Steve Eisman became a famous name in the investing world due to his prescient bet against the US housing market before 2008, which led to his starring role in Michael Lewis' book The Big Short. These days his investing approach looks a little bit more conventional in his role as a senior portfolio manager at Neuberger Berman. But he still has big ideas. These days he sees three dominant macro stories for investors: AI, infrastructure and crypto. The last one he just fundamentally rejects. The first two, however, he sees as tailwinds that can potentially last a long time. He's been looking for companies that can capitalize on trends like nearshoring, the Inflation Reduction Act, and power-hungry datacenters. In this episode show, we he discusses where we are in this big cycle. He also tells us about his love of comic books, and what he sees as the core problem with the Marvel franchise. This transcript has been lightly edited for clarity.
Key insights from the pod:
Financial conditions and the Fed — 2:17
The three big stories of our time— 5:45
Identifying non-primary AI plays — 12:11
Due diligence on AI investments — 14:31
Infrastructure investment and Trump — 17:43
Sell-side analyst arbitrage — 19:48
Utilities and greenification — 23:51
The big change in the infrastructure industry — 25:31
Reits and investing in data centers — 28:25
Steve Eisman’s comic book collection — 33:49
Steve’s literary theory of Spider-Man — 35:31
Problems with the Marvel franchise — 37:04
Why it’s not all priced-in — 43:31
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Tracy Alloway (00:20):
Hello and welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway.
Joe Weisenthal (00:24):
And I'm Joe Weisenthal.
Tracy (00:26):
Joe, does it feel like we're at a turning point of some sort? I feel like that's always a dangerous question to ask on a podcast because the tendency is to call turning points or say we're at, you know, the beginning of some new structural shift, because that's kind of what everyone wants to hear…
Joe (00:43):
You know what? What I've been thinking about that's like super-meta and maybe beyond the scope of anything that we talk about on a podcast, but just since we're talking about big moments? When I was a kid, probably my parents thought that the future would look very different when I'm an adult, you know?
But now I think that, well, for my kids, the future will look so radically different, that I just cannot imagine 20 or 30 years from now anything being remotely similar to [what] it is today due to various things that we're seeing with tech and geopolitics and things like that. Particularly AI.
Tracy (01:18):
I don't know. Back to the Future, promised we'd have flying cars by now and I'm still waiting.
Joe (01:22):
They did get video conferencing.
Tracy (01:24):
I guess that's true.
Joe (01:25):
So that's one thing, but yes, you're right.
Tracy (01:27):
Alright, well, there's obviously plenty that we could talk about when it comes to the future like what is realistic and what is sort of pie in the sky thinking, like flying cars. I suspect we are not going to have those for a while because of various reasons, but one person we do like to speak to when it comes to thinking big picture and kind of talking about these potential paradigm shifts is Steve Eisman. Of course, he's been on the show a couple of times. He's the managing director at Neuberger Berman. And Steve, thank you so much for coming back on Odd Lots!
Steve Eisman (01:57):
Oh, thanks for having me again.
Tracy (01:59):
So big picture thoughts. What are you thinking at the moment? The last time we had you on, you were talking about a paradigm shift as interest rates got higher and it seems like investors are starting to ratchet down their expectations for cuts right now. So we might actually get that higher interest rate environment for longer.
Steve (02:17):
You know, let's just start with the Fed, so we get that out of the way as quickly as possible. I have felt for a long time, the Fed is extremely insensitive to its own impact on markets. You know, was it last week when Powell spoke?
Joe (02:33):
Mm-hmm. So we're recording this April 2nd, but he spoke on Good Friday.
Steve (02:37):
You know, when he said that he thought that because rates are higher, financial conditions are tight, that was a little weird. Because credit spreads are extremely narrow. I've always felt that, like I said, the Fed's insensitive to its own impact on the markets.
It's clear the Fed wants to cut rates, it wants, seems to want, to cut rates very, very badly. Why it wants to cut rates so badly, I don't understand in that they've engineered something that's really pretty fantastic. You know, not only is there no soft landing, there doesn't need to be any landing.
And as far as, you know, the data that I can see, there seems to be something of a re-acceleration in the economy right now. So why would you cut rates? What's your rush? You know, the actual, what I would say, even though I think the Fed is going to cut rates, the fear that I think should be out there is that if they do cut rates, it'd be even more of resurgence in the economy and there'd be a resurgence in inflation. So why would you rush to take that risk? I don't get it.
Joe (03:39):
It's funny you start off, you started off talking about financial conditions. Actually, I wrote about them a little bit more, a little bit this morning. And the question that I have in my mind, measures of financial conditions are clearly loose, right? So the stock market is basically at all time highs, [which is an] input into financial conditions. As you mentioned, credit spreads are pretty tight.
And then of course, crypto, which maybe you have thoughts about, [is] going to the moon. So all kinds of measures of, in liquid markets, loosening. On the other hand, the IPO window still hasn't totally reopened. It's not obvious that private investment is reaccelerating in some dramatic way, hiring intentions, the labor market continues to at least normalize — it's not falling apart by any stretch — but it's nowhere near where it was, you know, a couple of years ago. Are those tight credit spreads in high stock prices translating into the economic variables — employment and inflation — that the Fed really cares about.
Steve (04:37):
Inflation, I can't say, I think it's too early to say what's happening there? I mean, the only thing I could say is that from the companies that I speak to on the industrial side, things seem to have re accelerated this year. Orders have picked up. Supply chain problems aren't as much of an issue. Nobody's really talking about firing anybody, you know, is it perfect? Yeah. What's perfect? Sure. But things are pretty good.
Tracy (05:02):
Yeah, my framework for understanding this is that the Fed basically can look through loose financial conditions on the assumption that if it does build out investment and a lot of the inflationary pressures that we've seen have come about from supply constraints, then it maybe is reducing inflation longer term rather than leading to additional inflationary pressures.
But one thing I have to imagine they might not be huge fans of is crypto. Crypto's back, right? I think Bitcoin's down as we're recording this, but it's surged to a new all-time high. I don't think anyone was really expecting crypto to come back in this way when rates are, you know, still at the highest level in decades.
Steve (05:45):
Well, that’s because it has nothing to do with rates. So let's backtrack first. Here's my big uber picture. You look in bad times, people focus on balance sheets and credit quality. And in good times they focus on stories.
And there are three, I think, great stories of our time right now. And those are AI and everything having to do with IT infrastructure, and crypto. And I believe in the first two, and I don't believe in the third.
The thing about crypto, and here's me getting on my soapbox, so everybody can take this with a grain of salt. I have no position in crypto and I never have. But you know, there are two issues with respect to crypto. Number one, is it a currency? And number two, if it's a currency, why should you own it? So let's bypass issue number one because that's kind of philosophical and say, okay, it's a currency, why should you own it?
And the people who are advocates of crypto all say exactly the same thing, which is that there's a problem with fiat currencies, which is government currencies. There's been too much of it, there's too much bond issues, there's too much debt, blah, blah, blah. And so if you want to hedge against fiat currency, buy crypto. In other words, crypto is like digital gold.
If that's the case and the theory is correct, then how should crypto act? Crypto should do well when on days like today where people are starting to worry about inflation again, and interest rates are up and the market is down and NASDAQ is down. And crypto should do poorly when interest rates are are lower, nobody cares about inflation and Nvidia is up 25%.
And how does crypto actually act? It acts exactly opposite to its own thesis, which is the correlation between crypto and NASDAQ is very, very, very high. So what does that say to me? That crypto is just another way that people like to speculate, because they like to speculate. That's all. That's all it is. That's it's only use. That and money laundering.
Joe (07:44):
Which is a use. Okay, so the three big stories of our time that people are into: AI, infrastructure and crypto. Two of which you believe in, we know you don't believe in one of them.
Let's go to infrastructure for a second because you mentioned that you talk to a lot of industrial companies, companies that would be theoretically, I assume, primed to take advantage of a lot of the building out that's going on. So what are they saying to you specifically right now? I mean, you mentioned that they're not talking about job cuts, but where are we in the broader infrastructure cycle? Because we saw all of this money, we saw these various bills get passed.
Steve (08:22):
I think we're at the beginning. Okay, so here's my soapbox again. I think that there are several sort of themes that weave its way into infrastructure. So one is onshoring. You know, the world spent 40 years creating global supply chain that was incredibly efficient and inexpensive and deflationary. And turned out, what we all learned during Covid, [it’s] also very brittle.
So you're a CEO, you get a free pass the first time. You know, if you had supply chain problems, nobody's going to blame you that you had supply chain problems because of pandemic that nobody predicted. You get one bite of that apple. If for some reason you have a supply chain problem again, that's on you. You get fired for that. So companies are bringing parts of their supply chain back to the United States. That's a 10-year story. And we're like in year two.
That's theme one. Theme two is data centers, which is an AI offshoot. But it also has industrial implications because number one, the GPUs that NVIDIA and AMD are selling utilize three times more electricity than A CPU. And they're also incredibly hotter. So they require a lot more of the whole cooling systems that you have to put into those data centers.
And [that] brings us to theme three, which is improvement in the grid. Now the grid needed improvement before because of all the pressure that we're putting on it from electrification, etc. But now that you add the GPUs on top of it, the pressure on the grid is even higher. So, you know, all the industrial companies that deal with utilities that are spending a ton of money to improve their grids, that's also a very long term theme and also pretty much in its early stages.
And the last part is greenification, which has been a longstanding theme, but it's going to keep going. And you take all four of those boxes and you turbocharge them by the fact that the United States has not had an industrial policy in anyone's lifetime. And it has one. Now, the combination of the IRA and the IIJA adds up to about $1.2 trillion over 10 years. So that'll turbo turbocharge all the four themes that I just spoke about. That's why infrastructure is so interesting.
Tracy (10:35):
So I remember one of the last times we spoke to you, you mentioned a specific company, Quanta Services, which does electrification of the grids, something like that?
Steve (10:45):
It's an engineering construction company, and one of the things that it does if is if a utility wants to build a new plant etc., Quanta builds it for them.
Tracy (10:53):
And that one is up, I think around 40% since we spoke to you, which has been like less than a year or so. So are those the kind of companies that you're trying to find?
Steve (11:03):
Yes. There are those, then there are some, you know, materials companies that are going to be building the roads, the bridges, etc.. And you know, everything basically that surrounds that world.
Tracy (11:14):
Would you do pure commodity plays? I mean, copper was a big one for electrification.
Steve (11:18):
I don't do commodities. There's certain things I don't do. I don't do commodities, I don't do oil. I don't trade currency, I don't trade commodities, I don't do any of that stuff. I just buy stocks.
Joe (11:27):
Say more about some of these, because everyone knows Nvidia, but you do see this in the sell-side research that's coming out, which is that everyone is looking for these secondary and tertiary plays on AI. And so Quanta Services — congratulations on the good pick there — but what are the other types of companies that you're looking at as part of this? In areas like cooling, which is obviously going to be huge or you know, electrical components. We got ISM Manufacturing out yesterday. Transformers continue to be in shortage for basically three straight years. What is your process and how are you going about identifying the secondary and tertiary maybe AI data center plays out there?
Steve (12:11):
Well, I mean it's, you know, it's all the offshoots of the four boxes that I mentioned. There's the cooling part, there's the grid construction part. There are the utilities that are more on the green side than on the not green side. I mean, there's just a lot to do.
I mean, the other thing that we're trying to figure out is, okay, there's Nvidia, there's AMD, there's Oracle, there's Microsoft, you know, one of our newer stocks is Oracle. You know, anyone who has a huge database of anything, consumer businesses, you know, in the world of AI is probably sitting on a gold mine. The question is whether they can monetize it.
And then the next level, which I don't have an answer to is, okay, everybody's trying to invent apps. Whose apps are going to do well? Although my guess is that one of the be bigger beneficiaries is probably going to be Apple because at the end of the day, the consumer, I can't possibly predict what apps are going to do well, but let's assume there are a bunch of them.
And let's assume that a bunch of them are for the consumer. I have no idea what those are, but let's assume that they exist. They are created. People are going to use them on their phone. So AI is going to have to be on the phone. Which, so, you know, assume what I'm hearing is that Apple is talking to every AI creator in the world to say, you know, come on our platform because we'll make your app more efficient. They'll probably roll something out in June when they have their, I don’t know, if it's an investor day or tech day, but you know, Apple potentially, eventually is going to be one of the bigger beneficiaries in the second wave.
Tracy (13:53):
Hmm. Speaking of waves, this is one of the reasons we wanted to talk to you. How do you separate the hype around AI versus the reality, the real opportunity there? Because we are seeing this dynamic in the market now where, you know, companies are just mentioning AI in their press release, right? Everyone's doing AI. Everyone's looking into AI. And again, one of the reasons we like talking to you is because you are well-known for the due diligence that you do on various things, most famously on the housing market before 2008. So how are you separating the sort of fact from fiction here?
Steve (14:31):
Well, I mean the facts are that AI at this point is really only benefiting a very small number of companies, most of whom were very, very, very large. So that's what we have focused our attention on. Everything else at this point seems to me to be hype or potential. And we don't own those companies. We own the ones where [it’s] obvious. After that, we'll see.
Joe (15:13):
You know, Tracy asked about the due diligence process. And I sort of want to keep driving at this because you mentioned one company, but there are a bunch of companies out there that probably sell some component that is useful for utilities. There's probably various companies out there that sell cables that connect those Nvidia chips from one to another. And there's probably various companies that sell cooling solutions, etc. And so in that due diligence process, like how do you start that? Sort of open up the window of what does it look like? The process of identifying them?
Steve (15:46):
Well, in terms of, let's talk on the infrastructure side. I have narrowed down that world to where I think it's significant to about 80 companies. And of those 80, I would say about 30 are very, very interesting. The other 50 are not so interesting at this point.
Joe (16:18):
Is that a function of, when it's the 80 or the 30, is that about talking to people in the space and saying ‘Hey, what products do you use?’
Steve (16:25):
No, I mean it's, I mean I've been doing research on this for the last two years.
Joe (16:30):
Yeah, so what does that look like?
Steve (16:31):
It's a lot of work. It's a lot of reading. You know, it's going to a lot of meetings. You know, the area that I find is not interesting, for example is residential solar. Resi solar I think is just an area that did very, very well during Covid, but was actually a major beneficiary of zero rates. Because people who put a, so, you know, it cost about $30,000 to put a solar system on your roof. And 99% of people finance it.
And when they were financing it during Covid, they were financing it at 3%. And today, if they need to finance it, they're going to need to finance it at around nine. And one thing I learned in grade school is that nine is a lot more than three. And so sales are negative. Now, how long they'll stay negative, I don't know. But I'm not interested in speculating about it because the fundamentals right now are poor. On the other hand, you know, just from a pure fundamental perspective, some of the solar panel companies that sell stuff to utilities are doing quite well.
Tracy (17:28):
So the other thing that's happened since we last spoke to you is that we are about 10 or 12 months closer to a presidential election in the US. Does the infrastructure thesis take a hit if we were to get Trump in office?
Steve (17:43):
There’s perception, there’s reality. So the perception would be that a Republican administration would be less positive on Greenification. And so maybe some of those stocks would take a hit because of rhetoric.
I think the reality is, number one, the states that benefit from most of this stuff are actually red states, including on the solar side.
And number two, you know, one of the reasons why US solar panel companies, like a company like First Solar, are doing so well is because there are major tariffs against Chinese solar producers. Those tariffs were created by President Trump, not by President Biden. President Biden just reaffirmed them. So at the end of the day, I don't think it's going to matter, although there'll be a lot of noise.
Joe (18:31):
On the nearshoring. You know, this is one of those things where it's always hard, at least from my perspective, to disentangle like what's talk, you know, you see a lot of like, it might be like a McKinsey white paper about the benefits of nearshoring. And it's like, okay, but...
Steve (18:46):
Oh, I don't care about stuff like that.
