Steve Eisman is a managing director of Neuberger Berman, a New York-based investment management firm. He is better-known, however, as one of the few investors who foresaw the collapse of the U.S. subprime mortgage market in the run-up to the 2008 financial crisis and was profiled in Michael Lewis’s book "The Big Short" (and the subsequent film of the same name). In a Sept. 9 interview with Bloomberg, he talked about the ongoing global industrial slowdown.
Poor data
Eisman pointed out that indicators of industrial activity are down across the globe. For instance, purchasing managers index data for the developed economies shows industrial activity is contracting:
“PMIs are below 50 all over the globe, so that’s a global industrial slowdown. So there’s not a question that we’re in a massive global industrial slowdown. Whether that actually translates into a recession is another debate.”
Eisman added that even if the slowdown evolves into a recession, he doesn’t expect the same kind of catastrophic meltdown that occurred in 2008 because the financial system is healthier today than it was back then. He has also previously said U.S. banks are safer now than they have ever been over the last 30 years.
Money is free these days
Eisman said he has his doubts about the prospects of a U.S.-China trade deal, but that he has no real insight into the matter one way or another. For him, monetary policy is a much more interesting puzzle from an investment standpoint:
“I think the more interesting thing to talk about is what the global central banks are doing, including the Fed, and how long that will take to work and whether that will work. The Fed started lowering rates in June. Any economist will tell you that the transmission mechanism takes at least a year...I think the more interesting question to ask is: does the normal transmission mechanism of the Fed lowering rates work at this low level of rates? I’m starting to have my doubts about that.”
Eisman is echoing questions that have been raised by a large number of investors and commentators. How much of an effect can a 25 basis point cut really have in an ultra-low rate environment? He believes the problem the world is facing today is one of overcapacity:
“I think the problem is that at this low level of rates money has become free, and so every deal has been done, every project has been funded, every stock has been bought back, every startup has been funded. What free money has done is create global overcapacity and so why lowering rates should solve that - I have my doubts, I really do.”
In other words, more cheap money is unlikely to boost economic activity in the way policymakers seem to want it to. At a certain point, there are just no more projects to spend it on. Eisman seems to think that we could be approaching this point. And no one really knows what might happen next.
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