Big Short Reunion w/ Danny Moses: Rising Rates, AI & Private Equity | The Real Eisman Playbook Ep 80

0:05 Hi, this is Steve Eisman and welcome to another episode of the Real Eisman Playbook. I'm really pleased to say I have a recurring guest, an old friend, former partner from my Big Short days at Front Point, and who is now also a podcaster, Danny Moses, who runs a podcast called On the Tape. Danny, welcome back. >> Great to be here, Steve. You're now lapping me in the podcast arena, just so you know. Like you went from zero to 60, I'm still stuck at 20, but thank you for asking.

0:31 >> Thank you. Thank you. So, you run a podcast called On the Tape. >> Yep. >> Tell us a little bit about some of your guests, things have been happening on your podcast that that are of interest. >> Yeah, so I have guests from various fields. Some are technicians, some are strategists. We just had RP Eddy from Ergo, who does geopolitical consulting. His clients are sovereign wealth funds, hedge funds, governments, corporations. Really really enlightening. and part of the offering for On the Tape now also includes our Substack, What Are We Doing Contrarians at the Gate. And just this week >> Which you work out with with Vincent Daniel >> and Vincent Daniel, who you obviously know very well. You had him on there a couple weeks ago. So, now it's kind of all blended together and Clear Street is now sponsoring >> Who's Clear Street?

1:16 >> They're a broker-dealer on Wall Street that has kind of grown over the last few years and their service offering is really catering to all every type of investor. >> Okay. >> And they do lending, they're clearing, everything. And so, we're excited to partner with them. We're going to be doing events with them. But, I bring that up because it's now kind of all coming together. What started out as just On the Tape that I started with yeah, you know, the guys at CNBC, Dan Nathan, Guy Adami, and you've been on the show as one. Then they have three or four other properties. Now, this is now become part of this unit. So, it's been great and you know, writing, which I know you you like to do, it's a great expression. We do a Friday night dirty podcast, kind of like your weekly wrap.

1:51 We have it called the Friday night dirty. we just sum up the week and kind of what's out there. And so, it's been a it's been a lot of fun kind of growing both sides. >> Yeah. So let's start with your show. >> Yep. >> So you went to interview people like I interview people. Tell us a couple a few guests in the last let's say 2 months that you thought were particularly interesting. What did they say and what did you learn?

2:14 >> So actually the podcast that just came out this week was with Ergo which is a political think tank type of geopolitics consulting company and RP Eddie who went to college with Porter Collins at Brown runs it and gave us his thoughts on everything going on from geopolitical to midterm elections. He wrote a book in 2017 about Cassandras and how they're not just chicken littles and what to look for. >> Mhm. >> And some of the stuff that came up, you know, that's really interesting was Fukushima has led to a power shortage in Europe because they went anti-nuclear.

2:48 Things like that. Like >> What was what was what what was Fukushima and and and and let's go from >> was a nuclear facility in Japan that burnt because of the tsunami that occurred and the point being the the the reaction to Fukushima around the world by not wanting to build nuclear and use you know and that stuff has created potentially the stuff we're in today up to and including AI power issues that we're now as you know you've talked about this at length how we going to meet this demand.

3:15 >> Right. >> A lot of it's nuclear. I mean so it's amazing how one event >> which we might have had what you're saying is if but for Fukushima. >> Correct. So it's just how those things and so that was really interesting. Dennis DeBusschere was on recently the son of the great Dave DeBusschere who runs 22V Research. >> Oh wait. >> Where yeah. >> I know who Dave DeBusschere is and you know who Dave DeBusschere is. Well tell the audience who is Dave DeBusschere?

3:37 >> He was the until recently the last one of the last remaining obviously was part of a team that won the NBA championship with the Knicks in the 70s. >> was the four he was the power forward. >> Yeah, he was amazing and 22 was his number so Dennis DeBusschere who we know from ISI days and everywhere he's been he's he's a strategist and an economist. He started a firm called 22V and you know a lot of the people that work with him, including Bill Hebel, who your former bank analyst.

4:01 >> know Bill Hebel was there. You got to get him on. Was he running bank research? >> Oh my god, I got to get Bill on. Okay. >> So Dennis was there and you know Dennis was saying he thought the market was going to hit 6800 or 7800 this year on the S&P. That's what he said last time he was on a market. He was right. Thinks the Fed wasn't going to cut rates. This is even in the face of rising inflation.

4:19 I thought they wouldn't cut rates. Sorry, said they wouldn't raise rates any longer for the rest of the year. >> And he was wrong about that. >> No, but recently he came on and said no said the September chance the sorry, the October chance, which is now dropped chance. Anyway, so that's been great. So it's been you know, it's a nice mix of people that that come on and some come back on every quarter or so Luke Gromen.

4:39 Who you need to have on who's >> that? >> He's a macro guy, really amazing forest for the trees. He's been long gold for years and brilliant guy and thinks away. You know, I like to get people on that don't think like everyone else does, right? And this is so kind of >> All right, so let's talk about let's start with the Fed. >> >> Okay. >> And let's let's let's talk about Besant. Like I can't figure out what Besant's trying to accomplish.

5:03 >> So we're Fed or Treasury? We're going to go to both. >> We'll do both. >> Okay, fine. >> Give me your thoughts cuz I got thoughts, you got thoughts. We'll start with yours. Fed raised rates. Do you think they're going to raise more? More importantly Besant pulled this whole twisty twist thing where he issued short-term bonds to buy long-term bonds to try and drive down long-term rates, which only caused long-term rates to go higher. Just give me your thoughts about this whole stuff that's going on and and and that part of the market.

5:32 >> You know, it's amazing. Nobody's bigger than the market itself. Doesn't matter if it's the Fed trying to control the short end or if Treasury trying to control to control the one. It's too big of a market. And you and I both know if everyone knows your position and what you're going to be doing, your hand is out. So as far as betting against the house, we wrote a piece on our Substack, you know, counting cards basically. You could count cards right now and figure out what the dealer has, Treasury. What they're What Do you know what they're doing? They've told you. But, it's too small and it's ineffective. It's more symbolic in nature. So, that's That's the part to do with messing with the Treasury. As far as the Fed goes, if you're truly an inflation hawk, you would want the Fed to raise rates short-term to control the longer end of the curve, right? Because that's what is supposed to happen in our economics class, right? It's supposed to happen.

6:13 So, I don't envy either of their positions that that they're in right now. Obviously, the higher oil at some point, hopefully we There's peace of some kind in the Middle East and oil comes down. And then the assumption will be that inflation will will come down. But, we're running. We've moved the goal posts from that 2% number to the three. As long as it's going towards two, we're okay. But, the cost of living is going up higher than you know, faster than wages. And it's going to be We're in a cycle now. This feels like a much more secular than cyclical cycle as far as where rates cuz rates were so suppressed for so long. And so, you and I lived through held hands at some points in literally Literally holding hands in 2008. And when you think about 2008, oh, what did we do? We never solved the underlying problem. We transferred the debt to the government balance sheet. I know you've talked about this before.

7:03 And rates were you know, we went to zero on rates and the Fed's balance sheet went from you know, from zero to 9 trillion in a straight line through COVID obviously. Some things that came And now it's sitting at 6.7 trillion. And the debt on our balance sheet in the US went from 8 trillion to where it sits here to over 40 trillion. >> Right. And so, rates higher, debt higher. >> impressive move by the way to go from 8 trillion to 40 trillion.

7:25 >> being long that? >> Yes. How do you go How do you go long that? I wish I knew. >> Exactly. So, when you think about nominal growth and real growth in the economy, it's been fiscal and monetary stimulus that has been really what's been driving everything to a degree. And so, when back to your original question, when you start to do things or you're forced to do things that are supposed to kind of rein that in a little bit, whether it's debt, you know, whatever it might be, whether it's inflation, get things under control. No party wants to deal with this. There's no It's No one wants to stomach it. And so, again, I don't envy the position, but I think the course is set.

7:58 And I don't think anything that they that they do right now will have any impact. Raising a quarter point here, stopping, cutting a quarter point here, buying 20 billion worth of 10-year It's It's an ant. >> I agree that the the level of underlying rates is going to be higher >> Yeah. >> for longer. The fact that 500 billion of of AI issuance is taking place this year >> And growing. >> is crowding out in the statement that something in the private sector is so large that it would actually crowd out treasuries has never happened before, but it's that big. So, I mean, one thing that I would be very nervous about right now is just the whole housing sector. Because, I mean, I think you know, as of now, mortgage rates are 7 1/2%. People are not buying homes at mortgage rates of 7 1/2%. They're just not. So, it's a big negative.

8:50 >> I think there's a demographic shift that has occurred since COVID. >> Yeah. >> This generation, our kids' age, whether they buy a home or not, they're just different. They don't think of it like we used to. >> I made a I was in a I was giving a speech yesterday, and somebody way in the back, young person, raised their hand and asked, "Is it a good idea to buy a house?" >> >> And I said, I said, nicely, I said, "Listen, if you find a house that you really like, and you can afford it, and you can afford the payments, include all the other payments, like the taxes and stuff, God bless, buy the house. But don't expect to make money buying the house. I think those days are completely over."

9:35 >> Did you ever tell the story that from in 2008, so it was during the crisis that was going on, we all went down to Orlando, not the Vegas trip, the Orlando trip, the second year, it was the ASF, it was a fixed income conference, and you gave up to give a speech, and you said you said you you were going to pass out Prozac before you spoke. >> Oh, I remember that. >> And I think you made a comment of something that turned to your left, turn to your right, one of those people won't have a a job a job, right. So, again, kind of along those lines of where what part of the cycle, you know, are we in here? There's actually more wealth that there's more household wealth in the stock market right now than there is in people's homes.

10:11 >> Really? >> So, what's interesting is that you shifted the risk the stock market going down poses more of a risk to the economy right now >> than housing. >> That is a very interesting >> and then the K-shaped economy, obviously, you can see the high end of the K, the housing, who cares what rates are, people are buying in cash or whatever it might be, but underneath, there's no there are not a lot of transactions going on.

10:31 >> part of the K, people are not buying it. >> It's bad. It's it's it's not easy, but the top part of the K continues to carry the economy. It's amazing the spending that still goes on. >> All right, so let's turn to AI. >> Okay. >> We could probably talk about this for the next 3 hours. Let's see if we can narrow it down to 20 minutes. Just random thoughts, give me some random thoughts about what you're thinking about.

10:53 >> So >> And I mean, you and I'm sure you've had tons of guests on to talk about it. >> Absolutely. >> So, we we've all that in. >> So, obviously not a tech person, right? Don't right. >> But, you know what? >> Yeah. >> You don't have to be a tech person to understand what's going on. >> Correct. So, couple comparisons, and then it's every cycle is very unique. so, there's this secular trade is massive. It is a it's a secular change, right? That I thought would by now have become more cyclical. What do I mean?

11:20 Nvidia's gross margins staying up in the high 70s. If you told me 2 years ago that we would still be in the high 70s, I'm like, there's no chance. >> chance. >> Some point, competition comes. The memory chips, I know what's going going I don't know when, but Micron is great good good for them. There's a reason the stock traded eight to nine times earnings because people don't care what earnings multiple trades at today. It's like, what does it look like? How Is this a commodity? Is this going to be a commoditized product? And the answer is yes, at some point, because all you got to do is build a fab and start making these chips at some point. What really bothers me and the comparisons that I see, it's a little bit of 1999-2000 and a little bit of what we lived through GFC. What what are the comparisons? 99-2000, the fiber optic craze. You and I were working together, you know, at the time >> Just so everybody knows, Danny and I were at Oppenheimer.

12:07 I was the financial services analyst. Danny was one of the more senior sales people, and Danny used to take me on the road. >> Correct. >> Go see clients. >> I could tell that story. That would be a seven-hour podcast. Taking you to Alabama to an NBC suite with no hot water and you coming downstairs. That was That was quite something. But, let me tell a story now that you bring it up. So, people that know So, I started there in 1996.

12:28 >> Right. >> You were one of the first analysts I met. Meredith Whitney was working for you. Vincent Daniel was working for you. And your first call on subprime auto and home equity lending, I'm a salesperson sitting there covering accounts. I cover hedge funds, state pension funds. And you got up on this podium and said the following eight stocks are going to zero. And I turned to the guy I was kind of learning from, Barry Karnik, and I said, "Barry, how do I make that call?"

12:53 Exactly. He goes, "You don't make that call." I said, "I don't make that call?" He goes, "You can't call a portfolio manager analyst and say the stock you own is going to zero. You get him over here. You talk a little bit." Whatever. So, I I grew grab Meredith. I grab Vinnie. I grab you. I'm like, "What is this Moody's trust securitization data and why should Anyway, I wanted to tell that story because that looked like Anyway, so, 99-2000, Henry Blodget, Jim Jungjohann. We're living in this very similar >> Blodget was at Oppenheimer.

13:19 >> Yes. And and and Jim Jungjohann, who was the one of the Jungle Jim Jungle Jim. There's a reason his name was Jungle Jim. Covering JDS Uniphase and these things, right? And you sit there as a salesperson and you sit there as a financial as an analyst covering financials, which you can't really meme. Book value this, ROE this, it's hard to get past this stuff. They can dream the dream. What was the dream? The dream was that fiber optics were changing the world, that the internet was growing so fast.

13:43 They were right. But if you actually stop to do the math, which is what I'm going to get to in a second, on the amount of CapEx that was being spent, the amount of fiber that was being laid, the amount of fiber that was being leased, the amount of equipment that was being leased by Lucent and Nortel, how Lucent and Nortel were basically, you know, providing loans to people to buy their equipment to do this stuff. The math didn't work. You could have wrapped that fiber around the globe 10 times.

14:06 Like, so stop and do the math. Back to where all this CapEx is on AI. And again, it's a real story. I'm not saying that it's not, but so was the internet. And there was winners and there were losers in into that trade and trying to identify the secular and the cyclicality of various names within the AI play. For example, I love Alphabet, Amazon, Meta, and Microsoft on pullbacks. Why? Because they have an incredible business. Yes, their CapEx in some cases has now gone negative for the first time. They can turn that Their cash flow is gone. Their cash flow, sorry. Cash flow has gone. They can turn off that spigot whenever they see fit. They said, "We're done. We're done. It's enough."