Joe (18:47):
Yeah, no, no, I know, I know. So I'm trying to understand like what are they doing. Specifically the companies, the industrial companies, that you're talking to, what actually is being built either in the US?
Steve (19:00):
You know, that’s a long, you know, two-hour conversation. But look, there's some factories that are being built here. There's some chip factories being built here. There's some other kinds of factories being built here. You know, all you need to do is listen to, let's say, the Eaton conference call when they report to understand that they're doing very, very well and they'll do very well for a long time because of those trends.
Joe (19:21):
Eaton Corp.?
Steve (19:22):
Yes. ETN. I don't own it, but I've done a lot of research on it. You can't own everything.
Joe (19:31):
And they’re saying what?
Steve (19:32):
That's a company that does electrification for factories...
Joe (19:34):
Yeah, the stock’s done well. And they're saying what specifically, on their calls?
Steve (19:37):
They’e got a lot of orders. That’s what they’re saying.
Tracy (19:41):
I'm looking at the share price now.
Joe (19:42):
‘Eaton Corporation Plc manufactures engineered products for industrial vehicle construction, commercial and aerospace markets, hydraulic products and fluid connectors.’
Steve (19:48):
Or take a company, like a newer company — it's an older company, but it's a new company listed — called CRH, which is a materials company. The headquarters is in Ireland, but 75% of the businesses in the United States. They do roads, cement, all that stuff. And on the commercial side, things are picking up and they're partially picking up because of the IRA and the IIJA money just starting to be spent.
And one of the things that was sent on the conference call by the CFO was that ‘This is now a golden age for infrastructure.’ I never heard anybody say on a call this is a golden age for their industry, but he said it.
Tracy (20:31):
Yeah. Some of these stocks, they look a little AI-ish when you look at the chart.
Joe (20:36):
A straight line up, straight line up.
Steve (20:38):
So CRH is funny because — and this is a perfect example of why the thesis that markets are efficient is sometimes nonsense. So CRH was a Irish-listed, UK-listed company with 75% of its business is in the US. So materials companies in Europe sell at literally half the multiples of US companies, for whatever reason.
And of course all these sell-side analysts who covered CRH were European analysts and the people who cover Vulcan Materials, let's say, are US analysts. So CRH in September, re-listed in the US and their thesis [was] ‘Hey, we might get a better valuation because we're 75% US!’ And all of a sudden people are... And that's what we started to buy it because we said to ourselves, this thing sells at less than half the multiple of its US comps because it has a different audience.
Tracy (21:34):
That’s so funny. That's like sell-side analyst arbitrage. That's great.
Steve (21:37):
That's exactly right. It was sell-side analyst arbitrage and all of a sudden you had US analysts pick it up and say ‘Wait a second, this is 75% US. What am I missing?’
Tracy (21:47):
So one thing that comes up in infrastructure conversations is this idea of crowding out. So the government is spending billions and billions of dollars through various programs on building out infrastructure, identifying new opportunities. And you know, we speak to people like Jigar Shah from the Department of Energy's loan office program about how he makes his investments as a private investor. Do you ever feel like you're competing with the government in this area, in things like renewables or green energy or infrastructure?
Steve (22:18):
No, not at all. I mean, I don't do private investing, so it's not my problem. I just do public equities.
Tracy (22:24):
Okay. But as a non-government investor. Do you feel like it's harder to identify opportunities because the government is in the mix now more than they used to be?
Steve (22:34):
No, no, it's just another part of the story.
Tracy (22:35):
How do you take it into account?
Steve (22:38):
They're spending money. I'm just trying to figure out who's benefiting.
Tracy (22:40):
Just follow the money?
Steve (22:41):
I follow the money!
Joe (22:43):
On electrification, you mentioned the grid and there seems to be this incredibly wide consensus that the grid is not currently sufficient for...
Steve (22:52):
That is what, in Silicon Valley, you know, the tech world, that's what they're worried about.
Joe (22:57):
They’re all talking about that?
Steve (22:57):
They're all petrified of it.
Joe (22:58):
Who's going to pay for it? Because this was not something, the IRA spent a lot of money in a lot of areas, but it did not really d do anything for the grid itself. And there was even a lot of acknowledgement at the time.
Steve (23:10):
Well, let me rephrase. There's $500 billion in tax credits for green energy stuff.
Joe (23:21):
Sure. Absolutely.
Steve (23:21):
And so, you know, a company like Xterra, which will build, let's say a solar field, gets a tax credit to do it. So that does help.
Joe (23:33):
But then there's the lines and the wires and so there's all these questions about regulations and there's the question about money, etc. Who's paying for basically, I mean you, you mentioned generation on the solar field side, who's paying for the lines that will connect all these solar fields?
Steve (23:51):
Oh, the utilities are doing that. So if you look at the end of every year, when all the utilities report their fourth quarter, at least most of them, they put out their three-year CapEx budget projections. So it only comes out once a year. So we just went through that period. So of the 20 companies that our very good Neuberger Berman utility analyst covers the average increase in the three year CapEx budget is 20%.
Joe (24:23):
Over the last year?
Steve (24:25):
In other words the three-year combined forward is 20% higher than last year's three year budget. It's basically 20% because you're adding one more year, or something like that. That's a lot of money, you know, and it's been going up and up and up and up and up every single year because utilities keep spending money to improve their grids.
