Steve Eisman on the 'Paradigm Shift' Happening in Markets Right Now

Tracy Alloway (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:14)

And I'm Joe Weisenthal.

Tracy Alloway (0:15)

Joe, it feels like an interesting moment in markets.

Joe Weisenthal (0:20)

Yes. I mean, there's the sort of short-term, obvious stuff that's interesting, like, oh, what's gonna happen with the soft landing, or what's gonna happen with the Fed, et cetera.

But it also feels like a pretty big turning point in markets overall.

Tracy Alloway (0:34)

Absolutely. Well, to me, it feels like kind of a massive flip-flop from doom and gloom 2022, where it kind of felt like everyone was talking about the world was actually ending, and suddenly, fast forward to just the beginning of 2023, and everyone's talking about a soft landing, maybe the recession is averted, markets are up quite remarkably, including things that got absolutely crushed last year. So some of the big tech stocks, Bitcoin, I mean, some of the Chinese companies, like real estate and consumer tech companies, all of those are surging.

Joe Weisenthal (1:08)

Right, so there's this hope, right? That we should go back to 2019, or let's just go back to 2021, let's just hang on. And it's sort of this thing, because when I think of 2021, or when I think of 2019, it was sort of the ultimate speculative, froth, low interest rate environment. And as everyone's tired of hearing me say on this podcast, I first got interested in markets at the end of the.com bubble.

Tracy Alloway (1:36)

Here it comes, folks.

Joe Weisenthal (1:37)

No, but I remember those periods where it's like, you look at the NASDAQ in 2001, or 2000, and you have these 50% rallies. It's like, oh, we're back. Oh, no, it's over. We're back. It's over. And that process of, I guess, a bubble deflating is a long process. People are slow to give it up.

Tracy Alloway (1:55)

Well, that's exactly it. And it sort of happens in fits and starts. And I'm glad you mentioned the keywords there, which are bubble and speculation, speculative interest, because today we are going to be talking to someone who is kind of an expert in exactly that, and particularly one period of speculative financial history. We are going to be speaking with Steve Eisman. He is a portfolio manager at Neuberger Berman.

And he famously bet against subprime mortgages before the 2008 financial crisis. Of course, you might recognize him from the movie, The Big Short. He was played by Steve Carell.

So really, the perfect guest to talk about markets right now.

Joe Weisenthal (2:35)

Perfect, let's do it.

Tracy Alloway (2:36)

All right, Steve, thank you so much for joining us.

Steve Eisman (2:37)

Thanks for having me.

Tracy Alloway (2:39)

So where should we start? Maybe give us just your top line opinions on where markets are right now.

Steve Eisman (2:46)

This is gonna be a long intro.

Joe Weisenthal (2:48)

Okay, that's fine. People are gonna enjoy listening to it.

Steve Eisman (2:52)

So I remember back in college, one of the most influential books I read was a book by Thomas Kuhn called The Structure of Scientific Revolutions. He invented the modern meaning of the word paradigm.

And the point of the book was that science paradigms change over time. Sometimes those paradigms change violently, and sometimes those paradigms change over time because people don't give up their paradigms easily. And I think we're going through a period possibly like that again. So markets have long periods of paradigms where there are certain groups that are leaders. So in the 90s, for example, it was largely, I'd call it large conglomerates like GE was what people made money in and wanted to invest in. And it lasted about eight years until there was a small period of the dot-com bubble. And obviously that ended and there was a recession.

And after that, really through 2007, the new paradigm, and just to take a step back, when market paradigm shift, it's unusual that the old leaders become the new leaders. There's a shift and there's a new leadership group. And one of the most important leadership groups, I'd call it from 2002 through the end of 2007, were financials, largely investment banks, very large banks, where the opinion of the market was the people who ran these firms were basically geniuses, until they weren't. And we had a violent period in 2008 and 2009, where those stocks got crushed. Almost all of them would have gone bankrupt unless the government bailed them out, which it did.

But financial stocks that did well in the 2000s did literally nothing until probably 2020 So call it a dozen years where the old leadership group evaporated.