The ‘Big Short’ investor on how the AI bubble bursts

Let's just imagine that open AI fails. Could happen.

The host of the real Eisman playbook podcast.

I don't know about you, but I know that I don't have a hundred billion dollars to spend on building data centers. [music]

You may know our next guest from the Big Short.

Your character.

You had to work that in there, didn't you?

I did have to.

Do you like being described [music] that way? I think it's going to be on my tombstone.

The whole United States of America would go into a recession overnight. Oh, yikes. Okay,

Mr. Anders.

Well, I'd have said you're out of your mind.

Yeah, you're insane. to get my programming to impersonate a DT.

This industry, despite all the hundreds of billions of dollars [music] that's been spent on it, has

join us right now is Steve Eisman.

Let's bring in Steve Eisman.

Steve, welcome back. You are known for spotting a bubble before anyone else does. Michael Lewis wrote a whole book on it. So, my first question to you is, where on earth are we in AI right now? There was a great movie with uh Sean Conre where he played this I can't remember the name of Finding Forester. And I remember the young character asks him a very complicated question and his response is as he's eating soup he goes, "It's not exactly a soup question. It's a complicated question." [laughter] I never forgot that line. I thought it was one of the best lines in in the history of movies. It's not a soup question.

Not exactly a soup question, is it?

This is how I look at it. The concentration risks here are all inspiring, you know. So, you take a step back and you and someone said to me, why don't you analyze this software company? Forget about what it does. It's a software company, an established software company. And if it turned out that the company had thousands of customers, that would be great. If it turned out the company only had two customers, you'd say, "I don't want to invest in that because if something bad happens to one of those customers, this company is is dead." There's something of that going on in the whole AI story. So, let's start just with Nvidia. So, Nvidia, God bless them, and I own the stock, okay? When they reported a few weeks ago, I think the revenue growth was like it was like 110%.

It's a lot. So, so let's just let's just take a step back just for a second and say to ourselves, wait a minute. The largest company on planet Earth just had forget about earnings growth, which was great, too. Just revenue revenue growth of over 100%. Like, that's insane. So, that would say the AI story is great until you read the 10 Q, which came out that night. And I'm going to impress your viewers by saying if they look at it and they go to Note 7.

Oh, okay.

Okay. Yeah. Note 7 says that 70% of Nvidia's accounts receivable as of the end of July came from five customers.

Warning flag. Not the end of the world. Warning flag. Now, let's go to the hyperscalers. You're talking about Google, Meta, Amazon, Microsoft, and let's throw Oracle in for good measure. massive companies spending massive amounts of money by buying Nvidia's chips and everything else under the sun. 70% of their AI revenue which equals something like 25 to 30% of their entire cloud revenue comes solely from anthropic and open AI.

Right?

Let me just let me just say it again so your viewers get it. If you look at leave out Oracle for a second, Microsoft, Amazon, [snorts] Google, 70% of their AI revenue, which is equivalent to 25 to 30% of their total cloud revenue is just from anthropic and open AI. If you go to Oracle, Oracle puts out a data point called RPO, which is basically a form of backlog. when they reported earnings last year in October for their August quarter, their RPO went from like 150 billion to like 400 billion

in 3 months.

It was a massive jump.

It was massive jump. I mean, people went insane. Yes.

And the stock went crazy.

The stock went crazy. It went from 230

to 330 like in two days.

Yeah. And then some of the cellite analysts who are very good who did some digging came out with reports that said 50% of that RPO is just from open AI.

Now now today Oracle is is over 600 billion and it's still like 50% is from open AI. Basically 50% of future revenue of Oracle is from a company that loses money like crazy.

Well that's what I was going to ask you. Maybe you can explain how this works. But from my perspective, I don't understand where this money is coming from.

We're coming to that. Okay. Let me let me just finish the let me just finish the chain. Yeah.

So now we come all the way now to Oric to Anthropic and Open AI. And my view is the entire chain from Nvidia to the hyperscalers all the way down the whole chain rests on the future health and growth of enthropic and open AI because they're creating the commitments to the hyperscalers. If they don't grow and have the money to pay for those commitments, well then the whole chain slows.

Yeah.

