Is Private Credit the Next Systemic Crisis Steve Liesman Weighs In The Real Eisman Playbook Ep 53

Hey, it's Steve Eisman, and I want to give the date because so much is happening in the markets. This interview is being recorded after 4pm, March 31st, after the markets had a tumultuous upside on some news about the war. My guest today is Steve Leisman, recurring guest, senior economics reporter at CNBC. We're going to talk about oil prices, the war and the impacts on the market, tariffs, the Fed, private credit. There's just so much going on. I'm really looking forward to touching on all these topics with Steve. And then after the interview, I'll come back and we'll talk about some takeaway thoughts. See you soon. Hi, it's Steve Eisman, and this is another episode of The Real Eisman Playbook. Because the news is moving so fast, I just want to let you know when we're recording this. It's Tuesday, March 31st, right after the close, right after 4pm, and the market has had an enormous rally. In the morning, the Wall Street Journal had a report that said that President Trump was willing to end the war without opening the Straits of Hormuz. And then later in the day, there were news reports from Iran that there are talks. What's true? What's not true? Who knows? But here to help me explore that, the economy, the markets, is a recurring guest, Steve Leisman, senior economics reporter at CNBC. Welcome back, Steve. Good to be here, Steve. Thanks for having me again. So I don't even know where to begin because it's so frenetic, but you're reporting the news every single day. Let's start. Give me some preliminary thoughts that just come into your head. If all I had to do was figure out the lingering effects of tariffs on the economy, that would be enough. If all I had to do was figure out the effects of AI on job losses, that would be enough. If all I had to do was figure out what's going on in private credit, that would be enough. And I left the most important for last, which all I had to do is figure out the effects of a surge in oil prices on the economy, that would be enough. So there's at least four major stories that we're trying to figure out, all of which are potentially very consequential for the outcomes. We could have a chat here for the next hour, if you like, on AI. And that would be a lot. That would be a lot to figure out. And I'm spending a lot of time on that. When it comes to this oil story, my brain is a bit of a void because what are we doing with scenario analysis? It could go on for a long time. It could go on for a medium time. It could go on for a short period of time. And nobody really knows. And all of those outcomes are dramatically different. Obviously, there's a political overlay on each one of those scenarios, where you have this Republican side trying to say, oh, oil price spike, it's not as bad as it was in 2022. And it's not going to be, it's all legitimate. I read a piece over the weekend that said that in order for oil to have the same effect on the economies it did in 1973, which was a tripling of oil from 3 to 11, it would have to go to $550 a barrel. Now, it's legitimate. Probably true too. Legitimate. Legitimate. On the other hand, if you do the math, which is not hard to do, I don't know, take the 20 million barrels a day, multiply that by $35 extra, and do that every day and do it for a year, you're talking about a couple hundred billion dollars that will be transferred from oil users to oil producers. It's a massive transfer. And by the way, many of whom are in the United States. Well, that's a difference. That's another difference. But if you're paying, you don't care if the Saudis are getting it or if Exxon is getting it, right? And the dividend holders. So there's a massive transfer. And that transference, by the way, amounts to a reasonable percentage of either discretionary or total retail spending, however you want to do it. It's a meaningful amount. And it's a big difference from a macro standpoint that the money stays in the United States. But talking about layers and scenario planning, I actually just asked this question of Fed Chair Powell. This was at the last press conference. I said, the staff tends to see the impact of higher oil prices offset by the increased investment. Is that still your view? And he kind of hedged on that answer, but that is generally the way the staff views it. So among the layers you're trying to figure out when you talk about this internal transfer of money, which is a huge deal, what you're trying to understand is what will the oil companies do with the money? And I'm old enough to remember, you may be. Now, you may not be. I don't know how old you are, whatever. But the point is, you don't look so old. But anyway, Exxon in the 70s got into word processing. They took their extra money, and I think they were also involved in faxes. I know this because I know that Lee Raymond, who was the head of Exxon, when I covered Exxon for the Journal, he had become famous in getting Exxon out of all those crazy businesses they were in from the 70s. So anyway, the significance of that is, do they drill more? Where do they invest? Do they do special dividend? Anyway, what happens to that money that is transferred