Jim Chanos on the Nuttiness of 'Bitcoin Treasury Companies'

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1:43Hello there, OddLots listeners. You are about to listen to a very special episode. This is a conversation recorded live at our recent event in New York. That's right. We had a live Odd Lots event on June 26th. We had tons of conversations. We're going to be rolling them out in the days ahead. But the first one we want to bring you is our headliner for the night, Jim Chanos. That's right. The famed short seller. He was there giving us all his thoughts on the market right now. So take a listen. All right. First question. Are Bitcoin treasury companies the stupidest thing you've ever seen in your entire life?

2:24You know, it's rarely, rarely that I have to increase my personal security after a podcast, which I had to do after your our last podcast together when I send some intemperate things about Bitcoin treasury companies. Look, here's the thing. I get people very agitated about this and they point out on just what a genius idea this is. And I keep trying to point out to them, I'm doing the same thing that guys like Michael Saylor are doing. I'm on the same side of the trade. And I keep pointing out to my critics, you're on the opposite side of that trade. And you don't want to be on the opposite side of the trade.

3:10And the Bitcoin treasury paradox being that you are the one buying the pieces of paper that have infinite supply so that Michael Saylor and I can buy the digital asset with the limited supply. And it makes kind of no sense. So what will inevitably happen is happening, and that is there's nothing proprietary here. This is just simply raising capital to buy a financial asset, and other companies will do this. And in fact, even since the podcast we last did, But I think the number of companies that have announced this strategy scores more. I think there's over 100 in the U.S. and over 200 globally now.

3:53So who's actually buying MicroStrategy? Because, you know, I thought... Everybody on my timeline. Okay. But I thought once the spot ETFs, the spot Bitcoin ETFs came out, like this business model would go away and it hasn't. No, because there's a wonderful sales job that's being done about the fact that this is an economic engine in and of itself. And so therefore, terms like Bitcoin yield are used, and I've called them financial gibberish because they are. And in fact, this will get arbed away, ultimately, by companies that will do this to try to capture that spread. In the case of microstrategy, it's substantial.

4:36It's still$50 billion, something like that, of the difference between the enterprise value of the company and the value of their Bitcoin holdings. But the thing that really kind of shot me into orbit on all this was when Saylor and others then said, well, no, you can't really value us on an NAV basis, the so-called MNAV, multiple of NAV. you actually have to also give us additional value for the amount of profit that we make every quarter from the appreciation in the asset. And I said, I just pointed out, I said, well, that's like saying, you know, my whole net worth is in a house that's worth$400 ,000 that that is now worth$500 ,000 a year or two later.

5:23And my net worth is not$500 ,000 now, it's two and a half million because it's the value of the house plus a multiple on the increase in the profitability of the asset when you put it that way it sounds a little absurd it is absurd there's like 200 of them now right it's over 200 globally yeah that's that's uh wait i have one more question why did microsoft i have to remember to call them strategy but i can't bring myself to do it um why did they switch from issuing the convertible debt to preferred shares because he realized that as he began to issue more and more common, it was putting pressure on the premium.

6:02So now the latest iteration is, well, we're going to do this quasi equity security, quasi debt, preferred stock, and then we can torque up, we can lever up the balance sheet. Now, this is a company whose selling point a year ago was we're not going to lever because we have this wonderful equity that we can issue at a premium. And now they're saying, well, you know, if maybe if it trades above 2x, we'll issue equity. But if it's between 1 and 2x, we'll do preferred. And then if it's below 1x, we'll buy back common. And then what is Chano's going to do? To which I said, well, I'll be out of the trade by then.

6:39You know, if it's 1x NAV, it's not a trade. So that's kind of the latest game plan. But stay tuned. It'll change, I think. The narrative keeps changing. The other one is, of course, that micro strategy will be put in the S &P 500. And so that will be untold riches for everyone that doesn't know that's going to happen. We got to move off this topic because I just find it so depressing. You know, like I read the news and they're like, oh, like, you know, some big breakthrough with batteries in China is happening or whatever. And then the big entrepreneurial innovation in the United States is the 200th company that's borrowing money.

7:15Like it's too bleak. When you really think about it, it's too bleak to contemplate. So on Tuesday or Wednesday morning, shares in real estate companies fell after Donnie's victory. What's your take on New York City real estate these days? Well, I guess I'm glad I sold my apartment last year. But look, I think a lot of people are surprised. Clearly, New York City real estate and commercial real estate will be challenged if a lot lot of things happen that the current front runner, you know, wants to happen. I think there's a lot of restrictions that will be put in front of making some of that stuff happen.