So that's the risk. I would say between the two probably Open AAI is the weaker entity. But it's not clear because really we really don't have enough numbers. The only thing we do know because the Wall Street Journal reported this, so I'm assuming it's true. Open AI had I something like six and a half billion in revenue in the second quarter of this year.

Okay.

Anthropic was at 11 plus

but this is just revenue

just revenue.

Okay.

Open AI lost something had cost of something like 12 billion. So the way the math worked was in three months Open AI Open AI's revenue went up a billion and its cost went up three billion which which we like to say is upside down.

You want the reverse not the former they want the other way to go.

Great business model.

And and their revenue grew 18% in 3 months whereas Anthropic's revenue grew over 100% in three months. So they're the weaker company at this point. That could that could change. My my only point is that this whole this whole industry makes me nervous because let's let's just imagine that open AI fails

could happen.

The whole like the you know the whole United States of America would go into a recession overnight if this would and now eventually there'll be a lot more diversification and there'll be a lot more companies but that's going to take time. So you know within the next year or so those companies have got to stay healthy. That's where I think we are. So there's a concentration risk.

There's a massive concentration risk.

And that brings me to the to the question I I was asking before. My understanding is that well we just spoke about these uh open AI and anthropic are not making money. They're losing money.

Excuse me. To say that they're losing money would be kind. They bleed money.

What's the nicest way?

They lose a lot of money.

We're pre Yeah, we're pre-p profofit, right? Prepit. [laughter] Something like that. They they make money if you exclude all costs. Yeah, exactly. That's how they like to think about it.

That's that's we should start reporting that metric.

Yes, I we [laughter] should.

Um so where where does the money come from?

Well, that's actually a very interesting question. I had thought that most of the company most of the money was coming from venture capital and that h happens to be not true. Most of the company is coming from Amazon, Google, Microsoft and Nvidia investing in these companies and SoftBank.

Okay. So, taking equity stakes in

taking equity stakes. They raise capital and those guys have ponyed up money. Whether they want to continue to pony up money, I don't know.

That sounds like a circle. It sounds like money or commitments are going one way and then commitments are coming back the other way.

Yeah, it does have that tendency, does it? This kind of reminds me of the It's actually a scene from the big short uh with your character.

You had to work that in there, didn't you?

I I did have to work I remember you saying, "Oh, it's kind of like CDOA and then they put parts of that into CDOB and those two put in CDOC."

There's some similarities obviously, but in their defense, there is a circularity to the financing. But as long as anthropic and open AI keep growing very very rapidly and people keep giving them money, the chain will hold. It's if one of those two companies really messes up and pe people pull money or don't want to invest it anymore that that's when the chain doesn't hold. That that's where the concentration risk problem comes in. If the industry was much if if this if if if I had said instead of 70% of hyperscaler AI revenue comes from anthropic and open AI if that number had been 10%. We'd be having an entirely different conversation because there clearly there are a lot more customers out there of size. M. So that brings me to another argument that I've heard you make on your podcast and with your guests is that if some

Let's just plug that podcast for a second and call it the real Eisman.

Real Eman playbook. Yeah, absolutely. It's very very good and it's gaining a lot of traction. I think it comes down to the authenticity of it.

Well, I appreciate that. I really enjoy it. I think it's very very high.

My wife and I work on it

every day.

Both of you guys? I didn't realize. So my wife is my partner in this and um so she does god bless her all the editing.

Oh really?

This gave you an insight into into things. So I I am a very linear thinker

which which the way I would define it is one two three four five conclusion.

Got it?

And too often I write that way. So, I'll write I'll do we have this thing called the weekly rap which we put out Friday where I sum up the week

and too often when I write it I'll I'll I'll do one two three four five six and and Valerie my wife who's who's the editor will always say you buried the lead again. Yeah.

And she'll flip it.

Ah okay.

And so because she says you know most people never get to the bottom. you know, people get your conclusions at the bottom and it takes it takes 10 minutes to get to the bottom. So, she so she edits it and she runs the business,

right? Okay. That's cool. I didn't know that. That's that's a little behind the scenes. I like that.

Okay. Back back to back to AI train of thought before I forget my train of thought again. So going on from what you're saying, if something happens to OpenAI or Anthropic, that's where the problems could be at this moment in time when we've got the concentration risk.

How do you see things like Deep Seek's new model or Kimmy, what is it called now? Kimmy,

best name in the biz.

Kimmy K3.

I like that. It just rolls up the

So this is where the the industry has, I think, real weak business weakness. Yeah, not not con let leave aside concentration risk. That's its own risk. Here's the business risk. There was something going on for a while which is called token maxing which is where for lack of a better term I work for a company [clears throat] and I'm the I'm I'm a software engineer and I've been told by management you're to use AI 247 whether you need it or not.

Just do it.

Just do it. Right.

What happened was last year Open AI and Anthropic were dramatically undercharging for for their services. Then they raised prices because they they were so undercharging for the cost of tokens. It was killing them,

right?

So they increased the prices that so that the the customer was bearing more of the cost of the token.

So you get people in once you got people in raise the price.

Raise the price. Uber I think went blew through its entire AI budget in like three or four months.

Oh yikes. Okay.

Okay. And that this was some some other company that I read about spent $500 million before they even knew they had spent $500 million. So what's happened is people have gotten a lot more costconscious. Token maxing has gone away and people are using these openweight models a lot more. You don't need a Cadillac for everything, you know. So people will use um anthropic and open AI as models only for the super important tasks. Everything else they'll use Kimmy K3 or or whatever. So what I like to say about this is that this industry despite all the hundreds of billions of dollars that's been spent on it has no moes.

There are no moes. This is you know Google with its search until very very recently that was a moat. I mean, everybody used Google like I mean

90%

90% of planet Earth used Google and no one even think about it

because because it was just better and nobody could could approach it

you know here one day it's Gemini one day it's chat GPT another day it's Claude they they just rotate

and so well we'll come to it about my conspiracy theory about the end of the world

conspiracy theory all right so this this dovetales into my conspiracy Okay. Okay.

So, as every as all your viewers know, the world's going to end

some point. It has to

at some point it has to maybe it could be five billion years from now or in a couple of weeks.

Yeah. CNBC and Wall Street.

I I think this entire AI is going to end the world is a complete subtrauge.

Okay.

And what I think is really going on is that these companies are nervous. They're nervous that token maxing has ended. They're nervous that there are no moes. They're nervous that these they these Chinese openweight models are taking massive market share. So they're manufacturing a hysteria which what they're hoping for is for the government to come in and regulate the industry and they think that by manip they could manipulate that regulation to create a duopoly

so that will that the regulation will create the moes. the regulation will say no Chinese AI models. There's too big a risk.

I see.

And then all all of a sudden there's a moat. Yeah.

That didn't exist before

a legal barrier.

That's what I think is is is actually happening here. So you think that's the reason behind I cuz I've noticed Elon he's always talking about it but recently the uh anthropic CEO Dario

and they're also talking about slowing down

slow and that that cannot be that cannot be taken seriously because if you really really really if you if I was Dario Modi

and I really really really thought

that my product is dangerous and I really need to slow I'd postpone my IPO.

You'd have to postpone your IPO.

You could just do take the steps.

Take a step back and and you know, I'll fix fix what we need to fix and we'll come back. Are they postponing their IPO? No. You know, Elon Musk had a very funny quote the other day where I think he did on X where he said something like um I'm going to paraphrase. I don't have the exact This is some messed up 4D chess where you're saying that the that your product's going to end. Oh, and by the way, how much can I allocate to you for the IPO? [laughter]

Yeah.

You know, seriously, I I take people seriously when they put their their money at risk,

right?

You know, this this statement about a slowdown is is just all part of this hysteria that they're trying to manufacture,

right? So they're aware that there may not be moes and it kind of for for those that don't know explain what you what you mean we're talking moes specifically in uh not hypers scale in the LLM providers because the there I guess there's still

the hyperscalers have moes

okay hyperscaler so so what's a moat

your grocery store doesn't have a moat

because somebody could open up a grocery store across the street tomorrow

but there are some businesses that have real moes real moes around them

like a competitive advantage.

It's but it's a competitive advantage that is eternal or or at least very long lasting like Nvidia makes GPUs.

Mhm.

Well, nobody else really makes GPUs.

That's a moat. certain software companies have, you know, when if you're Salesforce or Service Now, which are two massive software companies, you your product is embedded in the companies that you service. Like like

those companies that use your your product, [snorts] they've used it for so long, they can't function without your product.

Hard to switch away.

You try and get to try and switch out of that is brutal.

Yeah,

that's a moat. There's no hyperscaler. What's the moat? Well, I don't know about you, but I know that I don't have hundred billion dollars to spend on building data centers.

Okay?

They just don't have it.

So, there is some moist.

So, that so just in terms of size and money, I mean, there only certain companies that can actually build data centers.

They're just that expensive. LLMs, the the creation of the models is expensive, but there's so much competition and there's no loyalty. Like, you know, if you're a if you're a software developer and you're using Claude, if tomorrow another LLM shows up that's better than Claude, you'll switch.

Y

you're you're switch there's no there's you're not stuck.

That's the problem with the LLM model.

Gotcha. So, there's no moes in LLM.

Yes. hyperscalers they have I guess they have diversified business models so there's

and they have modes but they're dependent upon the LLMs in their cloud businesses that's their weakness right now

so okay so there's kind of a argument for hyperscalers for and against having a mode you kind of in some ways there's the scale and the cost and the barrier to entry mode of of the investment and then there's also the dependency on the people that are buying

that have no modes

yes

that's the problem

interesting Okay.

And the other and the other problem with the hyperscalers this may be temporary but then again maybe it's not is you know Microsoft Amazon Google 3 four years ago and way prior to that these companies were incredibly profitable but even more importantly they just threw off cash like crazy. I mean so much cash they didn't even know what to do with it. So they just bought back stock because they literally didn't have any enough investments to pour back into their own businesses. Today, because of the incredible amount of money that they're that they're spending on these data centers, their cash flow is gone.

I noticed that.

And in some cases, negative

negative now. Yeah. Yeah. Very little.

I mean, Google raised equity capital 85 billion. I mean, if you had said to me a year a two years ago that that hey, Steve, I'm gonna make a prediction. Google, which hasn't raised capital since it went public, is going to raise 85 billion not in debt, in equity capital. I'd have said, "You're out of your mind. You're insane." Like like what are you talking about? They they create 85 billion in cash in like overnight like why what would what would possess them to raise equity capital? Well, world changed.

It's a very dramatic shift. Uh I I feel you know as you know an investor that's held Google for probably eight years right the company that I hold now is very different to the company that

and that's an interesting point we've seen the market get a little bit jittery with the amount of spending that's happening there could be a payoff maybe there's not you

by the way let me just jump you for one second let's go back to Oracle

okay

because after that I I didn't finish after Oracle Um every people said that 50% of Oracle's RPO the the backlog is from open AI. the stock which had gone from 230 to 330 over the next 2 3 months went to 200 and today it's 150 and what's fascinating fascinating

is Oracle just reported and the numbers were pretty good

and the stock was up four or five% after hours

and was up 7% at the open and closed down on day

right

and I was and and there was no news so I don't have like I don't have like a news explanation like nothing happened but

clearly people are very nervous about Oracle because Oracle got downgraded and its debt rating is like triple B minus by S&P which is like I think maybe just one level above junk.

So people are nervous about Oracle and how much debt they have.

Well, it seems investors are nervous about all of these hyperscalers now that are investing literally hundreds of billions like

hundreds

hundreds of billions. It it's just it's insane. staggering. It's the numbers and you know the numbers are just so big.

I think the number that I heard this year is that if you just look at the hyperscalers, they will spend $700 billion on AI capex this year.

It's like that's such a huge number. It's hard to even get your mind around it.

It's so enormous.

I'm interested in your perspective on what Michael Bur has been saying where he's concerned that the data centers are taking too long to come online. They're buying so many chips. He his opinion is the chips become obsolete way faster than the depreciation schedules.

I I I understand his argument. So So let me give his it's its due first. Yeah.

What he pointed out last year, I think in November was that the hyperscalers had changed the depreciation schedule of the chips from 3 to four years to like five to six years. And if you did like a I can't remember exactly what the calculation but but it's an it's an enormous increase in profitability just from the change in that accounting because by by changing right it's like click by by um by changing your depreciation schedule from three 3 to four years to 5 to 6 years by definition your depreciation expense which you report is going to be lower all other things being equal. He also said that, you know, there's so many new chips coming that they become obsolete. Where I think he's wrong for the moment is that there is such demand for chips right now that there's still huge demand for the older chips whose price has gone up with all the other chips,

right?

So I I I think with all due respect to Michael, I think his argument is too academic.

Okay? Like put this way if AI succeeds because anthropic and open AI you know grow like crazy and the hyperscalers do well etc etc it's not going to matter if the depreciation schedule changed from 3 to four years to 5 to six years

right

at the same time if open AI fails and and the whole chain goes in reverse we'll have a massive correction which has nothing to do with the depreciation schedule I don't I mean I think what he's deep down what he's is trying to point out is maybe there's something wrong here, but I don't think what the thing that he's pointing to as being wrong is what's going to is is important enough,

right? There's bigger factors that play both directions in both

much bigger factors.

Okay. Interesting. So, we've spoken about no moes, we've spoken about China coming in potentially being competition. Another headwind that I've been trying to wrap my head around more is is the power element as well

because this is another one of those big things that we're talking about earnings and chips and this and that.

But when I started to look at power, I I think it was Elon Musk's interview with the economist that opened my eyes up to it. He said China has a chip problem. The US has a power problem.

He's right.

However, in his view, China can solve its chip problem. might take some time, but a harder one to solve is the power problem because power is physical infrastructure. It takes a long time.

Correct.

I don't know if I have the expertise or the understanding to know how big of a restraint or a bottleneck power in the United States is actually going to be.

Get in line. Nobody Nobody knows,

right?

I mean, I keep looking, you know, I there are people who say it's a b that things are slow. There are other people who say things are fine. I can't I can't nail it down yet.

Right. Okay. I mean, I do know that the companies that are involved with power

are doing great.

Like Genova, for example, and that stock's gone nuts. You know, I'll pat myself a little bit on the back. I bought that stock really early. Oh, really?

But but I I bought it because the sell side analyst I'm very friendly with told me I should buy it and I just took a flyer on it.

But um

for those that don't know Geneva told me,

let me tell you, it's very interesting. So GE used to be composed basically of three massive divisions. healthcare,

aerospace where they basically make the jet engines for planes and then they service them

and then call it energy. If you ever saw a jet engine

and looked at at a gas turbine, which is what goes into a utility that creates electricity, they look exactly the same. It's just that the gas turbine is much bigger.

Yes.

But it's basically the same technology. So the energy division of of GE makes gas turbines. They have all this electrical equipment that they sell and then they have a wind division which does terribly.

Now this should show you how like fast the world can change. The the energy division was created when I think around 2015 or so. GE bought a company in Europe called Olam. Now Olm did was an energy company that also created gas turbines and GE had a business that created gas turbines. So they mushed them together just in time for the entire gas turbine business to fall apart,

right?

And this is why IML lost his Jeff Immel who was the CEO of GE finally lost his job because that was like enough already. So eventually all three divisions got spun out. So there's GE healthcare. I think its symbol is GE.

Okay.

And there's the energy division which is called GE Vernova which is GEV. And then there's GE which is the aerospace division.

Gotcha.

A year before [snorts] GE Vernova got spun out. So that would have been like 2023 maybe or 2022. If you were to read sellside reports upon about the industry, the energy business was so bad that they ascribed negative value to G to to Vernova. Negative value that it was worth negative. I think when one guy wrote it was worth negative3 billion.

Oh my gosh.

In terms of a sum of the parts analysis

right

now what's happened is even prior to the whole data center thing electrical production in the United States finally started to increase for the first time like in 15 years. Now add on top of that the data centers and you're talking about US electricity growing 3 to 4% per year. Now that may not sound like such a huge number but 3 to 4% off of the base of the United States is the equivalent of like two large cities.

Okay. It's a lot.

It's huge.

Yeah. You know, a company like GE Vernova has backlogged like two 20 35 that that's how crazy things are

because this is how these data centers are being powered. It's with these gas turbines, right?

Mostly

mostly

and there's some alternatives. People are talking about nuclear and they're and there's a company called Bloom Energy which makes its own little turbine

that that you could hook up to a to a data center, but most of it's going to be through gas turbines. M well that's what um Elon had to do with the um Colossus data center that he built in Memphis. The grid was too slow. It was not ready. So he he ended up getting 35 of the portable gas turbines,

right? And hooked it up to his hooked up.

Hooked it up. He created his own mini power center like on site right next to Okay.

So So most most of GNOVA is these um

well it's the gas turbines. It's all the electrical I mean think about it. I mean there's You know, you're not just when you're building a new utility plant, it ain't just turbine. There's all this other electrical equipment that's got to get hooked up. They make that too. And the wind business will always, I think, be a crappy business. And and that that so what,

right? Okay. Very interesting. Very interesting. But you would say the thing to look out for in Genova's case is the gas turbines. Is that the core of that business?

Yeah. I mean, that's the core. And you would just want to look at the orders.

Yes.

Which I think in the last quarter up like 85%. Something insane. I

I mean they I mean there's those gas turbines like in the room that we're in. It's like is it's like five of these rooms combined is how big these things are. They're huge. They're I mean it takes years to build them.

Yes. Well, that's what I was going to I think I read something that their backlog is stretching out to past 2030 or something like it is

which is just

Well, because people want to they want to line it up as much as they can. M but is that even more of a uh an argument for this power problem if [laughter] people are making orders now we want these turbines now and hang on well we've got 2030 you want

I I just don't know I really don't know I don't have enough information

yeah I um I can't remember who it was that you interviewed the man that knew uh it was about power but I found that was a really good interview I might leave it linked um on screen right now but I I thought that was a really really good explanation okay so we've covered a lot headwinds when it comes to AI. I think you you went on the record saying that if you try and predict what's going to happen, you're a fool. So, don't don't try and predict it. I think there are a lot of people out there that feel compelled to look at these AI plays to to look into the realm of AI. If you're if someone comes to you and says, "Oh, look, Steve, I really got to get in on AI somehow." What are what are some of the maybe safer ways to play AI? And what's what would you say are the high-risk ways to play AI? Talking about just investing in in stuff.

I mean, I would play I wouldn't invest in an LLM because I just think, as I said, there's no I would not. I would not

because there are no moes.

Yeah, that makes sense.

I might be a little wary of the hyperscalers at this point just because their businesses have they've lost all their cash flow.

But I would be looking at the companies that are getting that cash flow,

right?

So, you know, that would be Nvidia. you know, maybe you you'd want to own Micron, GE, Verova, um, Arista Network, Cisco, and then if you want to get into the industrial side, you could talk about like an Eaton, which could is electrification company. That's what I would

So, it's more it's more picks and shovels.

Picks and shovels,

right? As opposed to the flashy software side,

right?

Okay.

The software, you know, the whole software industry to I mean, I'm sure you've heard the word SAS apocalypse.

I have. Um, [laughter] and I I I I all I know is there will be software companies that will have problems

because, you know, take this new Agentic AI um, Muse, I think it's called, that Meta put out. You know, if I want to book a flight, I say to my muse, oh, that's good. I say to my muse, I want to book a flight to Miami on such and such a date. book me in the best hotel in Bickl.

Okay. And it goes and does it. Well, how does it do it? It goes on all the travel sites and finds the best price and books it.

Mhm.

Well, that kind of makes the travel sites worth less because you're not going to you're not going to bookings or travel velocity or what whatever directly anymore.

You're not their customer anymore. your AI is

you're AI my AI agent is my customer he and he does the work

and the sidebar ads don't work on that

so stuff like that I think stuff in the payment world could get dicey but on the other hand you know software that's deeply embedded in enterprises is probably okay

well that's what I was going to ask you it sounds like the most important thing to look at is the switching mode and how how resilient

how resilient is it okay I mean you know for bookings what's the switching mode you know I go to I go on the bookings website and I book a trip so now I don't go on the bookings website. I my agentic AI finds just the best deal.

So that kind of makes the the travel online companies worth less. I think it's a little early, but I think that's a possibility.

Yeah. Okay. So I I guess another argument that I've heard and I'm interested to hear your overarching thoughts on this around AI is people are very fast to liken it to 1999,

a techbubble 2.0. Oh, no. You know, that's that's what the media will say,

right?

I'm very interested in what your thoughts are on this. I have my own opinion, but I'm interested to hear what you think. We're in the same setup. New technology, speculation in financial markets,

similar setup. Is it different this time? Is there anything fundamentally different?

I I don't know if it's different or not. I think it's too early. I mean, if open AI or anthropic fail, you'll have a real correction and then the next generation of people will come up and pick up the pieces. I don't know if that's going to happen or not. So, I I just don't know.

Fair enough. Going back to the investing argument, I I'm actually interested because I didn't ask you last time and I had some subscribers that are interested in understanding how you actually go about your investing, not stocks, not what stocks you're picking or anything like that, but when it comes to the Real Eman playbook, what is the Real Eisman playbook? How do you analyze companies? Is it do you stick within a circle of confidence? Do you go down rabbit holes? Do you look at certain financial metrics that you really love to see or not?

Well, a couple of things. I'm very storyoriented.

Story. Okay.

I am not a quote unquote value player, I think.

Okay.

You know, stocks are cheap. They're probably cheap for a reason. Okay. You know,

but I can't see you being someone that will grossly overpay for something either.

I I see you as personally I see you as very rational. You know, I I mean, I would have loved to have owned Palunteer, but I won't buy it now because it's so expensive.

Yeah.

Um,

so story but rational.

Very story. Story but rational. [laughter]

Okay. Is there anything uh are there any kind of uh metrics on your checklist or anything that you love to look at that might be a red flag? I'm just interested to see like what you really look for. Is a moat like a must-have for you or

Not necessarily. I like a moat.

That's why I own Moody's for example. Um that's why I own Visa.

Mhm.

But um it's not a complete requirement. So no.

Is there anything that you particularly hate to see in a company? What's what's what are some things that will instantly turn you off?

Management selling stock.

Okay.

I generally don't like cyclical companies.

Okay.

Because then you're just predicting the economy. And I mean there are exceptions, but I I I like companies that have a real story with real growth tailwinds,

right?

That's what I like.

Okay. Interesting. Hey, do you mind if I finish off by asking you some questions from the audience? Sure. Is that all right?

All right. I had a quick screen, but I might have forgotten some. [laughter]

All right, let's Oh, this is a really interesting one. I did want to get your opinion on this. US debt. This is such a a an interesting topic and it's very very very highly covered. So it's at $40 trillion now. The average interest rate on it has gone from 1.77% in 2020 to 3.45% today. The interest expense has risen from 523 billion a year to now 1.22 trillion. Is that something investors need to be genuinely worried about? Is there a real risk of a debt spiral in the future?

I mean all the things be equal. I wish the deficit was smaller.

Y

um I I have my doubts about a debt spiral. Number one, we are the reserve currency of the world. But maybe even more importantly, US treasuries are the financial system of planet earth. So just for example, banks all over the world do something called repos where they lend to each other overnight. They do it through overnight treasuries. So, as long as the US Treasury is the backbone of the financial system of the world, I tend not to worry about the deficit too much, although I'd like it to be smaller. If there was an alternative, we'd be in trouble.

Okay?

But there is no alternative at this point.

Let me ask you this. The Fed just raised rates for the first time in 3 years. Are rates uh likely to be a showstopper for the market and in particular the AI narrative? The rate to look at is the 10-year.

It's long the long-term rates, not the short-term rates that the Fed does because that's what people borrow.

Okay?

You know, the Fed is just

the Fed funds rate is the rate at which the Fed lends to banks overnight.

Okay?

You don't have access to that. Neither do [laughter] I.

Um to the side.

Yeah. So, you know, just today, for example, the markets rallied because despite the Fed raising rates, the 10-year yield went down. I'm getting the feeling that 5% is sort of the Rubicon for the market.

And um as long as we're below that, we'll probably be okay. But if something were to happen and and we blow through that, I think we get a correction.

Okay. Because it's around

that's just my guess. I actually thought originally the number was 4 and a half% and I was wrong.

Okay.

But five feels more.

Do you know where it is now? It's around there.

It's 4.98.

4.98. Okay.

But it was over 5% yesterday. Yes.

And it's come back down. People are watching every tick.

Yes. Interesting. I'm interested to hear Steve's thoughts on Here we go. rising yields of long-term treasuries. Is Scott Bessant's buyback plan really designed to increase liquidity in older long-term bonds? Or is the government trying to manipulate long interest rates to ease their interest problem?

The latter. He's trying to buy long long-term treasuries to bring rates down to ease the cost of of money for the United States of America. He's failed miserably at this point. You know, rates are higher than when he made his announcement. I have a suspicion that he's going to come with something else because because well, he he he announced 6 billion. 6 billion is nothing. I mean, it's a $40 trillion deficit.

That's that was my thought.

So, I I I don't think he's an idiot. So, I think he's going to come with something else. What else that is, I don't know.

Okay. So, a different plan of attack to do the same thing. Yes. Ah, okay. Okay. I've always been skeptical about precious metals, but Steve's recent discussion with Porter Collins and Vincent Daniel made me second guess that. I would like to know if he has any conflicting feelings about precious metals, or is he still firmly opposed to the asset class?

I'm not opposed, but I don't I've never owned it.

Y

I've never owned it. I It's not something that has ever really enticed me one way or the other. Similar thinking to Warren Buffett. It just sits there and looks right.

Sits there. Does nothing.

Does nothing. It's not productive. It

It has value because people say it has value.

Okay.

That's all. Doesn't pay you an interest rate.

Similar argument, I'm guessing, to Bitcoin and anything else that sits there in

Oh, definitely.

Baseball cards, blah blah blah, whatever sits there.

Well, Bitcoin is worse.

Bitcoin is worse. Yeah,

Bitcoin is worse because it trades inversely to its own thesis.

Yes, I have noticed that. That is quite strange. So, so for those for your viewers, what I what I mean by just to explain what I mean by that is people like if you went to a Bitcoiner

and you said, "Dude,

why do you want Bitcoin?" The answer you would invariably get is that that fiat currency, which is government currencies, has been debased, inflation is coming, and you want to hedge against this, so buy Bitcoin.

Okay, that sounds reasonable. The problem is that if that were the case, on days where people worry about inflation, rates are going up, and the stock market goes is down, Bitcoin should be up. And on days where NASDAQ is up like crazy and rates are down, Bitcoin should be down. But it does the opposite.

Yes.

So, so you know, you you say that Bitcoin is going to go up when because when the sky is blue and then the sky is blue and it goes down, you know, why do I own it? You have no thesis. It seems to be just a speculative asset.

It's just like it's a way to speculate about speculating.

Speculate about speculating. I like that. All right, let me ask you this. Dear Steve, you seem to be very much centered on the US stock market. Have you ever tried to broaden your investing or trading horizon geographically? Do you have any interest in companies held outside the US?

Great question. When I used to run my hedge funds, I used to invest overseas.

Mh.

And I found that there was no night and there was no day.

Okay. So for the last many many years, all I do is the US and I'm perfectly happy. There's plenty to do in the US. I don't feel the need to invest overseas.

Fair enough. Plenty of opportunities here. I like it. What's his view on when all these wars would end? I guess particularly the Iran war. Do you see inflation coming down anytime soon?

I have no more insight into the war than anyone else, so I can't answer the question.

Fair enough. Well, I think that is just about all we've got. Is there one more? Is there one or a set of numerical indicators, whether related to interest rates or inflation or unemployment or otherwise, that Steve could see as being the tipping point for the US to take its medicine with cutting benefits or wash spiking rates up or whatever he thinks that medicine might be? I've seen I've seen it said that oil will rise until stocks fall, meaning that the US won't get out of Iran until stocks really take a beating. But this is a much broader question about getting the debt back well under control. I guess we kind of touched on that with the kind of touch. I mean, all I would say is that's a total political question,

and there's no political appetite in Washington right now to cut the deficit

a dollar

by either side.

We'll see where that goes.

I think that's just about how we finished our last [laughter] our last interview. And I was like, on that cheery note, so again, on that cheery note, Steve, thank you very much for for coming on. For those that don't know, well, we talked about it earlier, but The Real Eisman Playbook is uh is what you're currently working on. That's your podcast. Can you tell us a little bit more? What can people expect from that? It's on YouTube. I guess you can get it on podcast platforms as well.

Well, we do two two free podcasts a week. So, one is an interview. So, and then the other one is a market rap where on Friday I put out like a summary of the whole week and then if you're willing to pay for the payw wall on Substack, we do an additional podcast which is sometimes an interview. This week was part one of two-part master lecture of how to analyze banks.

All right.

Yeah. I have to check

if anybody who ever But you have to subscribe.

Okay, I will subscribe. [laughter] No free lunch.

No free lunch there city here.

I will see.

Yeah, but if you want to know how to analyze banks,

go there.

That's where you should go.

Awesome, Steve. Thank you very much for Thank you very much. Appreciate it.

Great. Bye.

Yes, you're the man now, dog.