from the oil users? And then what happens to the low-income consumers? I'm thinking about a story now putting the KO in the K-shaped economy, right? That when it comes to that lower leg of the K-shaped economy, it's going to be real tough for those people. Oh, I'd agree with that. I mean, if this war goes on for another two months or so, the bottom part of the K is going to hurt. It's going to hurt. Now, whether that's enough to tip the economy into a recession, I don't know, but it's certainly not helpful, for sure. Let me just add that in all of this scenario planning, there's this really funny x-factor, and the x-factor is the unforecastable resilience of the U.S. economy. That is a great point. We come through these things in ways that end up not being as bad as the models might suggest. And it has to do, I don't know everything, why it has to do it, a bit with the dynamism and the adaptability of the economy, along with the way the economy is very segmented, it's different sectors. It's got a lot of different things going on. We have, for example, an oil economy the size of Saudi Arabia inside the U.S. economy. It reminds me of what they said about Tampa when I lived there. You could put Tampa in New York City and you would lose it. You'd never know it was there. Same thing is kind of true. I mean, it's a big economy, but it's a service part of the economy. It's not a leading edge part of the economy at all. But we have this massive, massive oil industry inside the U.S. economy that will play a role, will play a role in the dollar, but it won't be decisive. So you know, it's interesting you brought that up, because since the Great Financial Crisis, I've noticed it's almost like a competition of who's going to predict the next demise. And every couple of years, something happens. You know, there was an oil shock here, there's COVID. Since the Great Financial Crisis, it's probably been six or seven things. And someone comes on your show and said, this is it, this is the end. And it's not the end. And I agree with you. The actual amazing story since the Great Financial Crisis is how incredibly resilient the U.S. economy has become, probably more so than at any time in our lifetimes. And nobody knows how to model that. No, you can't. Nobody. I mean, look, how many recessions were we going to have after 2022, when the Fed was raising rates to 5%? Right. It was guaranteed. It was a guaranteed recession. Right. The tariff story is an interesting story as to whether or not that was over-apocalypsed, if that's a word. It was maybe over-Armageddon. Do you know why it was over-Armageddon? I have a thesis as to this. Okay, I'm interested, because I've got another answer. Okay. Everybody we know, everybody who watches CNBC, everybody in the markets went to college. Right. And everybody took Econ 101. And you don't remember, but taking economics... Some were high, is that what you're going to tell me? What's that? Some were high in Econ 101. No, they weren't high. Okay, never mind. I'm saying, taking economics the first time is a very, very, very powerful experience, because it's got charts, it's got graphs, it's got math. It's completely convincing. It's completely convincing. I mean, you walk out of economics thinking, not only is the professor right, but you actually think you know something. And one of the things that you got taught, and then got drilled in your head, and everybody we know got this drilled in their head, was that tariffs are bad. Tariffs cause the Great Depression. And so when Trump came out with the tariffs, everybody just basically took the book out that they had when they were 18, and they said, okay, here comes the recession. Has to be, because that's what we learned in college. I think that's a decent explanation. I just would caution the evaluation from the following standpoint. Okay. A lot of the people who say Trump was right about it, that it wasn't such a disaster, they take the forecasts from the worst possible tariff level, and project that forward. Let's be clear. The tariffs have been changed 50 times. Yes, they have. Since then, they've been brought down. And I will tell you a story. I might have told you this last time. I don't know if I told you. I think I said last time. We were on the brink of one of those interesting moments when those tariffs came out. And Trump pulled back. He pulled back in a big and meaningful way. And I was talking to people inside the repo market, the generalized collateral repo market, and those sort of things. And they said, we were close, Steve. We were close to a meltdown. And if he had not backed off it, we might've gotten there. But he did back off at the last minute. So which predictions ended up being how wrong, I think is a matter of when you evaluate them. Fair. Okay. But I take your other point. I think it's a good point. I'm thinking more to the psychology of people. It was a reflexive. It was almost like someone took your religion and said, you're wrong. And it was intolerable. Meanwhile, if I might, you're down 100,000 manufacturing jobs since that happened. Yes, you are. For the year. So it is true that they have not been as bad as perhaps predicted. But they also haven't, in a way, it's hard to find a way they've meaningfully added to GDP or the economy. Certainly not yet. And I talked to people who are in the business affected by tariffs, and they're still dealing with it. And they're still talking about passing along. I had lunch the other day with one of the local craft breweries in my town. And he owns a beautiful brewery. And I'll just tell you, it's Captain Lawrence Brewery, which is a regional brewer. He just got another 7% increase in the aluminum price. He's getting killed. He's getting hurt. And I don't know what that means for him. Let's switch gears from the war. Why? Because, well, we can switch gears simply because by the time this podcast drops next Monday, who knows where we will be. I will say one more thing about the war, which is it is interesting today, today only. Change in an hour or change tomorrow morning. The market surged on that. Stock surged. Oil didn't come down so much. That's true. Oil came down 106, 105, down to 102. At least it was when I last looked a little while ago. The concern here is that we move from a flow problem to a stock problem. And that's something that I am monitoring. And what do you mean by that? What's a flow problem? A flow problem is the oil's on the way, but it's not here yet and I need it now. But it's there to be had. The stock problem becomes it's not there to be had. Because the straight stays closed. Because the straight stay closed, the reserves start to dwindle. I've heard stories that say, or predictions, April 1, and now I hear maybe the middle of April, that if we don't get this resolved in those couple of weeks, then you're dealing almost exclusively with a stock problem, and then you have a potential asymptotic reaction in the oil market where prices go 150, 200. If you don't resolve it by then, or it may be enough to create the illusion that it will be solved, but when you get into a stock problem, it's just you can't find it. And if you must have the oil, I like to describe it this way. This is maybe econ 102, was let's price a bottle of water. There's 10 people in the desert and there's nine bottles of water. What's the bottle of water worth? So that's where you get into these tremendous spikes in the price of oil. So we have to either solve this problem or create the illusion that it's being solved before we get into a real stock problem versus a flow problem. And that's just part of my thinking about these scenarios that we're talking about. Okay. Let's switch to the Fed for a little bit. Well, we've got two situations here. A, where do you think the Fed's at mentally given everything that's going on? And B, you've got Walsh who's nominated, but there may be delays. You got Powell who may hang around, he may not hang around. What are you hearing from people? And you got Cook. You got Cook who's subject of a Supreme Court decision. Right, and you got Cook who's probably- There's three things at play there. Yesterday was Monday, correct? Powell used the phrase, policy is quote, in a good place. Where did he say that? He said that yesterday up at Harvard. Okay. That's a phrase that he used to say, we're okay here. We have no intentions of changing things. And what I think he is saying by that, and what I hear other people saying, and I will say there are both sides have carved out positions here, I can get to those. What I think he's saying is we're a bit above neutral. We're not at neutral, we're a little tight. And I think that little bit of tightness, he thinks is okay to address what may be the initial phases of what's coming in terms of inflation. Now, I also asked Powell a second question at the press conference last time. And I said, are you concerned that you look through the tariffs, you've had inflation above target for five years running now, and now you're telling me you're going to look through the oil price shock. At what point do you start to lose credibility of your commitment to the 2% target? And he said, that's an issue. That's something we're thinking about. At some point, he could see longer term inflation expectations becoming unanchored. Now, do I need to explain that to your viewers what that means? Let's explain that. Hi, Steve Eisman here. You listen to this show because you want to know what's actually happening, not the narrative the banks or the financial media are feeding you. And if you've had some success in life, you know the noise only gets louder. Suddenly, everyone has a product for you, a new fund, a tax scheme, a once in a lifetime private deal. How do you know what's real? You ask the people who have already been there. That's why I'm partnering with Long Angle. 