Steve Eisman, the Neuberger Berman portfolio manager of “The Big Short” fame, appeared on Bloomberg TV this week to discuss whether the current global industrial downturn will lead to a global recession, and whether central banks can save the global economy from sliding into another period of contraction.
Eisman started the interview by mentioning the downturn in global PMIs, a sign that the developed world has already entered a manufacturing recession.
And even if this metastasizes into a global recession in the coming months – something Eisman believes is certainly possible – the downturn won’t be nearly as devastating as the devastating recession that followed the financial crisis. For one, the financial system is a lot more secure than it was in 2007, Eisman says.
“There’s not a question that we’re in a global industrial slowdown…whether that will translate into a global recession is open for debate.”
“Even if it does become a recession, we’re not going to have the systemic blowout that we had last time because the banks are just much healthier.”
Asked about whether a trade deal between the US and China might save the global economy, Eisman said he believes the trade war is really more of a side show.
Although investors have been fixated on the US-China trade war and its impact on global growth, Eisman noted that the industrial slowdown started before the trade war really got going.
He’s more interested in what central banks are doing. For example, while economists insist that, because of the complicated ‘transmission mechanism’, it will take a full year before the effects of central bank stimulus have an impact in the real economy, Eisman has his doubts about whether stimulus will work at all, since rates are already so low.
“The industrial slowdown was taking place before the trade war really heated up…I think the more interesting thing to talk about is what the global central banks are doing…economists will tell you that the global transmission mechanism takes at least a year.”
“But the real question is: Does the transmission mechanism work at this low level of rates? I have my doubts about that.”
After ten years of ZIRP and NIRP, Eisman believes the abundance of ‘free money’ that has been sloshing around the global economy has prompted investment firms to pursue every deal brought to them, while corporations have been incentivized to issue debt to finance their stock-buyback programs.
“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 VC deal has been done, every private equity deal has been done.”
“Why should lowering rates solve that? I have my doubts I really do.”
Watch a clip from the interview below: