Eisman (pictured), who shorted collateralised debt obligations (CDOs) prior to the collapse of the US housing bubble in 2007–2008 and was dramatised by Steve Carell in Hollywood film ‘The Big Short’, told Portfolio Adviser a recession is closer than people think, but would not be drawn on exactly when.
“I don’t know if it’s this year, next year, the year after, or the year after that, but it’s coming,” he said.
But once recession does set in, Eisman does not think it will progress to a financial crisis.
He added: “What do you need for a financial crisis? First is obviously a recession but you also need systemically important banks to be so over-levered that people are worried they are going to collapse; that was ’08.
“Leverage in the US in the banks is roughly a third of what it was. So, the US financial system is safe, in Europe it’s safer.”
Eisman said leading economic indicators on the manufacturing side have deteriorated dramatically for certain economies meaning we are in a global industrial recession, but “that’s not the same thing as a global recession”.
“What’s happening right now is if you look at the manufacturing PMI, they’re all below 50 all over the world – the US got below 50 in August. That’s partly economic, it is also a lot to do with the trade war, yet people are sitting on their hands not doing anything. As a result, we’re in a what I would call, and I don’t want to overemphasise this, a global industrial slow-down-slash-recession.”
“In the US [industrials] is about 10-15% of the economy, so 10-15% of the economy is in global recession. On the other hand, the consumer is fine because the consumer is employed, the consumer is not over-levered and credit quality is very good. So, you’ve got a real bifurcation.”
Eisman is lead manager on the TM Neuberger Berman Absolute Alpha Fund, a global long-short Ucits vehicle launched in the UK earlier this year. The fund is co-managed by Eisman’s sister Dana Cohen and her husband Michael Cohen.
The portfolio is about 15-20% net long, down from about 40% which Eisman said is “pretty low” and a reflection of a more conservative approach. It is long tech names including Cisco, Visa, Amazon, Facebook and Google and its biggest long is Motorola Solutions. In Europe, the portfolio is long Nokia.
Themes he is shorting in the portfolio include European and Canadian banks and industrial cyclicals. Names being shorted include video streaming service Netflix and US online estate agent Zillow.