14:44 So, where is the mismatch between the capacity that we're building, the time that it's going to take, the demand, and the economics of the products which are being created? I have no idea if OpenAI is going to make it or not. I know we've had people in the show talk about it. Anthropic, these guys are burning cash like crazy. At some point you're going to need to show you can make money. A profit. I don't know where the math Show me the math both on the enterprise demand side and the consumer demand side with token and all the again, I won't pretend to know all that. But common sense tells you that if you were to stop and do the math on all the loans, the amount of debt that's that's gone out there, what the prices are that people are charging. Over time, the price you're going to create more chips, GPU pricing is going to come down.

15:28 You're going to have the next generation, the next generation. China's coming open source this and the other. So, to me, it's not something I want to short. Although there's a few names out there that aren't as financially sound as some of the others. >> Like who? >> CoreWeave. Which which I think is >> Why is CoreWeave not profitable? >> of kind of the you know you know the trade. Yes, they're buying chips. Right? They're they're they're big clients.

15:51 and now they've gone to kind of renting out shorter term. So, they have a mismatch potentially on their balance sheet of they have 51 billion in debt. Which includes leases, obviously, on on some of these things. >> Yeah. >> You just said that CoreWeave has 51 billion in debt. >> That's >> It's a lot of money. >> Yep. >> But we're sort of >> numb. >> are so big that you're you're like in the context of CoreWeave, 51 billion dollars, when you when you have when you take a step back and you actually think about it, you say to yourself, that's frightening. But you actually have to take a step back.

16:27 >> That's my point. >> Because the numbers that are being, you know, they're spending a trillion dollars this year. So, when you say that CoreWeave has 50 billion in debt, my my initial reaction was, "Eh, whatever." >> Whatever, right. Who cares, right? >> so big. >> Exactly. When are they going to make money? So, if you're not making money So, you need a path to profitability. >> Right. >> Could they make money at some point? I haven't done enough analysis. My point is that that's not a stock I want to own to express my AI theme.

16:51 >> Okay. >> Okay? That's just not. So, where are the similarities to 2006 and 7? I'll tell you where it is, especially with the you know, news a few months ago about this securitization partnership between Nvidia and all the banks on Wall Street. And okay. >> Yes. Which I don't know what what's happened since then. They made an announcement >> deals right now. Like it's starting to do now. >> Okay. >> And so, remember I'm telling you as if I'll explain this to the world, which you already know cuz you taught me everything to deal with this was the mortgage trade went on because of one reason and one reason only. Wall Street's willingness to lend to the mortgage originators to provide lines of credit so the mortgage companies could produce these mortgages and they could package them, Wall Street could buy them and sell them to the world. Same thing.

17:33 >> Let's actually just repeat that. So, Wall Street just just so everybody understands, Wall Street would would basically lend money to a mortgage lender so that the mortgage lender could lend money to a >> consumer. >> Correct. >> Then they would take that loan and they would sell it to Wall Street who would then package it and sell it to investors. >> So, we'd use a warehouse line. They would provide a warehouse line. >> Provide a warehouse line.

17:53 >> And as long as the economics kept working, Wall Street was more than willing to provide them the warehouse line. >> Correct. >> So, for people So, if a if a if a loan's at par, which is a hundred, and a Accredited Home Lenders costs them two and a half percent to originate a loan, their cost is 102 and a half. >> Right. >> As long as you can sell loans for more than 102 and a half, >> We're all in business. We're all in business.

18:13 >> the minute the thing started to drift lower, you and you and I both know what happened. >> Right. >> Wall Street started to pull the warehouse lines. And then what happened? Those mortgages were then stuck on the balance sheets at New Century, Countrywide, or Cal-Western, and the rest is history. >> Right. >> Right. There's a similarity here within the kind of the lending and when we got into the securitization space. And the craziest quote was Larry Fink on CNBC, which was a great interview. They had everyone around This is a couple months ago when they announced this deal.

18:38 >> Okay. >> Jensen was on there. >> the deal that Jensen created with you. >> They were all sitting around, right? >> Right, right, right. >> And I think Fink was the only one that was remote. Everyone else was actually in the CNBC studio. >> Right. >> And Fink goes, you know, this is amazing. This reminds me so much of what we did with mortgage-backed securities back in the '70s. This is incredible. I'm like, what did you just say?

18:56 >> >> So, anyway, so there are some you know, and and the other thing, Steve, is the just to take this full circle here is that, and you know this better than anyone, we were so shocked in 2008 that the government had no idea. The reason we got so scared at the end, we're like, "Wha- We thought you knew. You thought we knew?" >> the government? >> Yeah, the government. >> We thought the government knew what we knew.

19:17 >> They weren't tracking anything. They didn't know the leverage anywhere. Well, what's happened since then is the perfect storm, which is that a lot of the lending's gone outside of the banking system. >> Correct. >> Yes, it's at Blackstone, it's at Apollo. And I know you've had guests on in Glenn Show. You've had people that have talked about this, but I don't know what's, you know, we don't know what's the the type of you know, the amount of lending that's actually out there. We couple trillion dollars, what are they doing? Private credit. And a lot of the private credit trade has lent itself into the AI growth sector and the technology sector. So, we there's nothing systemic. I'm not saying that, but this has to be accounted for somewhere. And it just seems like yeah, one-off bad credit here in the private equity world and private credit, a one-off thing here. Things don't feel Things feel fragile to me overall because the fragility that, you know, we're at 5. As we sit here today, we could be very different when this airs, but 5.27, 5.3% 10-year yields. You can live with that. It's not an issue, right? If you have the growth to support it.

20:13 >> Mhm. >> But you're reaching levels now where companies that aren't growing >> Their ability to grow in a higher rate environment is just different. >> One of the things that bothers me and and I'm I'm like you, I'm not going out telling people to short the whole AI trade. I think that's that's would be insane. But one of the things that work concerns me is the concentration risk. So, just as an example, you know, Nvidia reported maybe like a month ago. I think revenue was up 110%.

20:42 So, everybody said, "Hurrah!" But the next day you got the 10-Q. And the 10-Q said that 70% of Nvidia's accounts receivable is from five accounts. I was like, and I you know, I remember when we were at Oppenheimer, there was a software analyst there. >> Melissa Eisenstat? >> Melissa Eisenstat. And I remember she told me this story where the bankers came to her with a software company to bring public. And it was a very fast-growing company, but she dug down into the numbers, and she realized that the company had like three customers.

21:17 And she said, "That's too concentrated. I'm not going to take a company public that has three customers." Well, Nvidia is the largest company in the world, and 70% of its of its revenue comes from five customers. There's a lot of There's this a tremendous amount of concentration risk. And the other part is that so much of this whole chain is is dependent upon the health of Open AI and Anthropic, which I I can't handicap. Nobody can handicap. We don't We don't even have any financials at this point.

21:41 >> It's a national security issue in the sense of the economy, the reliance we have right now on the growth. It's contributing, you know, a huge amount of growth to GDP. >> Oh, it's at least half of GDP growth. It's massive. And so, you can't afford to take a step back and take a deep breath. No one on Wall Street or in Washington wants to say, "Oh, let's slow it down a little bit." You know, that's the last thing they want to see.

22:00 >> So, what do you What do you make of the whole AI is going to destroy planet Earth routine? >> We'll figure it out. I don't think Listen, I don't Again, I don't know the technology enough. It's a little scary, the stuff that I've seen, you know, approaching it from the of a non-investor lens, just to see We already have cybersecurity issues going on all over the place. This I can't Hopefully, this could be used in a way to help cybersecurity. For But, it seems like there's some rogue agents. I mean, I've watched these videos. I try to educate myself, and I >> >> and I get so scared when I watch it.

22:30 I'll never I Like, how do you trade that? Like, if that's going to happen There's going to be things that happen. It happens in every technology. But, I don't I I can't predict it. I think some bad things are going to happen. I I just hopefully it's not catastrophic. >> Right. Okay. >> Yeah. >> Let's go to our good friends in the private equity world. >> Okay. >> I mean, one thing that's been happening is I mean, if we were talking 5, 6, 7 years ago, that amount of time for monetization was 3 to 4 years.

22:56 Now, it's seven. Maybe it's going to 10. What do you have any thoughts on the future of private equity? >> What it's an incredible business model in the sense of permanent capital. >> Right. >> Management fees just go on forever. It's not an area you can you can you can trade them. So let me go back. You can trade them at massive inflection points when people get so scared that private credit's going to blow up and they destroy the stocks, you have a chance to buy them. And the flip side of that is when it looks like the Fed's going to be in a rate cutting cycle and these things explode higher. But for the most part, like I said before, they have replaced the traditional banks as far as lending goes.

23:31 >> Yes, they have. >> And because they're not regulated, but they're smart, they all own a piece of their business, they're not trying to blow their firms up, they had one job, go out and raise as much money as you can. We've been around that world. We know that. So your sales people go out, insurance companies, pension companies, go out and raise as much as you can from them. Let's close fund one, fund two, fund three, fund four, fund five, fund six, fund. So there's a tail here. So they have the ability to keep investing whether it's in the same companies that they want to invest in or whatever. So it's an AUM it's it was an AUM game gathering game for them because that's where they can make Now, to your point, distributions and realizations is really where they want to make their money and those are goes through goes go through cycles. We haven't had a true shutdown cycle since COVID, which was a one-off in that sector, since it's been a secular growth story after taking assets away from the banking system.

