose a half a billion dollars or 400 million dollars of other people's money in like four or five months, just about the time I decided to propagate. And it was, that was, that was such a stressful time and people of your generation, you know, I hear all these, I don't want to call them sob stories, but, but fears around jobs, getting out of college and everything and the economy's not, you know, the market's not going up. When you're sitting in a board meeting of the New York Times, I'm not exaggerating. They're like, if we don't raise money in the next 60 days, we're declaring bankruptcy

• 1:01:10Scott Galloway?

  because our advertising was 300 million dollars a month, you know, January, February, and in March, it's going to be 22 million.

• 1:01:20Scott Galloway?

  The great financial crisis, people just stopped advertising, they just stopped spending. It was like, and it was like, okay, if we don't figure out a way to raise money, we ended up raising a bunch of money from Carlos Slim of all people.

• 1:01:38Scott Galloway?

  If we don't raise money fast, the cousin, Arthur Sulzberger, he's going to be the cousin of the loss of New York Times, it's going to be bumped into bankruptcy and we're going to lose it. And every company I was on the board of involved in, it was just like, I mean, you don't realize how fast things can flip and people your age have never lived through that. And they get, I don't want to say they're not resilient, but they, they think, oh, I mean, youth unemployment's at 10% right now, that's a tick up, but it's not historically, that's about average. That's not. And in, and when I got out of business school in 92, only 40% of us had jobs at graduation. Anyways, my point is, it was, I look back on it, it was such a wild time.

• 1:02:21Scott Galloway?

  It was so strange to be constantly on board calls, trying to figure out like, are we going to go out of business here? And of all these boards, but I was working at this hedge fund of this guy who got very famous making this incredible short trade. And then effectively slowly, over the next few years, went out of business because he had this incredible risk appetite and then eventually that catches up with you. But I was living in New York, had two babies and lost almost everything again. Yeah, that was a very stressful time for me, Ed. I'm like, I can feel my heart.

• 1:02:59Scott Galloway?

  I feel my blood pressure going up just thinking about being 40 and broke again with, but now having like kids that are going to demand that I feed them and send them to school.

• 1:03:12Scott Galloway?

  Not anymore, baby. Not anymore. We'll see. The podcast era has begun. Yeah. Problem is I'm shrinking again. I don't know if that's an omen of bad, of bad things to come. Read us out, Ed. I'm going to go start drinking.

• 1:03:29Ed Elson?

  This episode was produced by Claire Miller and Alison Weiss and engineered by Benjamin Spencer. Our video editor is Jorge Carti. Our research team is Dan Shalane, Isabella Kinsel, Chris Noddy and Mia Silverio. Jake McPherson is our social producer. Drew Burrows is our technical director and Catherine Dillon is our executive producer. Thank you for listening to Prof you Markets from Prof you Media. If you liked what you heard, give us a follow and join us for a fresh take on markets on Monday.

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