Steve Eisman is best known for his portrayal in Michael Lewisâ book "The Big Short," and in the 2015 film of the same name. He is one of the few people who managed to foresee the collapse of the U.S. housing market in 2008. He also managed to profit off of it. In a recent interview with CNBC, he talked about what the state of the economy today and, most interestingly, on what the consequences of loose monetary policy have been.
On industrial recession
Whenever Eisman does an interview, he is always asked whether he thinks there will be another macro-meltdown like there was in 2008. This is unsurprising, given what he is known for, and it must be quite tiresome to answer the same questions over and over. When asked the same thing this time around, Eisman reiterated what has been his position for a while - that he views the U.S. financial sector as fundamentally quite sound, and that banks are in the best state they have ever been during his career. He did add, however, that he believes we are in the middle of a global industrial (but not systemic) recession:
âIs there going to be a recession this year or the year after? I donât know. I think we are in a global industrial recession as we speak. Thatâs not the same thing as a recession, because industrial companies are about 10% of 15% of the economy. I think when industrial companies report itâll be pretty universally weak, almost without exception.â
On loose monetary policy
Eisman was later questioned about his view of monetary policy. As anyone with a pulse knows, interest rates have been at ultra-low levels for over a decade now, inflating asset prices to a significant extent.
âQE (quantitative easing) is what I like to call âmonetary policy for rich people,â meaning it raises asset prices and has zero effect on the economy. It actually has some very negative aspects to it - if youâre a saver itâs not helping you, itâs hurting you. So I donât find QE is helpful to the economy, it just causes asset prices to go up.â
The bottom line
I agree with Eisman that the last decade of easy money has disproportionately benefited those with assets, and has left ordinary savers behind. I further believe this has fuelled an already dangerous tendency towards borrowing and funding consumption with debt. If the price of money is low - and, conversely, if there is little point in putting money away - it makes more sense to spend it now, and to borrow at higher levels.
A further consequence of this has been the proliferation of venture capital-backed, high-profile tech companies (or in some cases, companies that claim to be tech) that rely on outside funding to survive, and who have not shown any ability to generate free cash flow. Itâs actually remarkable how many household names fall into this category - Uber (UBER, Financial), Lyft (LYFT, Financial), Tesla (TSLA, Financial) and WeWork, to name just a few. And with the Federal Reserve resuming open market operations, it will be very interesting to see what the future holds for this odd slice of the economy.
Disclosure: The author owns no stocks mentioned.
Read more here:
- Be Humble and Learn From Your Mistakes Like Warren Buffett
- The Importance of Having Strong Investing Rules
- ââšSeth Klarman: What Happens When Everyone Suffers From Short-Termism
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