24:19 >> Right. >> So it hasn't been tested yet. We haven't seen anything other than during COVID. And what happened during COVID? The Fed and Treasury were buying HYG. >> Right. >> they they resurrected all a lot of companies that probably they lent to that should have gone to zero and they didn't. So they were more focused on it. And what do they have to do? They're paid to put the assets to work, the cash to work. So they they lend. The and I'm concerned about some of the coverage ratios that, you know, the EBITDA ratios. I know you probably do a teaching on your Substack on that on covenants and things like that, covenant light loans, so to speak.

24:49 >> Right. >> Because they needed to deploy. So you underwrite in a different way when you have so much money because what you have to deploy that money to raise more money. Fund seven, let's go. We're almost done with fund six. We're it's already accounted for. So, I think it became an AUM gathering game over a maximizing >> you on that point because I think this industry really took off post GFC, like exploded. >> Amazing. >> Now, in its defense, one of the reasons why it exploded was because the banks had to pull back, so somebody had to replace them. But, on the other hand, there's there's another aspect to this which I think is really hurting them, which is you're an institution.

25:27 You were not previously invested in private equity. You were in public markets. 08 was unbelievably painful cuz you lost basically 40% of your money like that. >> Yep. >> You don't want that volatility anymore. So, what you did was you put money into private equity because at least you could pretend that it wasn't volatile. Now, the private equity is just as volatile as the public market. It's just that you don't get a public you don't get a price every single day. So, you So, you could sleep at night pretending to yourself, "I got my money with some real great professionals in private equity who are going to make me a lot of money and it's not volatile."

26:07 And I think that's one of the big reasons why this that industry grew so much. Now, the mon- no one's getting monetized. Rates keep going higher. This business really only works in low rates because it's a leverage business. I think the private equity business is going to go through a long period of very troubled times. >> So, this is like this reminds me of definitely one of your favorite movies, definitely one of mine, Willy Wonka with Gene Wilder, right? Where he brings out the contract at the end, "You lose!" And he brings out this long thing goes, "Article four, section three, whatever."

26:39 This whole thing with gating, okay, which you never think about when times are great, gating of a fund. >> All these private private equity funds are getting gated. >> The demand for redemptions is exceeding what they wanted to give. So, they all we're done at 5%. There's a built-up, you know, amount of money that needs to go out the door. And the second thing is, to the point you just bring up, is the mark-to-model versus the mark-to-market. You know, there's no There's no incentive to to mark-to-market if you don't have to, to your point, because the AUM changes, everything changes at that point. And the last thing, Steve, is that if you're a retail investor, which a lot of the people that watch you here are, and I've been saying this for years, how do I have the good fortune of being able to invest in this particular product? Why am I the lucky one that sees this, you know, this private deal that comes to my Why am I getting this in my inbox? Like, we know this whole distribution into retail, getting access to these sophisticated products, happens for one reason and one reason only. They need to fill it. They need to fill these deals.

27:35 >> Right. >> Institutions don't pass on good deals. There's always It's like an IPO in equities. When do the IPO doesn't work? When the hedge funds and all the large institutions and Wellington and Fidelity don't want it. >> And they they stuff they stuff they stuff retail. >> What do we used to do on our desk when they did? Happy Thanksgiving in July. You know, stuff they stuffed us. Oh, we asked for 200,000 shares. Steve, hey Danny, what did we get of that IPO?

27:56 200,000 shares. you know. You don't want 200,000 when you ask for two Anyway, my point is that they might be overstaying their welcome in that. And I think that's another thing that has happened is allow retail investors to have everything that institutions have. Careful what you wish for, so. >> What else we talk about? >> What I mean, let's let's talk about the media world that you've entered here. I would love to ask you some questions.

28:18 >> go ahead. >> You know, you you've been involved in the markets longer than I have, few years longer than I have, and I made the transition to kind of this media podcast stuff before you did. And you've always been a professor. You've always loved to teach and to learn. That's always been your your thing. If you didn't go to Wall Street, you'd have been a professor at Columbia. You That's what you would I could see you in that outfit. You'd be spectacular. Probably a pipe Probably a pipe at this point. Probably a pipe at this point. but so I think there's I want to ask you The you learned from your guests? I love learning new have you learned from your guests? I love learning new things. You do You do You do as well. So, talking about the journey because you were on On the Tape 4 years ago. You came on a few times. And you were good on it. I think you were a little bit It was You weren't comfortable not because you were comfortable with what you were talking about. You're kind of like, what is this? Like, what am I What am I supposed to say? And now, you know, look what Look what's happened. So, congratulations on what you're doing. And I know who the brains are behind the operation.

29:13 >> That would be my wife, Valerie. >> Obviously. And so, that makes it That's a great team. So, talking about your journey because Yeah. >> So, we started April of last year. I would interviewed Dan Clifton of Evercore. We had the fortune of It was sort of weird. I had scheduled him just because I just had scheduled him to be my first guest. And it turned out that I interviewed him like 2 days after President Trump did announced the tariffs. So, couldn't have been more relevant. You know, I remember we did the interview. And I think we had 5,000 views.

29:54 And we were like, wow, 5,000 people want to watch me? How crazy is that? And so, you look at it took time. I mean, first of all, we I found that you know, I could interview people. And then we added the the weekly wrap, but which is you know, when I when I wrap up the week and I just speak into a camera. And you know, the first several times I did the weekly wrap, it was awkward because you know, you're looking into a camera. There's nobody here. You're getting no feedback. And you're you're just talking.

30:26 It took time to to to sort of >> Sounds like being a research analyst on Wall Street. >> Exactly. >> >> And so, I I think the sort of the the niche that we've sort of developed, which you intimated at, is we I'm not here to tell anybody that they're wrong or to convince them that I'm right and you're wrong. I'm just trying to educate people so that they have a better understanding of of of what's going on and I and I try and do that in a very non-confrontational kind of way. So and I it's sort of >> It's interesting. I need to I need to ask you on that because I'll flip I'm flipping it completely. Yeah.

31:06 We're sitting on the desk. You have money at risk. As a portfolio manager you're running your fund. You would do everything you could to explain your side of the story to an analyst that you either thought wasn't being not honest, but wasn't really looking at these things from the standpoint that you were. Could be a lender, could be whatever might be and you would get heated and you would get very upset. >> I would. >> Not even cuz the maybe the stock wasn't working yet because you're like, are you see like you not see what I see? And that's because you're coming at it from a different angle, right? You you're you have a position on. You're not forcing them to do anything, but my point is that it's interesting to see how you can take you literally can wear those that hat and wear this hat because you have to have the >> I'm a little older.

31:45 >> Yeah. >> So I'm not quite as emotional as I used to be and I've I've sort of taken the attitude that what I'm trying to accomplish is education. >> There's some great stories, Steve. I could we could Can I tell a couple stories? I mean okay. The story I get most, the question I get most. >> The question you get most. >> about The Big Short, which is 100% true cuz the book was 100% accurate, the movie was 75 to 80%.

32:10 >> is this you holding up the zero and I can't tell you for I still get emotional when I think about watching you actually do it. People said, "Did he really do that?" I go, "He did that." I mean, Ryan Gosling did a much better job of narrating. You were in the room. You were sitting next to me. >> you and me. >> That's right. I mean, the room was full of fixed income people and I'm next to you ho-hum ho-hum. Option one guy up there. I'm like, " this guy is you're like I go, "Steve, what are you doing?" And you raise your hand and you you show zero. And the guy speaking and literally said, "I'm sorry, is that a question?"

32:42 No, it's that's not a question. There's a 0% chance your losses are going to stop at 5%. I'm sorry, what what? Zero. And then he's trying to get his wits about him, the H&R Block guy, option one guy. And literally as he's about to come back at you or say something or hopefully you go away, your phone rings. >> Valerie. >> Valerie's calling you. >> >> And I'm looking now your phone's ringing in this thing. We just went to dead silence when you you stopped everything by doing the zero. And you walked out.

33:08 And you left me there. And I did this. I literally I I've never like you see it in movies. I literally went like this. I didn't know what to do. And we were sitting in the middle. Like it wasn't like I could get up and go. So I stayed for the rest. >> >> But you actually did it. You actually did it. >> definitely did it. >> And and the dinners and I I it was that was I can't even make that up. Like the stuff that went on there. That's a once-in-a-lifetime. It was crazy. And the other thing people always ask is No one insinuates that we're lucky.

33:34 You know, I always say it is it was an opportunity trade. We couldn't understand how you could effectively express the short theme for these companies in the form of a bond which are shorting at par which can't go really up more than par. It can go up maybe a couple points and paying two to three percent coupon. So if you're wrong, you're wrong for a year. You lose 5% and you're out. Michael Burry, I always tell this was we didn't know him at the time.

33:58 And if that had been us, I think you would admit if we put that on in 2004, no chance we're around in 2006. >> Not even We would have We would have been out of business. >> Yes, exactly. So for once in our lives >> Yeah. our timing was impeccable. >> Steve, the day we put it on, that trade was small. We started out small. Come in the next day and immediately the marks that we get were in our favor. Right.

34:19 Not once did it go against us. Every day would start, "Danny, did you get the marks?" >> Anyways, right. So so So So everybody understand when when you do a credit default swap on subprime mortgages, which is what we did, there's no screen. >> It's OTC. It's over the counter. Right. >> not like, you know, at the during the day you and I are looking at the screen and we're going, "Oh, the price is changing to our benefit." We would have to wait till the end of the day or sometimes in the morning to get prices.

34:46 And you were always the one to get the prices and I would always say, "Danny, >> Yep. >> what's what's the price?" >> What's the price? How are we? We're starting out good. We're up a little bit to start the day. So, change our mindset. So, it really was a a useful tool, but that was the other misnomer. People like, "Oh, you like I go, "No, but there's a long book, there's a short book, and there was the See, yes, and you know, we had wanted to, but that book could have been much bigger.

35:06 >> Right. >> But, we were doing the thing we thought was responsible. So, anyway, wouldn't trade those times for anything. Even though it took years off of our lives, that was amazing. >> did. >> I do want to ask I do want to talk about something else, though. I want to talk about the debt and the deficit. >> Okay. >> Because I know you care. >> I do care. >> You care as an American, you you >> I actually By the way, by the way, I actually wrote you know, on Substack you can do those chats and notes.

35:28 >> Yes. >> So, I wrote a note today comparing what's happening in France versus what's happening here because there are real parallels. The The debt to GDP in France and the US is roughly the same, about 120%. >> Mhm. >> France, like us, is completely What's the right word? Politically paralyzed. >> beholden to the euro. >> Right. But, they're completely politically paralyzed about cutting the deficit to such a degree that one of the people who's running for president, Marine Le Pen, actually wants to reduce the retirement age from 63 years to 60, which would increase the deficit even more.

36:06 You know, rates are starting are now marching higher in France. The difference It's not that I don't have concerns about the deficit. It's just that because we are the reserve currency of the world and the entire world functions on the entire financial system of planet Earth functions on Treasuries, I don't see the alternative. If If Put this way, if there was a serious alternative to Treasuries, we'd be in trouble. Because people could could say, "I won't I don't want I'm not going to own Treasuries. I'm not going to do repos with Treasuries. I'm going to do repos with I don't know, Bitcoin, whatever." And if I could And And if if that was a possibility, whatever problems that you that you're concerned about with the deficit would be much more much more problematic.

36:51 >> Let me push back. So, we have no appetite to cut spending either. Just so we >> kidding. Nobody does. >> Nobody does. All right. So, that's Neither side. >> So, sorry. So, we're the >> Which is like the French in that sense. >> So, we wake up one day and then France they decide to send yields higher because they're concerned about their their ability to fund themselves. The Liz Truss The Liz Truss moment 3 years ago in the UK, same thing. She's gone. I mean, because of the You have these periods of time. We might be experiencing a little bit of that in the in our bond market. The reason that Okay, we're moving higher cuz of economic growth. Okay, we are to some degree. But But maybe part of it's term premium what people risk people want to tell Let me give you couple stats here.

37:28 The dollar is 57% of the world's reserve currency. It was 71% a couple decades ago. It's dropping. Still dominant. It's not going anywhere. Central banks Global central banks, number one holding is not US Treasuries. It's gold at 27%. Treasuries are 22%. And now, gold's on up. So, the reason it's obviously passing it to a degree. And then the BRIC nations we're talking about for a while coming up with their own currency. So, there are things underpinning that concern me. You We're We're playing with fire in the sense of we I think we take for granted that the dollar is still going to be the world's reserve currency.

38:01 >> But listen, you could drive yourself crazy. >> I'm not >> You could literally drive yourself crazy. >> But the math if you if this was the balance sheet that you were underwriting USA Inc. I think Mary Meeker did it in 2008, whenever that was in 2008 or 9. Remember her Morgan Stanley? She actually did it Let me treat the USA as if it was a company. >> Right. And you analyzed it. So, anyway, there's some There's some things that just concern me. I don't know, to your point, who's willing to take pain to help us get us out of it. I believe I believe QE's coming. Again.

38:30 >> Do you really? >> 100%. >> Because >> way out. I I don't know how you're going to you're going to print your way out and deal with the consequences later. >> It's so funny cuz Warsh is so against QE. >> I mean Yes, he also wanted to quantitative tightening. Have you heard anything about the balance sheet reduction? >> heard no quantitative tightening. >> Anyway, I just I wouldn't want any of those jobs. I'm just saying taking the >> agree with you. It's a job.

38:50 >> trade the way oh, we're going to default. We're not No, no, I'm with you. I'm with you, but you have to incorporate the idea that that there is a required higher yield to >> That's fair. >> That's it. So, I'm concerned. >> Okay. Danny, thank you. >> Thanks for having me, Steve. Great to see you. >> >> This podcast is for informational purposes only and does not constitute investment advice. The host and guests may hold positions in stocks discussed.

39:20 Opinions expressed are their own and not recommendations. Please do your own due diligence and consult a licensed financial advisor before making any investment decisions.