Tracy (24:46):
What's the investment opportunity there though? Do you buy the actual utilities or do you buy the sort of like periphery things that benefit from it?
Steve (24:53):
I think you buy some of the utilities, you know, unfortunately utilities are very interest rate-sensitive stocks. So, and you know, on a day like today, probably, I'm guessing because rates are up, utilities will go down.
Joe (25:04):
The market opens in two minutes so we’ll…
Tracy (25:07):
We’ll test the thesis.
Steve (25:09):
But I think some of the utilities that are more on the greenish side are an interesting opportunity.
Tracy (25:16):
So you've been looking at the infrastructure space for two years now, as you mentioned. What was a surprising thing you learned? Or how does this particular industry vary from other areas that you have looked at previously?
Steve (25:31):
I think the big change is that, you know, if you take all the 80 companies,most of them are what would traditionally be considered very cyclical companies. Very traditional cyclical companies with no good secular story other than how's the economy doing? And for the first time since I can remember, this whole group now has a real secular story. You know, not that they're not cyclical, they are cyclical. But they have secular tailwinds that they've never really had before. And those tailwinds are going to last quite a long time. That's the change.
Joe (26:09):
The XLU ETF has opened. It's down a little bit, down about a 10th of a percent. So there you go. Count that as a W.
Steve (26:17):
One for me!
Joe (26:19):
So sticking on this theme of the grid and electrification, actually you mentioned — oh, now it's up. It's up. So I'm taking it away. Now it's flat, now it's down.
Steve (26:33):
Well, you know what they say about our business. Peacock today, feather duster tomorrow.
Joe (26:37):
That's a good one. No, this is the question I want to ask. Those three-year projections that the utilities are coming up with, and you sort of talk about this shift from cyclical industries to secular, how did those three-year projections compare to, say, five years ago and no one was talking about AI and no one was talking about electrification, or very few.
Steve (26:55):
Well, I wish I brought my chart. I don't have my chart, but my guess is that the three-year CapEx budget today versus five years ago was probably 50% higher at least.
Joe (27:06):
Yeah. This is something that Jigar Shah, who Tracy mentioned, has talked about, which is that basically for the first time in forever actual there's growth in in demand, which there basically wasn't before.
Steve (27:19):
Correct.
Tracy (27:20):
Wait, can I ask something slightly off topic, but I think is of interest. So we recently had the sentencing of Sam Bankman-Fried, and he was the subject of a Michael Lewis book as were you in a very different capacity. Have you heard from Michael Lewis at all or do you keep in touch with him?
Steve (27:40):
We haven't spoken in a couple years, no.
Tracy (27:42):
Did you follow the SBF trial?
Steve (27:44):
Very marginally. I don't have really an opinion about it.
Tracy (27:47):
Did you read the book?
Steve (27:48):
I did not read the book.
Tracy (27:49):
Oh, okay. This isn't a very interesting line.
Joe (27:51):
That was a good line of questioning Tracy.
Tracy (27:54):
I tried.
Joe (27:55):
It had potential.
Steve (27:56):
It had the potential to go somewhere. Unfortunately, it's not going anywhere. The guest shot it down.
Tracy (28:02):
All right. So I hear all this stuff about excitement about data centers. And as far as I can tell, like part of the play is investing in, I guess data center REITs, something like that.
Steve (28:13):
Well, there are only two.
Tracy (28:14):
Right. Or you invest in like, HVAC and the companies that do the cooling around them. So how do you actually play that thesis? That's what I don't get.
Steve (28:25):
Well, I mean, like I said, you can't own everything. So, I mean, I'm not going to talk about whether I have a position in these, you know, Vertiv is the sort of the pure play to sell cooling stuff into data centers. The stock has gone stratospheric, you know, the multiple's really high, so you're playing, there's a lot of risk in that. Not that the fundamentals are bad.
Equinix and Digital Realty are a more Steady Eddy kind of play. You know, what you're dealing with is that the whole AI story is coming and so the demand is going to go up, but you're still dealing with CapEx budgets having come down in tech. So the growth is still not great or as good as people would hope, but it's coming. So that's the yin and yang on the data centers. And there are only two of them.
Joe (29:15):
One of the things that we've seen with data centers, and I think it was a few weeks ago, there were some headlines about Microsoft wanting to have onsite nuclear power generation. And we've talked a little bit about, on this show, about the hope, the promise of small modular reactors, which haven't really taken off, but maybe that could be a solution for some of these huge CapEx data. Have you looked at nuclear at all?
Steve (29:41):
I haven't looked at nuclear. The regulatory situation there is just so complicated. You know, the one company, I think it was a Constellation Energy is the utility that's done incredibly well because it has nuclear, but it's not creating, as far as I know, more nuclear plants. It's just that the value of it's existing nuclear plants have gone up a lot.
Joe (29:59):
That is a nice looking stock. On the other hand, NuScale, whose ticker is literally SMR, standing for small modular reactors, that stock has not done so well, though it did get a pop, I guess, on that Microsoft headline.
Tracy (30:14):
It is interesting, one of the things that's sort of emerging from this conversation is, even though we're talking about new technologies and things like that, a lot of the benefits seem to be accruing to the biggest players in the market. So the big companies. I don't think this time last year anyone would've expected Microsoft to emerge as a leader in AI, and yet that's exactly what's happened. Is that what people should be focused on? Who's going to dominate these CapEx-heavy tech plays? It's going to be the guys with the money and the like existing connections?
