Steve Eisman: Warns On Hong Kong And Details Short Zillow Pitch

Steve Eisman of Neuberger Berman breaks down the rising risks he sees in the U.S. economy and why he is betting against Zillow Group Inc (NASDAQ:Z) with CNBC’s “Power Lunch” team.

Steve Eisman danger to the system

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Steve Eisman: Hong Kong And His Bet Against Zillow

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Transcript

Do you rely on bond ratings at all? Never? And what do you do instead?

Actually do my own research.

And that is how you uncovered some of the internal weaknesses in the, in the synthetic securities that brought the system, basically to the brink of disaster is you went in mortgage by mortgage and looked at what was in there and saw that what was being rated as filet was charitably, something far less than that.

I think that's a fair statement. I mean, I what what your guests said that the business model, the rating agencies is unchanged as 100% accurate. And as long as the the issuers pay the rating agencies, which is what they did pre crisis, and what they do post crisis, you'll always run the risk of rating rate, Greg, credit rating inflation.

Let's fast forward to today, there is a lot of debt out there, a lot of it is corporate debt. A lot of it is once again so securitize packaged debt and leverage one way or another leverage always seems to lead to problems, is the scale of us corporate debt out of hand and a danger to the system.

Do I think there's probably too much corporate debt? Probably do I think it's a danger to the system? Definitely not. the only the only time there's a real danger to the system is when banks over levered. And then there's, there's a risk that banks are going under. And today, the leverage in the banking system in the US banking system is about a third of what it once was. I honestly can say, for the first time, the almost 30 years that I've analyzed the financial system, I actually think the financial system in the United States is safe. That isn't to say that the next recession, people won't lose money, but it's not going to be a systemic crisis.

Speaking of the next recession, when do you think it will be many folks are pointing to a lot of signals that say, hey, it may not be so far off from right now.

I have a strong opinion about when the next recession will be. I mean, the only thing that I would say is, are the major risks is obviously the trade war. And then I think the potential Black Swan, if there is a black swan right now is what's happening in Hong Kong right now. And, and that if things escalate even further in Hong Kong, that would have a real impact on the global economy. But we'll see,

you had said previously, when you were with CNBC, I believe in May that you are confident that we would be able to make a trade deal with China. Have you changed your tune on that? Do you think there's still a chance that we can make a trade deal where the US is...

I didn't say I was confident? I said it was more likely than not, I would say right now, it's more likely than not that there is no trade deal.

And so if there is no trade deal, what do you think happens with our market? Is that already priced in?

It's not clear to me how much of its price in at this point? I mean, it's really going to be determined by how much the US economy slows as a result of that or not, I don't think we'll know that for a few months.

Everybody would love to know what you're doing right now in with your investments and without without opening your playbook. Totally. I know that one of your shorts lately has been the real estate data and and brokerage, Zillow, it is down very heavily today. So you're having a nice day, I guess. Why? Why is Zillow, one of your sort of flagship shorts right now,

I would say Zillow has one of the most flawed business models I've seen in a very, very long time. They had a good business, which was their internet real estate platform, the growth in that has slowed dramatically, so that now the growth is zero. And in that business, they're having real problems. They like to say that they're experimenting with new pricing. But really what they're doing is they're trying to change the pricing of their entire business. That's the problem. The problem is I find the most problematic is what they call their I believe I home business, internet buying business, where they actually go out and buy homes and flip them. I actually think the company doesn't understand the risk, the real risk of this business, which are massive. And one of the ways you can see that as last night on the conference call the first words out of the CEOs mouth when he talked about this business was the to how big the TAM was the total the addressable market. And of course, the real estate market, United States is very, very large. But it's a miss application of the word Tam to apply it to the real estate market, because there really is no Tam and the way people think about in terms of the internet, there are thousands of many markets all over the United States. They're all local, they're all extremely different. They all have incredibly different risks. For example, did you know that in Dallas, there's a problem that many, many homes have cracked foundations, these type of different problems exists all over the country. This is a capital intensive business. I know I know only one thing for certain between now and five years to Now assuming the company has some level of success. There will be massive problems that they will uncover. I'm sure they'll be right downs. I'm sure they'll be impairments. And I'm convinced that the investor base doesn't have a clue about what this business is really all about.

Let me That's very interesting. And and a strong argument indeed. I'm sure we'll we'll have Zillow on and they'll they'll address some of your your points, I'm sure. Let me turn back to the macro economy, if I might, if you and I know you're not predicting in any sense a the kind of financial crisis or meltdown that afflicted the large us banks in the banking system around the world. But if you were to advise viewers on the one or two things that they ought to keep their eyes peeled for you mentioned Hong Kong as possibly being the smoke signal that deeper Trouble is, is around the corner, what would those be?

Well, let me just focus on Hong Kong. And I'm, I want to be very careful here because I'm not making any kind of predictions. But things in Hong Kong seem to be escalating. The people who are protesting are not backing down, the Chinese government doesn't seem to be backing down. So if cooler heads prevail, it's possible things in Hong Kong could get very ugly. And that is not going to be a positive in terms of negotiating a trade deal between the United States and China. It's just not gonna be a positive at all for the global markets. And that's actually what I'm worried about the most right now because every weekend, we've got this drama where the people of Hong Kong go out and protests in the millions and it's starting to get very violent.




About the Author

Jacob Wolinsky
Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Prior to ValueWalk, Jacob was VP of Business Development at SumZero. Prior to SumZero, Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver