'Big Short' Investor Reveals His Biggest Bet for 2024.

I'm always a little bit hesitant to try to ask you for Big Picture top down analysis, 'cause a lot of times you don’t really want to go there. I actually have an opinion on this one. Good! If you don't know that man, his name is Steve Eisan. He's the senior portfolio manager at Neuberger Berman and has built an estimated net worth of $1.5 billion.

Steve is typically fairly low profile, but of course that all changed when he was featured in the movie adaptation of "The Big Short," played by Steve Carell. Like Michael Burry, who I've spoken about at length on the channel, Steve is also a very rational, highly analytical investor. Luckily for us, he has actually been popping up a lot more in the media over the last six months or so, giving his opinions on monetary policy, where the economy could be headed, and also what he's investing in at Neuberger Berman.

Interestingly, as opposed to many who get brought on by the media for their bearish Doom and Gloom sentiment, Steve, despite being quite skeptical of the system, has actually been fairly optimistic with his outlook on the economy. We're in kind of an interesting environment where we're definitely worried that the economy, for Fed reasons and for Fed cut reasons, is staying strong. I think it's more than staying strong; it's actually, I think, there's been a reacceleration.

But we're also worried that there's going to be a recession because the FED is going to have to engender one too. So we're worried about the economy being too strong, and there might be a recession. Everybody's hoping for a little bear's porridge—exactly right, something just right. Because we're worried, has that ever happened? Can we really orchestrate that? Yeah, we have it right now. Everybody should just relax.

In Steve's view, while there is plenty in the world to be concerned about—whether it be higher interest rates, inflation, geopolitical tensions, what have you—when he looks at the underlying statistics like business performance, workers' wages, unemployment, the economic factors that will most rapidly and significantly influence a person's quality of life, he notes that for the most part, the economy seems to be humming along relatively smoothly. At least a lot smoother than the big recessions of the past that so many are quick to compare this current period to.

That's also evident by the fact that inflation is persisting a little bit more than expected. Demand-side inflation can really only persist if people have the money to keep buying, and that's exactly what Steve is seeing happen. That’s what leads Steve to hold this fairly unpopular opinion that the Federal Reserve shouldn't really mess around with the idea of rate cuts just yet because there isn't really a need to. You don't want to increase the likelihood of further inflation.

You know when Powell said—was it last? I think it was last week—it feels like an eternity ago, that financial conditions are tight? I was like, what planet are you on? My view is the economy is fine; there should be— I personally think there should be no Fed cuts this year. You know, the market will do whatever the market does, but the economy is fine. Things are good. The Fed should do nothing and wait for data to get weak because there's no weak data.

I've spoken about this at length in some recent videos, so I won't hop on about it too much in this one, but this is the unpopular opinion held by a lot of very notable people—Jamie Dimon, Ray Dalio, Howard Marks, just to name a few that I've covered here on the channel. The thinking is that because lowering interest rates can only be inflationary, why would you do it when economic factors aren't calling for it?

The one thing you don't yet have full control of is inflation itself. That's why Steve says everyone should just calm down; the economy is doing relatively fine. The one thing the FED should not do is lower rates. My actual fear is that if the FED were actually to cut rates, the market goes into a state—so it becomes, I guess, Bubblicious—and then we have a real problem. You know, not that anybody ever calls me, but you know I would just do nothing.

Why would you do something when the economy is fine? You don't think we need to raise? No, I don't. But actually, my fear is that if they cut, we will eventually have to raise— that would be the worst possible thing that could possibly happen.

One of the things I've learned as a portfolio manager is maybe the hardest thing to do as a PM is to do nothing because it's so easy to actually do something. It's the same thing with the FED; it's so easy to do something. They could cut whenever they want to cut. The hardest thing to do is just to sit back and say, "Okay, everything's fine; let's just sit and wait." If things get a little weak, then we can cut.

Cutting rates is obviously a stimulative measure, so it makes logical sense to keep that cut up your sleeve until the economy actually calls for it, not to play it now just to make a warm economy hot once again. So that's Steve's opinion.

I wanted to delve into his thoughts a little bit deeper. In his view, the economy is hot, and the market starts to, to use his phrase, "almost Bubblicious" right now. But what are the major forces behind this economy and the thriving stock market? Later we'll look at how Steve is actually capitalizing on these macro forces.

So what do you think is driving this economy though? Is it new productivity gains that somehow AI is coming? I mean, I think the two big things that are happening right now—what's—no, I don't think it's the liquidity per se. I think what's real fundamental is that there's real AI, there's real investing, and there's a tremendous amount of money being spent on infrastructure.

There's still a shortage of jobs, so the consumer is fine. So, two forces in Steve's eyes that are driving the economy right now are the development of AI and investment in infrastructure. Now, I know what you're thinking—oh man, Steve is another one that we've lost to the AI hype. Rest in peace, brother. But that's definitely not the case. He is not one of the AI speculators that have sent stocks like Nvidia up 200% in the last 12 months.

What he's saying is that a lot of the biggest companies in the world have started investing significantly in AI infrastructure to build out new technologies, and that investment has helped to spur on the economy. Goldman Sachs last year reported that investments in AI technology could reach around $200 billion by 2025—investment that will quote "probably happen before adoption and efficiency gains start driving major gains in productivity."

So he's not betting on the big companies that are trying to make the AI of the future; he's just noting that there's a heck of a lot of investment happening in AI technology, and that is helping to drive the economy. That leads us to Steve's next core factor driving the economy, which his AI argument really falls under, and that is infrastructure.

If you've listened to any of Steve's interviews or podcasts over the last year or so, you will know he is very intrigued by the current infrastructure landscape in the United States. 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. I believe in the first two, and I don't believe in the third.

Let's go to infrastructure for a second because you mentioned that you talked to a lot of industrial companies—companies that would be theoretically, I assume, prime to take advantage of a lot of the building out that's going on. So what are they saying to you? Where are we in the broader infrastructure cycle? Because I think we're at the beginning.

So in Steve's view, we're really just getting started on this trend. When it comes to this major economic driver, that is investment in infrastructure, Steve noted that there are four primary contributing factors. I think that there are several sort of themes that weave their way into infrastructure.

So one is onshoring. You know, the world spent 40 years creating a global supply chain that was incredibly efficient, inexpensive, and deflationary, and it turned out to be what we all learned during COVID—also very brittle. So companies are bringing parts of their supply chain back to the United States; that's a ten-year story, and we're like in year two.

That's theme one, and that's something that has really come to the fore after the pandemic— this idea of de-globalization. The World Economic Forum summed up this trend perfectly by saying that recent disruptions to global value chains, such as the COVID-19 pandemic, the war in Ukraine, growing ideological differences, and the green transition have prompted governments and corporations to reconsider external dependencies.

They are looking closer to home and to trusted partners for more resilient growth models. We've seen legislative trends, such as the Chips Act, even encourage the de-globalization of the semiconductor industry, which has spurred companies like Intel to build new chip fabs in Ohio. TSMC is building a new factory in Arizona.

Long story short, the lockdowns and the geopolitical issues are encouraging US companies to retreat to the safety of their own borders. So that's macro theme number one when it comes to infrastructure.

Theme two is data centers, which is part 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.

So again, this is the idea that while AI products and services aren't yet contributing much to the economy, the building out of this new infrastructure is the classic example. Here is Nvidia—sure, it's a little bit meaty at this point, but their 200% rise in the last 12 months has been because of really impressive growth in Q4 last year. Nvidia did $12.24 billion in net income, which was up 7,169% year-over-year.

They're making sales like it's nobody's business, but Nvidia is not selling that AI software of the future; they aren't selling the chat GPTs of the world. They're selling the hardware that other companies will use to go ahead and build their own things. So, as Steve notes, right now AI is more of an infrastructure play as opposed to a products and services play, but it's a big shift that is extremely early.

So he's taking advantage of that trend. This brings us to theme three, which is the improving of the grid. Now, the grid needed an 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.

All the industrial companies that deal with utilities 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. So this is the third factor—the need for the improvement of the electricity grid.

I'm sure I don't need to tell you guys over in the States, but as Forbes notes, "Electric shortages have become more acute; brownouts and blackouts have become common." This fact is especially troubling because it confronts the country just when Washington and several states are pushing electric cars and an increase in the use of electric appliances. I'll add one more to that list, as Steve did—increases in computing demands.

As Steve notes, this is an area of focus, from both the public and private sectors. Quote, "The Biden Administration last year announced it's putting $3.46 billion into improving the strength and resiliency of the United States electric grid," joining $4.7 billion in investments from the private sector.

Then, of course, closely related to the energy grid is Steve's fourth infrastructure pillar, which is the greenification of our energy and transport infrastructure. The last part is greenification, which has been a long-standing theme but it's going to keep going. 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 IJAA adds up to about $1.2 trillion over 10 years, so that'll turbocharge all the four themes that I just spoke about. That's why infrastructure is so interesting. For those that don't know the abbreviations, the IRA and the IJAA refer to the Inflation Reduction Act and the Infrastructure Investment and Jobs Act, which is known as the Bipartisan Infrastructure Plan.

So you have a huge amount of spending from the government, specifically in infrastructure, as Steve said, about $1.2 trillion in total combined with the other infrastructure shifts that Steve spoke about before. That’s why he thinks this is going to be a major theme in the US financial markets over the next decade.

Have a listen to this anecdote: take a company like a newer company—it's not an older company, but it's a new company listed called CR, which is a materials company. The headquarters is in Ireland, but 75% of the business is in the United States. They do roads, cement, all that stuff, and on the commercial side things are picking up. They're partially picking up because of the IRA and the IJAA money just starting to be spent.

One of the things that was said on the conference call by the CFO was that this is now a golden age for infrastructure. I never heard anybody say, "I'd call this a golden age for their industry," but he said it. So overall, Steve's opinion is you have these multiple factors seeming to line up for infrastructure right now. There's massive government spending to keep people employed and to fix aging infrastructure in the US.

There’s a sudden push from many companies to build out new technologies with AI, thanks to the initial success and power of ChatGPT. There's the ongoing transition towards renewable energy which needs huge investment in batteries, electric vehicle manufacturing, wind, solar, and other renewable power technologies. Then at the same time, all that manufacturing is coming back to the United States as opposed to being outsourced to the global supply chain.

That's what leads people like the CFO of CRI to openly state that we're headed into this golden age of infrastructure, and that's why Steve is doing his due diligence in this sector, now in much the same way he did his digging on the US housing market back before the 2008 financial crisis.

So that is Steve's updated opinions—that is what he's looking at, that’s his views on the economy for this year. I hope you guys really enjoyed the video. Anyway, guys, that will just about do us for today. If you did want to go and support the channel even further, you can check out New Money Education if you want to learn how the likes of Warren Buffett go about their investing. I've done a full step-by-step course teaching you how they do it.

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