Steve (30:48):
I mean, there are two parts to this. There's no question that at this point the dominant players are the big boys, and they're going to be spending the money. And then, you know, there'll be interesting smaller companies that create apps and we have no idea who those are at this point. None. One day they'll show up on your phone.
Joe (31:04):
Something I'm curious about with the data center REITs, is that they’re REITs. I mean, I know they talk about the AI opportunity and the demand for compute that's going to in theoretically keep exploding for years. But on the other hand, like they're not Google, they're not Amazon with AWS, they're not Nvidia. Is there a risk that they just can't compete with the sort of specialized more tech-forward companies that are at the very cutting edge of this?
Steve (31:35):
I mean, you know, the hyperscalers want to build their own data centers, but you know, an Equinix, for example, services everybody who's not a hyperscaler. So they will do really well when all the apps that are going to be created get created and people need to put their stuff in the cloud and they'll do it through Equinix. So it really depends. Digital Realty is more of a hyperscaler.
Joe (32:14):
Can you say more about Oracle? For a long time I sort of thought they always seem to be straddling, in my mind, where it's like, and I don't know that much about the company, but they always seem to be sort of on the cusp of like, are they in the category of the hyperscalers? Are they sort of a legacy software database business that you know was not...
Steve (32:35):
Well, they're a legacy software database business that's moving to the cloud. They're an AI play. You know, the problem with the stock has been that every couple of quarters they have a really bad quarter and they say ‘sorry.’
Joe (32:45):
As long as they apologize!
Steve (32:46):
Yeah, but in this most recent quarter, that seems to have least for now gotten their act together.
Joe (32:52):
And what's working for them?
Steve (32:54):
You know, the demand because of AI, of moving stuff into the cloud, to move their database into the cloud seems to be increasing. Their problem, they say, is they haven't been able to buy enough chips to satisfy the demand. You know, when you think about that, that's probably a better problem to have than the alternative. And they seem to be getting their act together. So, you know, they finally announced a good quarter and people got excited about it, which is why the stock finally did well. That's a more recent purchase of ours.
Tracy (33:23):
Have you tried any of the AI chat bots yet? ChatGPT? Claude?
Steve (33:26)
Not yet. I'm too old.
Tracy (33:28)
You're too old? You know, you can make comic books on some of them. You can generate the imagery.
Steve (33:31):
Yes, I do You can make a comic book.
Tracy (33:35):
So, Joe, I didn't realize Steve's a big comic book fan.
Joe (33:38):
Yeah, so what's the comic book play?
Steve (33:42):
There's no comic book investing play that I know of. You know, the comic business is a small business.
Joe (33:47):
But you're really into comic books?
Steve (33:49):
Totally. I own one of the largest digital comic book collections in the world.
Joe (33:52):
What does it mean?
Tracy (33:54):
Yeah, is that like NFTs, what is that?
Steve (33:55):
No, it's not an NFT. So think of it this way. Instead of buying a physical book. You now read your book on your Kindle. So comic books became the same thing. There was an app called Comicsology, where you would buy your comic on Comicsology and you’d read it on your iPad. And Amazon bought it. And so my comic book collection is now in my Kindle. So the size of my comic book collection, I'm very proud to say, as of this morning was 10,863 comics, of which I have read every single one.
Joe (34:27):
For real?
Steve (34:28)
For real.
Joe (34:30):
Why?
Steve (34:30):
I've been doing this since 2012.
Joe (34:34):
I imagine like, I don't know...
Steve (34:38):
What's the attraction?
Joe (34:40):
The attraction of spending so much of your time here in life...
Steve (34:43):
I like to read. I read a lot of books.
Joe (34:46):
Do you read non-comic books?
Steve (34:48):
I read tremendous number of books. Nonfiction and fiction. And I have always enjoyed reading comics. And the comics have actually gotten very, very sophisticated in terms of literature and I enjoy reading them.
Tracy (35:01):
What's your favorite?
Steve (35:03):
Oh, that's easy. The greatest comic book ever written is Sandman by Neil Gaiman.
Tracy (35:09):
Oh yeah, I used to have a Sandman-themed tarot card deck for some reason, even though I never read the comics.
Steve (35:14):
The first season on Netflix was actually quite
Joe (35:17):
What's it about? I don't know anything about comics.
Steve (35:19):
Sandman is the god of dreams...
Joe (35:20):
My son is into Spider-Man. So I'm trying to like bond with him by like getting him...
Steve (35:25):
I could write a dissertation on Spider-Man. Literally.
Joe (35:29)
What would you say?
Steve (35:31):
I have a literary theory of Spider-Man.
Joe (35:32):
Good. Tell me this. So I need some stuff to like bond with my son over this.
Steve (35:36):
Well, you should get your son to read the newer Spider-Man who's called Miles Morales.
Joe (35:40)
Oh yeah. He loves miles.
Steve (35:44)
So my literary theory on Spider-Man is that Peter Parker was actually Jewish.
Tracy (35:47):
Okay...
Steve (35:48):
Metaphorically.
Joe (35:50):
This is good. Metaphorically, keep going, keep going.
Steve (35:51):
Here's why. So first of all, the guy who created him, Stan Lee, is Jewish, or was Jewish. Now who is Peter Parker? So Peter Parker is raised by his elderly kindly aunt who looks like your Jewish grandmother. He marries the girl next door who's the gorgeous non-Jewish girl, so every like Jewish boy’s fantasy. And he's consumed by, he's a science geek nerd. And he's consumed by a sense of guilt and social responsibility. So who is that? That's a Jewish kid. That’s my literary theory. I've had it for a very long time.
Joe (36:33):
Do you think Superman is Jewish?
Steve (36:35):
Definitely not. Absolutely not. Although he was created by Jewish guys.
Joe (36:41):
Yeah. Because I thought he was Jewish because some of the other names of his, like, relatives, and I don't, again, I'm not a big comic person, but they have sort of, I thought they sounded sort of Jewish...
Steve (36:51):
Nah, not at all. You're way off.
Joe (36:53):
Okay.
Tracy (36:55):
I'm desperately trying to think of some sort of finance or markets-related comic book question...
Joe (36:59):
Some way to bring this into the actual nature of the conversation?
Tracy (37:00):
Yeah. Totally failing. We could just talk about comic books
Steve (37:04):
The only thing you could bring it up to is, I have no opinion on Disney. But I could tell you what I think is wrong with the Marvel comic book movie?
Tracy (37:12):
Oh yeah, because Disney owns Marvel now, right?
Steve (37:14):
Disney owns Marvel. And that's been a big source of their profitability. So I think the problem with Marvel is that they've lost their story and there's two parts to this. So part one was they had a great story. It was a very complicated story where the villain only got revealed years after they started the whole process. You know, it was multiple stories with tangents, but in the end it all wove its way back into the last two movies.
And then it was over. And they have not been able to find a new story and they've been basically floundering because they don't have one. And the other major problem, which is even more serious than the first, is that there's a concept in comics called the Trinity. So in DC it's Superman, Batman, and Wonder Woman. That's the core. And in Marvel it's Captain America, Thor and Ironman.
And at the end of the last Marvel comic Ironman's dead. Captain America's over 90 years old. And unfortunately since then, Thor's been made into a comedic joke. So you've lost your Trinity. So even if you had a story, who's going to care? Because people care about those three characters more than anything else. And they're gone. That's my thesis.
Tracy (38:24):
They could just start the whole thing over like they did with Spider-Man. Right? You could reboot.
Steve (38:27):
But then you have to get new, you have to start fresh. I don't know if they're willing to do that yet.
Joe (38:32):
This is such a refreshing, interesting take. We could just talk about this because as someone who — I kind of like going to the movies, but unlike you, I was never a big comic book-reader — during that sort of Marvel era of movies when it just seemed like the only movies that were in the theaters were just these endless superhero movies, I just like totally tuned out.
Steve (38:53):
Oh, I was there religiously.
Joe (38:54):
Yeah. But I for one was kind of, I am relieved and sort of excited at the idea of Hollywood sort going post-superhero and maybe making movies again like Oppenheimer with normal people.
Steve (39:07):
By the way, Dune part two was very good.
Joe (39:08):
I've been meaning to see it.
Tracy (39:10):
I haven't seen it yet. No spoilers, please.
Joe (39:11):
Yeah. I haven't seen it yet either, but I don't know. I for one am excited about a sort of post-superhero era.
Steve (39:18):
That’s fine. I'm just talking about the problem with Marvel.
Joe (39:20):
Yeah, but it's connected.
Steve (39:23):
Right, but that's a big issue. But that's a big issue. But it's affected Disney.
Joe (39:26):
But it's connected, right? So it's like these stories have just gotten tired for people because there's nowhere to go for them?
Steve (39:32):
Well, you need a new story. And they haven't found one. So if I go back, you know, now I'll show you how into this. Loki season three was terrible. The Marvels movie, which [came out] recently was awful. Guardians of the Galaxy...
Joe (39:46):
Why? What made it awful? Because they all look awful to me.
Steve (39:48):
It was just stupid. The story was dumb. It wasn't interesting. And they tried to make it too much of a, they have a tendency to try and make their movies too funny and it doesn't translate very well anymore. And then The Guardians of the Galaxy part three was so boring. I almost walked out three times.
Tracy (40:06):
That one disturbed me, because there's a lot of animal cruelty in that one. And it was just kind of sad to watch.
Steve (40:13):
There was a lot of animal cruelty to it. They tried to make it relevant. But it was just a bad story.
Tracy (40:18):
Yeah. Has the market for comic books changed in the sense that, so everyone knows if you have a really successful comic book nowadays you can get a franchise attached to it — a film franchise. Does anyone come up with characters based on the idea of like what will play well on screen overall? It feels like you don't actually get that many new characters and new comic books...
Steve (40:41):
There's not that many new comics. There really aren't.
Tracy (40:44):
Yeah, it seems a shame. It seems like it would solve the story problem if we were actually coming up with new stories.
Steve (40:49):
Well, there's new stories and then there's new characters. There's always new stories. But you know, the problem with Marvel is they don't have a story. They just don't have a story.
Joe (40:58):
I didn't realize that. I didn't know anything about this. I just sort of assumed that every superhero thing was just sort of this endless story that could go on forever.
Steve (41:07):
Well it does, but when you're making movies, you know, they, what they had was, they had all these different origin stories, but then at the end of the day, all the movies were going towards this one central story, which was the last two movies. And then it was over. And so now you’ve got to like start again, and they haven't been able to find how to start again.
Tracy (41:28):
Here's my desperate attempt to bring us back to our, our core content. If you could come up with a comic finance investing markets economics crossover, what would it be?
