Next crisis tough to predict, says top investor

Steve Eisman, one of the investors who spotted the subprime bubble that caused the latest financial crisis is seen in his New York office on November 22, 2019. (AFP)
Updated 01 December 2019

Next crisis tough to predict, says top investor

  • Steve Eisman says a less severe crisis is still possible in the near-term, although such a slowdown is not a given

NEW YORK: Could it be the trade war? What about next year’s US presidential election? For famed investor Steve Eisman, the cause of the next recession is up in the air.

“It’s too hard to predict at this point,” said Eisman, who anticipated the 2008 financial crisis and served as the basis for Steve Carell’s character in “The Big Short.”

“What happened in 2007, 2008, 2009 was a systemic crisis,” said Eisman, who was one of the earliest investors to correctly read the subprime mortgage problem and invest accordingly.

“Planet Earth almost burned,” he told AFP. “And that was because of too much leverage in the banks, and a very large asset class subprime that blew up.”

“That risk doesn’t exist anymore. Leverage in the US and in Europe is much lower. The banks are better regulated.”

Eisman, a senior portfolio manager who manages the Absolute Alpha fund at Neuberger Berman, said a less severe crisis was still possible in the near-term, although such a slowdown is not a given.

“We’ll know more, maybe in 6 months, whether a recession is on the horizon or not, or whether it’s just continued slow growth,” he said. If a crisis hit, Eisman isn’t worried about households, saying credit quality today is “very good” in the US, especially on the consumer side.

“The biggest pain” will be felt in the corporate bond markets, in part because of post-crisis restrictions on banks that will limit their ability to provide liquidity if the bond market comes under pressure.

Eisman criticized the easy-money policies of central banks, saying that “one hundred percent, it’s a mistake.”

He said the first round of US quantitative easing in March 2009 succeeded in bringing more liquidity to fixed income markets, but there was less benefit to the overall economy from subsequent rounds of stimulus.

“All that really happened, in my view, is that the money went into the stock markets and it gave companies liquidity to buy back stock,” he said.

“It makes rich people richer because they own securities,” he said. “I kind of nickname quantitative easing ‘monetary policy for rich people.’” 

Eisman, who prides himself on having read the entirety of Thomas Piketty’s dense economics tome, “Capital in the Twenty-First Century,” attributes the debacle of 2008 to a concentration of wealth that began in the 1980s.

Inequality has worsened, but “rather than deal with that problem head on, the policymakers consciously or unconsciously decided that they would democratize credit, meaning people who before couldn’t get credit, would now get credit,” Eisman said.

“To deal with that, leverage in the banking system had to go up a lot. At the end of the day, I think that’s what caused the financial crisis.”

Demand issues ‘to overshadow OPEC+ supply next year’

Updated 29 October 2020

Demand issues ‘to overshadow OPEC+ supply next year’

  • Libya's rising production adding to pressure on oil markets

DUBAI: The Organization of the Petroleum Exporting Countries (OPEC) and its allies will have to contend with a “lot of demand issues” before raising supply in January 2021, given throughput cuts by oil refiners, the head of Saudi Aramco’s trading arm said.
OPEC and its allies plan to raise production by 2 million barrels per day (bpd) from January after record output cuts this year as the coronavirus pandemic hammered demand, taking overall reductions to about 5.7 million bpd. 

“We see stress in refining margins and see a lot of refineries either cutting their refining capacity to 50-60% or a lot of refineries closing,” Ibrahim Al-Buainain said an interview with Gulf Intelligence released on Wednesday.

“I don’t think the (refining) business is sustainable at these rates (refining margins).”

However, Chinese oil demand is likely to remain solid through the fourth quarter and into 2021 as its economy grows while the rest of the world is in negative territory, he added.

Among the uncertainties facing the oil market are rising Libyan output on the supply side and a second wave of global COVID-19 infections, especially in Europe, on the demand side, Al-Buainain said.

Complicating efforts by other OPEC members and allies to curb output, Libyan production is expected to rebound to 1 million bpd in the coming weeks.

Oil prices, meanwhile, fell over 4 percent on Wednesday as surging coronavirus infections in the US and Europe are leading to renewed lockdowns, fanning fears that the unsteady economic recovery will deteriorate.

“Crude oil is under pressure from the increase in COVID-19 cases, especially in Europe,” said Robert Yawger, director of energy futures at Mizuho in New York.

Brent futures fell $1.91, or 4.6 percent, to $39.29 a barrel, while US West Texas Intermediate crude fell $2.05, or 5.2 percent, to $37.52.

Earlier in the day Brent traded to its lowest since Oct. 2 and WTI its lowest since Oct. 5.

Futures pared losses somewhat after the US Energy Information Administration (EIA) said a bigger-than-expected 4.3 million barrels of crude oil was put into storage last week, but slightly less than industry data late Tuesday which showed a 4.6 million-barrel build.

However, crude production surged to its highest since July at 11.1 million barrels per day in a record weekly build of 1.2 million bpd, the data showed.

Gasoline demand has also been weak overall, down 10 percent from the four-week average a year ago. US consumption is recovering slowly, especially as millions of people restrict leisure travel with cases surging nationwide.