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The New York Fed has one. Those are opinion surveys. There's also market pricing of what they think inflation is going to be. And the Fed monitors all of that, and it watches the one-year forward inflation expectations go up and down with the price of oil and other inflation things. But it also looks ahead to the three-year and the five-year. And the real concern for the Fed would be when the three-year and the five-year become elevated, because that is seen as a sign that the public doubts the Fed's commitment to the 2% inflation target. And that's Econ 201, I think, at this point, right? I took that class, too. The funny thing was that Econ 201 wasn't that much different from Econ 101. No, just more charts and graphs and math. Exactly. So anyway, that's where they're at right now. And I think that Powell, I believe, is indicative of the center of the board. Now, on one side, you've got a guy like Stephen Myron, the Fed governor appointed by Trump, who he hasn't seen a problem that he doesn't believe is solved by cutting interest rates. In other words, he'll cut interest rates under any circumstance. High oil prices. He's worried about the economic impact, the negative economic impact, which is not crazy. I'm not saying it's crazy. I'm just saying that he has this consistent... That's his bent. He got into office. The first thing he ever did was, welcome to my house, and he insulted the house. He said, I'm dissenting. I want to cut by 50 basis points. And he kept dissenting. He's dissented almost at every meeting. And he wants to continue to cut by a quarter. So I don't know how seriously he's taken by his colleagues here. He does not seem to have gotten too many converts. Even the other Trump appointees are not voting with him. It's very interesting that Governor Chris Waller, also a Trump appointee, and Michelle Bowman, Mickey Bowman did not vote with Myron at the last meeting. On the other hand, we had Schmidt out today. It's Tuesday. There'll be a lot of talk between now and when this thing runs, but it's not a bad explanation of the parameters of the debate. Jeff Schmidt from Kansas City comes from a long line, as you know, of hawks from the Kansas City Fed. Esther George, Tom Honig. These were all... If you look at their history of dissents by the central bank... What are they feeding people in Kansas City? I met these people. They're all hawks. They're smart people, but maybe it's in the bird seed, that the hawks, whatever it is. But he said today, suggested today, that the higher inflation and the oil price shock suggests the Fed should think about policy action in order to keep inflation expectations anchored. By raising rates. Didn't say that, but policy action is about as far as you might want to go. Anyway... I sort of have a problem. Don't blame me. I have a problem with the idea. Oil price is going up as an exogenous event. Raising rates to deal with an exogenous event, I think, strikes me as not the way to go, because you could raise rates. All prices are higher anyway. You could lower rates. All prices are higher anyway. You do nothing. All prices are higher anyway. All you're going to do is slow the economy. Is that really what you want to do? Not clear to me. That's the way to go. I think that there's a good... There's a very solid school of thought about that, and I think it boils down to this. There is no amount of interest rate increase that will bring a single barrel of oil to market. Correct. Which is sort of talking about the ineffectiveness of the Fed to affect supply-side shocks. And that's the general theory. The only difference is, if you begin to get inflation expectations unanchored, if you end up having a situation where the job market is tight to the point where people can go to their boss and say, I need a raise because oil prices are high, and then that creates an inflation spiral. Now, that is not an argument that one could make right now. The argument that Schmidt makes is, hey, I've had, and the Hawks make, is that you're sort of in this 4.3% to 4.5% unemployment rate. You have zero job growth, but most of that is because of what's happening on the immigration side. So your employment market is balanced, and if you're not careful, it could get out of balance and you could have that. So I don't think it's important that they raise rates. I think it might be important that they're not necessarily seen as gonna cut in the face of this, and that they're seriously monitoring it, such that you can say to the bond market, we're serious about this. Okay. You know? Any thoughts on when Kevin Walsh finally gets in, what type of changes he might make? I have, you know, I've been very surprised, Steve. The fact, I was there the day, in reporting the day, when Jeanine Pirro, did you see that press conference that she had? Oh my God. Who was that? She is the former Fox News host, who is now the Attorney General for the District of Washington. Yes, D.C. For D.C. Yes. And it was the day that the judge quashed the subpoena in the criminal case against Jay Powell. Right. So this criminal investigation was opened, and they subpoenaed the Fed. The Fed moved to quash the subpoena, and the Fed said in its pleadings, here are a hundred tweets from Donald Trump saying that he wants to get rid of Powell because interest rates are low. Are high. Are too high, and the president wants Powell to lower interest rates. And there is no evidence on this side of anything Powell did wrong. And so the judge quashed the subpoena. Pirro went and said, we are going to go back to the court to ask him to reconsider his decision. That's one. And then we're also going to appeal. Why is that important for Kevin Warsh? Because he's not going to get in. Because Tom Tillis, the senator, the Republican senator who's leaving office, said, I am not going to advance any of the president's nominees to the Fed while the federal criminal court is still going. Do you believe all the stuff that's in my head with this crazy stuff? It's insane. Yeah. It's, anyway, so, and I hope I have it all straight, but anyway, that's what Tom Tillis said. So he's blocked that. So we do not have, we heard when the other day of a possible hearing date for Warsh. We don't know if that's true. It was a potential mid-April, but we can't confirm that. Senate banking won't tell us. So Pirro's proceedings could go for a month or more. Powell's term is up May 15th. Right. So what happens? He'll stay in office. But any thoughts as to, I mean, eventually Warsh will get in. I think that's right. Let's assume that. It's not a bad assumption. What do you think might change at the Fed? Once he gets in, if anything. Well, I think he wants to lower interest rates. He has an idea about lowering interest rates, which is interesting. It's a little experimental. I'm not sure how much support he's going to get on the committee for it, but I'll lay it out for you. He thinks the balance sheet is too big. The Fed's balance sheet is too big. $6.7 trillion of assets, assets that it bought over a period of time in order to try to help the economy and drive down interest rates. It did it during the great financial crisis, and it did it again in the pandemic and really did it during the pandemic. And they kept going for probably too long. Warsh wants to see that brought down. Now that is in some ways a tightening of policy that would make the economy, would make interest rates go higher. He wants to offset that with lower interest rates. He wants to bring down the rate, but he wants to reduce the balance sheet. Like your stock and flow. It's a stock and flow story. Now, it's a sophisticated comment you just made, Steve, because that is where the argument is. The argument is, did it matter for interest rates that the Fed was buying, which is the flow argument, or does it matter that it holds? And a lot of people think it doesn't matter that it holds so much, that the 6.7 trillion there now does very little work. But in creating the flow on the other side of reducing it, what Chris Waller, the governor, told me recently was, he has no problem bringing down the balance sheet if you reduce the demand for reserves. And how would you do that? You could reduce the regulatory capital, which might be something we're going to talk about when we talk about private capital, private credit. But we'll come to that in a second because I just want to add this one thing here. Which is that he thinks it's idiotic just to bring down the reserve level to bring it down. So he is not 100% on board with where Warsh wants to go, depending upon how Warsh wants to get there. Okay, let's talk about private credits. Since you brought it up, I was going to bring it up. Yeah, you bring it up. There is, it's been a long time since I've seen a story that literally has a story almost every day. You know, the great financial crisis, it was obviously you were busy every day covering basically one thing. You were busy making money. Well, on most days. I should have called you. But my point is just that it's been a very, very long time that we've had a financial story that has news flow like this. So consistently and so consistently bad. Yeah, tell what you were saying before about how you have a blog, you put it on Monday. You got updated every day. So we put out two podcasts a week. We do an interview with like yourself, and we put that out on Monday. And on Friday, we do this wrap where I wrap up the week. And I work on the wrap all week. And every week I'm writing about private credit. And what happens is I'll start writing on Monday and I'll say more bad news on private credit on Monday, blah, blah, blah. And then I wake up the next morning and I have to add another sentence And it's relentless. And I'm curious as to your opinion about what's going on. What are you hearing from people? The nervousness, the role of software. I mean, there's so much you could talk about. Okay, so I come at this from a different standpoint as a Fed macro reporter. I don't care if you lose all your money. I care if you create systemic risks that's gonna keep me up at night and cause the Fed to do emergency lending. That's what I care about. I come at that from analysis of that standpoint. And so far, I think the answer is no. It's not a systemic issue. That said, I can tell you that in the great financial crisis, we thought that they were offlaying all the risk out into the market. And we found out it came back to the banks. The idea that the banks are not somehow involved in this. Oh, the banks are involved because they lend. So when you talk about private credit funds, they're levered two to one. That one turn of leverage that they are levered, they get a lot of it from banks. Now, my argument is that, assuming this gets really bad, and there was an interesting article in the journal today about how, was it today or was it yesterday? Oh, I think it was yesterday. There was an article in the journal yesterday about how the estimate is that private credit has 25% exposure to