Steve (41:43):
Oh boy.
Tracy (41:44):
I don't know. Like Super Portfolio Manager, Neuberger Superman.
Steve (41:45):
I don't know. No, no, no. You know, I used to joke when I was a fund manager on Hallowee, I'd take my kids around just as me and they'd say ‘Who are you?’ I'd say ‘I'm a hedge fund manager. I'm the scariest person alive.’
Tracy (41:59):
That's low effort.
Joe (42:02):
Should we go back to some of your big themes?
Steve (42:05):
Sure, why not? Okay. This was more fun though.
Joe (42:08):
I mean, actually, this has been a true light bulb moment. Because all I knew is that people weren't really watching the Marvel movies the way they were three or four years ago. And now for the first time..
Steve (42:19):
Well, there’s a reason. I mean, I just want you to know that one of my favorite characters has always been Thor. And the last movie was so bad. I was offended. It's like, how dare you do that to my character.
Joe (42:30):
Interesting. God, I really don't know exactly where to take this. But let's let's just maybe go back to some of the infrastructure questions. It sounds to me, and maybe this is a sort of investing philosophy question, and you mentioned the sort of the sell-side analyst arbitrage with that one company that got listed here. You mentioned the fact that even if there's a change in administration that doesn't necessarily change the underlying stories.
It sounds to me like from a philosophical perspective, your view is there are big long-term trends and don't presume they're all priced in immediately. Even if we can all agree that there's 10 years of growing electricity demand, there's 10 years of demand for greater cooling solutions or whatever it is, or more cement or more copper, or whatever.
Steve (43:21):
I'm not a great believer in it's all priced in. I don't subscribe to that schtick.
Joe (43:26):
Yeah. Yeah. That's sort of one I wanted to get you on. Like, how do you think about that question? Because I have journalist brain, so I assumed if I know about it, it's already priced in.
Steve (43:31):
The way I think about it, I mean, you know, when people say it's all priced in, my my question to them is always, how do you know? Did you get the whole planet earth into group therapy and ask everybody, like, ‘Is it priced in?’ Like, how would you know that? Look, this is a story. It's a story that's going to last a long time. And as long as it keeps going, people are going to want to own it.
I mean, it gets back to what I said before. In good times, people traffic and stories. And as long as the story is there, they'll buy the stock. I mean, if you go back to, you know, the internet bubble, what killed the internet bubble? It wasn't valuation. It wasn't that it was all priced in. What killed it was that the US entered to a recession and these companies’ fundamentals fell apart. That's what killed it. It wasn't that they were very expensive. Well, obviously they were in retrospect. So this, you know, this infrastructure story I think is just going to go on for a very, very long time. And as long as that's the case, people want to own some of these stocks.
Tracy (44:32):
Alright, Steve, it was so good talking to you again. We talked about infrastructure, AI, crypto, and of course comic books. Slightly unexpected, but a lot of fun. Thank you so much for coming back on Odd Lots.
Steve (44:42):
Thank you!
Tracy (44:55):
Joe, that was really fun. I did not expect us to spend 20 minutes talking about comic books, but I enjoyed it.
Joe (45:01):
No, I'm really excited. Tonight, like I said, I'm going to go home and tell my son that, like him, Peter Parker is Jewish. I mean, like I said, I’ve got to bond with my son over his Spider-Man affinity.
Tracy (45:13):
You’ve got to develop a literary theory of Spider-Man. Just like Steve. That's what you need to do. No, there was a lot of interesting stuff in there. I thought the point about stories, so, you know, in good times people are into stories and then what really tends to knock those theses are when the bad times start. And that's when things start crumbling.
So far, you know, again, it's, it is now April of 2024. We do not seem to be on the immediate cusp of a recession. So you can see why people continue to get excited about these stories. The other thing I thought was interesting was the idea that like, okay, well a lot of the infrastructure programs have been started under the Biden administration. But there are aspects and themes that emanated from the Trump administration. So things like the subsidies for solar panels and the fact that we're not importing as many Chinese solar power panels as we used to, and that would be expected to continue. So yeah, that was interesting.
Joe (46:10):
Totally. In general, I liked his point at the very end about his belief that things aren't just priced in immediately, and as long as things are good, people will ride the story. I mean, look, so a year ago, by a year ago, so April, 2023, it was unambiguously understood that Nvidia was a key player in AI, right?
Everyone had used ChatGPT by that point. Everyone knew it was trained on Nvidia chips. Everyone's like ‘Oh, this is crazy.’ And in that time, Nvidia is up over fourfold. And I don't think there's like some new information that about Nvidia or AI that's come out. It's basically like, oh, just this story is very good and maybe some of the numbers and the degree to which other companies have piled in or wanted to buy chips is true. But to his point, this idea that it's all priced in the moment we're aware of the situation is probably a good thing to internalize.
Tracy (47:05):
Yes. And I always think life would be so boring if you went around just assuming that everything was priced in immediately. Right? Like, what are we even doing here? If we really believe that.
Joe (47:15):
Yeah. Why do we have a investment industry at all, if everything, I kind of still believe that but...
Tracy (47:21):
I don't have to. I refuse to believe it.
Joe (47:24):
Well, you would be a better investor than I would.
Tracy (47:26):
No, I wouldn't. Okay. Shall we leave it there?
Joe (47:28)
Let's leave it there.
You can follow Steve Eisman at
@EismanSteven
.