Should You be Afraid of the Bond Market?

“Big Short” investor Steve Eisman is afraid of the bond market but keeps his faith in America’s economy. Moreover, Eisman tells Bloomberg he is shorting US housing, Tesla (NASDAQ: TESLA), and Zillow (NASDAQ: ZG) but avoiding Uber (NYSE: UBER) and Lyft (NYSE: LYFT).

“Corporate debt is not going to cause the next recession it’s where the pain will be in the next recession,” Eisman concludes. “It’s a subtle difference but it’s an important point.”

Notably, Eisman thinks the US financial system is safe but believes there will be a recession. However, Eisman believes the Canadian real estate bubble will collapse and drag Canadian banks down with it.

“Let me be very clear there is not a financial crisis,” Eisman clarifies. “In a recession people will lose money, and I think where they will lose money will be in the bond markets because there’s some much liquidity it’s harder to clear pricing.”

“You will see big losses in things like triple B corporate debt, high yield etc.,” Eisman predicts. “But you need a recession first.”

Big Short Speculator thinks US Financial Stocks are Safe

“For the first time in all the years I’ve covered financials; I can honestly say think the financial system of the United States is safe,” Eisman says in a Bloomberg Asia video. “That doesn’t mean we won’t have a recession, and in a recession I think there will be massive losses in the bond markets because there’s a lack of liquidity.”

“But that’ll be the problem of the people who invest in the bond markets,” Eisman notes. “It’s not a systemic problem and it’s not a bank problem.”

To clarify, Eisman believes the US economy and financial are sound but he thinks some Us companies are accumulating too much debt. For instance, the Saint Louis Federal Reserve estimates US Nonfinancial corporate businesses had $6.24 trillion in debt securities in 2018.

Notably, the level of debt for nonfinancial American corporate businesses was $3.964 trillion in 4th Quarter 2019. Therefore, US nonfinancial corporate debt grew by $2.276 trillion in this decade.

Eisman thinks American Banks are safe

Hence, US corporate debt is high, but American banks are safe. The banks are safe because the corporate debt is in other retail sectors like retail and tech.

For example, Uber; which Eisman tells investors to stay way from, issued $2 billion in bonds in October 2018, Business Insider reveals. Tellingly, Business Insider alleges insiders kept the Uber bond deal secret through a cover private placement. In addition, Gizmodo claims Uber has nearly $25 billion in corporate debt.

For example, Uber; which Eisman tells investors to stay way from, issued $2 billion in bonds in October 2018, Business Insider reveals. Tellingly, Business Insider alleges insiders kept the Uber bond deal secret through a cover private placement. In addition, Gizmodo claims Uber has nearly $25 billion in corporate debt.

Specifically, Uber opened with a market capitalization of $76 billion and a share price of $45 on 10 May 2019. Uber finished the day with a market cap of $76.073 billion and a share price of $41.57.

The Danger from US corporate debt

Incredibly, corporate debt in the American retail sector could be worse than that in tech.

For example, lenders were bidding for the chance to lend money to dying retailer Sears in the hallway of a bankruptcy court in November 2018, Market Mad House claims. Note this report is dubious because I based it on a Chicago Tribune article that is no longer on the newspaper’s website.

Specifically, hedge funds Cyrus Capital Partners and American Capital Partners were bidding for the chance to loan Sears enough money to avoid liquidation. To clarify US Bankruptcy Judge Robert Drain was preparing to liquidate Sears to pay its creditors.

Sears, which owns department stores and the Kmart discount chain, declared bankruptcy in October 2018 because it could not pay its debts. However, Sears had no problem raising money it probably cannot pay back to stay in business.

To clarify, Eisman’s belief is that companies like Sears and Uber are making just enough money to service their debts. Consequently, even a slight recession could leave those businesses unable to pay their debts.

Eisman is not afraid of a trade war

Interestingly, Eisman is not afraid of a trade war between the United States and China.

“There’ll be a lot of volatility but my guess is there will be a deal of some sort at the end of the day,” Eisman says of US China trade tensions. In fact, Eisman believes US President Donald J. Trump (R-New York) and Chinese leaders will work out a “face-saving deal.”

Eisman; is a managing director and a portfolio manager at U.S. hedge fund Neuberger Berman. Eisman is famous for predicting the American subprime mortgage crisis of 2007-2008 by shorting collateralized debt obligations.

In particular, author Michael Lewis dramatized Eisman’s role in the subprime crisis in The Big Short: Inside the Doomsday Machine. Interestingly, American actor Steve Carell played Mark Baum; a fictionalized version of Eisman in the movie The Big Short.

Eisman is Shorting American Housing again

“My largest short is a company called Zillow,” Eisman says. In detail, Zillow (NASDAQ: ZG) operates America’s most popular online real estate marketplace.

“The reason why I think it’s an interesting short is they entered into a new business out of their basic business of being an internet platform company,” Eisman explains. “Where they’re going and buying houses and flipping them.”

“What is ironic about about it is why do people like internet platform companies they love them because they generate a lot of revenue,”Eisman notes. “They generate a lot of free cash flow they’re not cyclical and they have margin expansion.”

“And now Zillow’s getting in a business that’s capital intensive, cyclical, low margin and in a recession they’ll get killed, “Eisman says.

Thus, Eisman is shorting another American housing-related stock. Notably, US housing prices are rising dramatically again, USA Today reports. For example, a house in Commerce City, Colorado, a Denver suburb recently sold for $284,000. In contrast, the same house sold for $188,000 in 2012.

Eisman advises stay away from Uber and Lyft

Tellingly, Eisman warns investors to stay away from rideshare stocks Lyft (LYFT) and Uber.

“You know Uber and Lyft those are not valued on traditional valuation metrics,” Eisman explains. “So trying to short them is like shorting a ghost.”

In a related move, Eisman admits to having a small short position in Elon Musk’s overpriced automaker Tesla Motors (NASDAQ: TSLA). Eisman is leery of Tesla because the electric car venture is also short on traditional valuation metrics.

Eisman predicts Canadian housing correction

Eisman believes the Canadian real estate bubble will burst and drive down Canadian bank stocks. However, he thinks the Canadian housing bubble will not be a crisis like the US financial meltdown of 2008.

“This is not the Big Short Canada in the sense that Canada is going to fall into the ocean,” Eisman clarifies. “It’s going to get a normalization of credit, and since we haven’t had a credit cycle in 30 years . There isn’t a CEO of any bank in Canada who knows what a loss looks like. It’ll be ugly for awhile but it’s not a calamity.”