software companies. But that's the number that people have come up with. And the article in the journal, which was really great reporting, was it turns out the way you classify software, there's room for maneuver. So a healthcare company, which a healthcare software company is not classified as software. And so it's probably over 30% is my guess. So if you have a scenario where private credit takes huge losses, there probably could be some losses in the banks. This is my personal opinion. The difference between now and pre-great financial crisis is that the leverage is half in the banks. That's what I was gonna ask you. I was gonna say, Steve, two to one is not seven to one. Where were we in the GFC? How much leverage was out there in these CDOs? No, no, no, no. The way to think about it is how much leverage was actually in the banks when you put back all the stuff that was quote unquote off balance sheet, but was on balance sheet? Right. It probably averaged for the big banks, they were levered 40 to one. That's not serious. That's not where we're at right now. And that's not where we're at today. And there's equity in front of the leverage too. And there's equity. So look, I think- And they're in the senior position. Correct. If I had to make a bet, I would say there's definitely gonna be a lot of losses in private credit, but I'm personally not worried about the bank system. Let me tell you the theorem that I hope to win the Nobel Prize for economics for it. Please do. Are you ready? Yes. And I say this jokingly, systemic risk equals the value at risk times the opacity. Okay. And what we found out during the financial crisis, even a small amount of potential loss in a place can be a big amount if we don't know where that loss is. Right? If it's a billion dollars, but we don't know where that billion is, everybody's gonna sell to make sure they don't get that billion dollar hit. If it's $50 billion and everybody knows where that 50 billion loss is, nobody sells anything because I'm not gonna get hit. Right. So- That's actually right. It's part of the problem with private credit is- That's my issue. It's so opaque. I mean, put it this way, the statement that 25% of all private lending is in software. That's a new statement. That is six months ago. Nobody knew that. Good point. Nobody had any clue. Let me throw something else at you, a curveball. This is something I'm working on, but I don't know this to be the case yet. So I just want to throw it out only because we're having a good conversation here. Is there leverage behind the equity? What do you mean by that? Is the equity equity? Or is the equity got some leverage and lending inside it? I don't know. That's the thing that could bite you in the ass. Building a global team is hard work. So quick question, are you hiring in another country right now? Because once you do, things can get complicated fast. But that's where Pebble can help. You can send offers in minutes to anyone in the world and get them onboarded fast. 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But private lending is owned by private credit companies. So there's this whole incestuous relationship of private equity buying companies and borrowing from either the funds that they themselves own or their buddies own. Let me though tell you the other side of this story, which is something the software industry has been trying to get out, which is a lot of this lending is to software companies. And what I hear from them, and I talked to a guy on the phone the other day, and he said, look, AI is not going to be able to market, design, and service software. This whole thing started with concern about AI taking over the software industries. He thinks that's overblown. And he also thinks that the cash flows of the software companies, even with a hit from AI, is more than ample to service the debt. Okay, so let me challenge that just for one second. Okay. Okay? My challenge is that all of these software companies were bought by private equity between 2018 and 2022. Rates were considerably lower back then. Fair enough. And this stuff is going to start to get refinanced next year, the year after, and the year after that. And yes, they can service the debt at their current rates. Will they be able to service the debt when they have to refinance? That's an open question. But if this story is that there's 50% equity in front of the debt, then how worried am I? How bad? Maybe not that bad. I don't know. I don't know either. I don't know. That's the question. I think the other question is the extent to which this AI stuff... Look, I was at a conference a couple weeks ago in San Francisco, and this guy has a company, and this is probably old hat to all you San Francisco people out there. He is giving you the means to make everybody in your company a coder. Okay. Imagine your company... Like even you and me. Me and you. He said the line between the designer, the developer, and the marketer, it's gone. There's no line anymore. Anybody can code. You got an idea for a code for an app, you just tell AI to do it. And he's going to come in, he's going to serve, he's going to provide you the cloud space. Not entirely clear how he makes money, but that's what he's going to do. And that's what's going on right now. What is interesting, Steve, is the development I am talking about is 60 days old. Is it older than that? Not much. I mean, obviously some people knew about this a long time ago, but the idea that it dawned on the market 60 days ago that AI was going to come in and it was going to do the coding and anybody could be a coder and anybody can develop an app and that this creates a huge rethink of the valuation of the software business. I mean, I don't see how Adobe goes away. Do you see how Adobe goes away? But maybe I'm not thinking SAP go away. I don't know if it goes away. What happens here? I hear, I think... You got to have an expert on that stuff. I got a guy. He's coming in a couple of weeks. I want to hear that as a podcast because he's coming in a couple of weeks. But it goes up into a macro story. I think the issue is you're not going to be able to raise prices anymore. Fair enough. That's over. Maybe you have to cut. Yeah. Competition for you was coming. Your growth rate's going to slow. Maybe you survive. But you're no hero. It's a good point. You're no hero anymore. I mean, you got to remember the reason why private equity bought all these software companies is like the SaaS software as a subscription model. It was like the sexiest thing in tech ever. And by the way, I have a funny thesis as to why it became so sexy. Never underestimate the impact of an Excel spreadsheet. So prior to SaaS, software was just, what are you going to sell this quarter? That's unmodelable. I mean, the model for that and revenue would be last year's quarter revenue times 1.06%. That's not an elegant model because you could be off by light years. But if it's a subscription model, what you have is ending number of subscribers. You make an estimate what the new subscribers are. You have an average. You have the average price for the subscribers. And you have a growth rate for the subscriptions, which is fairly consistent. It's much more modelable. It's much more consistent. And that's why the multiples of software stocks exploded over the years. I can tell you that in 35 years as a business reporter, the nirvana for every company is to have a subscription cashflow model that makes them like a bank. Yes. Everybody wants to be a bank at the end of the day. And software had that for decades. Yeah. And now all of a sudden, it's not that you don't have necessarily that model. It's that you're not going to be able to raise prices anymore. Your growth rate is going to slow. It could get ugly. Yeah, it could get ugly. But again, my concern is, and so far what the Fed is saying, which they didn't have a great track record in the GFC. You remember when Greenspan said something like home prices in Bangor, Maine, do not arbitrage prices in Portland, Oregon. He was wrong. Or Bernanke said subprime is contained. Is contained. So be a little careful with that. And I would add on top of that, there is quite a robust deregulatory effort going on at the Federal Reserve when it comes to the banks. Yes, there is. So whether, now this is something I've also seen in three and a half decades of doing this. When times are good, they back off the regulations. Is it the smartest thing to do? I don't know. I think that the people who have been opponents to deregulation and reform of the banking system, I think were a little too orthodox. I think what they were like was like, we can't change a word of Dodd-Frank without considering that Dodd-Frank was passed in the middle of a crisis and it was an immediate, almost emotional reaction that effectively put the banking system into receivership. For all intents and purposes, it was like the entire banking system was in receivership. And moving them out of receivership to a place where there are less, there's less regulatory capital, is fine, but you don't want to see it go too far. I totally agree. But you know, introducing, the question is, what's the right capital ratio for the banks? And the answer to that question is, Moses did not come down from Sinai with the tablets and in his left hand and his right hand with the capital ratio. Right, right. It's an iterative process. It is. And, you know, did we, we probably went too far, maybe necessarily after Dodd-Frank got passed. Could the banks have a little bit more leverage? Sure. I mean, I don't, we're not going back to 41. We're just not even close. Maybe this rise of the private credit business is a sign that you've gone too far. Well, all loan growth has been outside the banks. You've had the huge demand for credit out there. Not overly leveraged credit because the banks are leveraged 12 to one. Right. So if private credit is two to one, that's actually better leverage, right? So, and there's good equity in front of it. Of course, the reserve ratios are different depending upon where the banks get involved. But all that said, it may be a sign that they went too far. And if you don't necessarily want to push all of this lending out of the regulated system, because then your visibility on it goes down, and the ability to gauge the systemic risk goes down as well. So let's finish up with some dialogue about the K-shaped economy. What are you seeing out there? Well, I follow this wonderful data that's now being put out by Bank of America. Do you know this data? No. If all I did with my time, which I had been doing for quite a while, especially beginning in the pandemic, was spend my time looking at the private sector data, that would be enough. It is a fascinating development going on out there, which I just feel lucky to be doing my job at this point in history, because what's happened is companies like Bank of America, CNBC has our own thing, where we talk with a company called Affinity Solutions. They have credit card data, and we do a retail report every month based upon actual credit card spending. Whereas the government's Census Bureau retail report is a survey. Ours is real data. There's all this data that's coming out right now that really is from the private sector, jobs data, ADP, all this stuff. Bank of America is now giving us some insights as to what's happening in Bank of America accounts. Don't get worried, folks. It's all anonymized. They're not looking, they're not giving me your name, but they're able to look at- Oh, they're big enough that they're a good slice of the economy. Big enough to be a good slice of the economy. JP Morgan has some other credit card data. As well. I think Vanguard is giving us insights into what's going on in its pensions. Fascinating stuff. So Bank of America can show us, for example, and I'm gonna answer your question, I promise, but I think this is also a fascinating part. Are people receiving unemployment insurance checks? Imagine that. They see that. They see, and they can identify from the patterns, a paycheck, and how much are you receiving a paycheck or not receiving a paycheck? Is it higher or lower than it was before? And then of course, the point I'm coming to is what income bracket you're in. And this is what I wanna point your attention to, and they do show the stress right now at the lower income levels. And what's interesting about that is lower and middle income did very well in the wake of the pandemic. It was a really interesting surge in income levels better than the wealthy did. It doesn't count the portfolios because they don't obviously have the portfolios, but the income levels did quite well. And a percentage basis. And now that data, and I guess we'll get a little bit of data next week, and we'll see how it's responding to what's gonna happen now with the oil prices, but that's something we're seeing. And we're also hearing some of the stress from the companies that sell these people. The retailers to the low and middle income are expressing some signs of stress right now that we have to watch for. Okay, Steve, that was great. I really appreciate your time. I will have you back again. Thanks, Steve. Thank you. That was a really great interview. And let me give you some of my takeaways from that interview. You know, Steve really covers the economy from a very macro perspective. So he's a Fed watcher. That's where he comes from. So with respect to the war and rising oil prices, his fear is that if the war lasts too long, oil prices will stay elevated. They'll stay elevated for a long time. And that's gonna seep into the economy and cause inflation expectations to rise and might obviously cause interest rates to go up as well. And that's gonna be a real problem for the Fed because it's not clear what the Fed could even do if inflation expectations are going up from an exogenous event, meaning oil. With respect to the Fed, he pointed out that there's a real debate in the Fed between those who want to cut rates, those who want to raise rates, mostly coming from the Kansas City Fed, and Powell seems to want to stand pat. And they're all watching whether inflation expectations are gonna go up because of oil. We then turned to private credit. I thought he had very interesting insight, actually two insights. One was it's possible that the equity, that private equity puts into companies is levered, that they're borrowing from the banks to put up equity to buy companies so that it's not even clear how much leverage there actually is in these companies. That was one very interesting point that I didn't know. And the second thing that he pointed out, which I thought was a very interesting insight, is that part of the problem with private credit is that it's opaque. Nobody really knows who's holding what. And so people are very, very nervous because of the mystery. If the numbers are small, but nobody knows where it is, people are still panicked about who's gonna be holding the bag. Whereas if the actual number was known and everybody knew who held it, people would be less nervous because they would know it's not them. And the last point that Steve brought up with respect to the K-shaped economy, which is how we ended the interview, is that Bank of America puts out some very interesting data about its consumers within Bank of America. And it's definitely showing that the lower end of the consumer is hurting. The lower end of the consumer did very, very well during COVID. And that Bank of America data shows that. And the lower end of the consumer right now is very much hurting. And higher oil prices is kind of insult to injury. So that was the interview. And see you soon.