7:56But my friends in New York City commercial real estate have said, really, the regulatory framework and the legislative framework in New York and New York City has done nothing but get worse over the last 15 years. And I'm kind of stunned that some of the publicly traded companies like Vornado and SL Green still have the cap rates as low as they do. I mean, SLG we looked at yesterday, and its cap rate is still 5.2%. You're short SLG, right? We've been short SLG on and off for a number of years, and we are again. And I just, I don't get the risk reward on a 5.2 % cap rate on New York City commercial real estate right now.

8:38I think it should be seven or eight. That's right. You can get four and a half percent by buying a treasury. Right, exactly. So if you're buying it at 5-2, and that's read accounting. Read accounting is also pretty squirrely, by the way, for a lot of reasons. They don't include overhead in the cap rate. And of course, there is real depreciation in some of this stuff. There's maintenance capex in New York City. It's pretty high. And that doesn't include any capex. So I don't get it. I don't see rents going up here. I guess it would be the easiest way. and that'd be the only reason you'd be buying office buildings at a five cap.

9:14What about residential? Yeah, I mean, you know, it's weird. I mean, your audience knows better than I do. I mean, it's problematic in so many ways. There's not enough supply. There's all kinds of weird regulations. Things are expensive and you can kind of see why Momdami's message resonated with a lot of people. A lot of it has to do with the cost of living here. Have you been on the receiving end, or I guess dialing, of any of the calls to gather capital for a challenger? Well, I'm not a New Yorker anymore, but the answer is yeah. Which, receiving or calling? Receiving. I'm not calling. But yeah, sure.

9:56Who are they saying? I'm not going to get into that. Those are private conversations. I think they're all pretty silly at this point. Yeah, yeah, it was a good try. Yeah, I tried. Okay. Well, since we mentioned the word bleak a couple of times in these conversations now, is it bleak being a short seller in the current market? It's not a lot of fun, but it's never really been fun. I mean, I I started my original fund back in 85. The Dow was a 1300. So it's it's pretty much and, you know, we started hedging back in 96. So, you know, it's always a slug. It's never easy. That's why a lot of people don't do it.

10:37On the other hand, the idiosyncratic opportunities, most things fail, as you know. And the idiosyncratic opportunities have probably never been greater, given the market we have now and with things like Bitcoin treasury companies and all kinds of other things. It's just they're sort of head scratchers and are a function of general animal spirits. So there's a lot to do. And I think that's the fun part of what I do is there's a lot to do and seemingly more every year. But some of the stuff going on right now is a bit of a head scratcher. And we don't try to predict where the market's going, but the animal spirits are definitely back.

11:15You know, it's like several years ago or 2021, people could have blamed ZERP. It's like, oh, it's because the rates are at zero and that's why everyone's going crazy. And I do think it's really interesting how much speculative activity has persisted. And the Zerp excuse does not hold water anymore. So we got to find something new. Speaking of idiosyncratic opportunities, one thing you've been talking about a lot and multiple times on the show is the data center REITs. And Equinix, I think, just had two terrible days in a row. What's going on with that? So these are the companies that have clouds, but they're not like the hyperscalers.

11:52What's their deal? I think the legacy data centers, and there's only a couple companies in the United States that really have legacy data centers. There's Equinix, there's Digital Realty, and then there's sort of the old colony capital is now called Digital Bridge, and they own these things sort of in fund format. And when we took a look at this with our partner back in 22, the idea was pretty simple. And we did not see the AI explosion in mid-22. But the idea was it was a pretty crummy business then, working on the cloud and SaaS demand. But it became a really bad business with the advent of AI because it just moved the hyperscalers to invest more in state-of-the-art data centers.

12:40And these are older data centers that were short. And the idea being that the new GPU-centric data centers need liquid cooling. They basically need all the infrastructure ripped out and replaced. And the business was not a high return on capital business before this. It's getting even worse now. And what Equinix said yesterday at their analyst day was that revenues were not going to quite be what people thought they would be, but more ominously, CapEx was going to keep increasing. And that's what we've been saying, that these are not like warehouses where you're just going to collect a check. These are actually operating businesses where you have to service the servers.

13:22You have to make sure there's redundancy. It's just it's a business, a tech business. And they're traded as REITs. And that was kind of the opportunity. That was the sort of dichotomy in valuation. So people added back the depreciation as they do with REITs. And they valued them on a so-called FFO or AFFO, which is a cash flow metric. But in fact, unlike warehouses, shopping centers, to a lesser extent office buildings, the CapEx was real. Depreciation was a real expense. So to give you an example, with Equinix yesterday, they said our CapEx is now going to bump up to between$4 and$5 billion a year.

14:02The problem is their EBITDA this year is expected to be$4.5 billion. So all of that's going to go to capex meaning they're going to have to basically borrow or issue equity to pay their interest in dividends And that's just the definition of a bad business And it's a business that's not growing very fast. So unlike other really true AI companies, which are growing 25 30 40 percent a year. These guys are growing 3 percent 5 percent 6 percent sort of with GDP So there's no growing your way out of this And so they're just really bad businesses trading at just nosebleed valuations.

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16:57On the topic of idiosyncratic opportunities, I got to ask about Carvana because when my husband and I moved back to the States in 2022, we bought a used car through Carvana. And that was a mistake because it took us about six months to actually get the car and they lost all our paperwork and it was just an absolute nightmare. And I thought at the time, this is a company whose entire business model is basically built on regulation, right? Like that's what they're doing. And I thought they're not going to have a future if they are this bad at it. And yet the stock is up. It's done insanely well.

17:36Well, it's done a double round trip, right? It crashed 99 % and now it's up 100x. So it's pretty interesting again. And the reason it's interesting is that if you go through the numbers, they are making more than 100 percent of their pre-tax profit from gain on sale of loans, subprime loans, and gain on sale of equity stakes in other companies. And you X those two out, they're losing money. And they're losing money now, right, after the rebound, after the restructuring from 2022, 2023. And this is a company that is being valued, again, as a secular growth stock that saw its used car revenues drop 30 percent between 2022 and 2023.

18:23So it's not necessarily a secular growth company. The accounting is abysmal. And then what people are really missing is that what's happening in subprime auto securitizations right now, and you can track it on your Bloomberg terminal, delinquencies are starting to skyrocket. Yeah, we actually did an episode on this recently with Jim Egan. Yeah. And so, again, a huge amount of their profits comes from selling, you know, generating paper from customers and then selling it in the open market or to affiliates. And this is a company that was spun out of a company called Drive Time Finance, which is their affiliated finance company, which was originally called Ugly Duckling in the late 90s, which was run by the current CEO's father.

19:10And that company collapsed in the first subprime blowup, which was not the GFC. It was actually in the late 90s in subprime auto credit and consumer loans. And it didn't go bankrupt, but it came close. And he had to restructure it. He bought it, bought it in private, and then restructured it and renamed it DriveTime Finance. But that's the genesis of Carvana. That's its DNA. It's basically a subprime finance, you know, lead company, if you will. And those companies should not trade at 40 and 50 times expected earnings. And they don't, by and large. They're consumer finance companies. So it's an odd bird.

19:53It's still heavily leveraged. The stock is up a ton. But what really got us interested again recently was the vast amount of insider selling that has just started in May and June in the company. If you go look at the insider selling in the company, it is just now a torrent of everybody selling like pretty much every day. And we just don't think that's a good sign, given what's happening in the subprime securitization market. One area of the financial ecosystem that you've been cynical about for a long time is private equity and a lot of the private assets. And something that I've been talking to some people about and that you hear people talk about is not so much necessarily that the values have gone down, probably in many cases that they have, but that it's been a long time since LPs, et cetera, have gotten distributions, et cetera, whether it's at the venture level, the PE level.

20:50How long can that go on where it's like people are not getting cash out before it becomes a real problem? So I really kind of got much more interested in this area, serving on a couple of big investment committees in Manhattan. And one of which had a really, really huge slug of our assets of this nonprofit in privates, in private equity for the most part, a little bit of venture, a little bit of real estate. And what always struck me was that we spent a lot of time talking about the market, talking about our managers, talking about why hedge funds were terrible. and then we'd get to the part about private and they say, well, the returns are lagged by a quarter.

21:31So, you know, here they are and let's move on. And I started looking at the numbers and this was a this is a fund that that had all the premier firms, the ones you all know. And gee, stock market is doing awfully well. And we're kind of doing 10%, 11 % in terms of realized returns and then estimated IRR, which is problematic for reasons a lot of your audience knows. And is it just me or are we not understanding we're leveraged long equity in these entities and yet we're underperforming the indices? That was five, six years ago. and I think that that's only gotten worse since and so I'm really beginning to wonder private equity was considered a panacea for non-profits and foundations endowments because basically as my friend Cliff Astin said it was volatility you know laundering if you will because no one ever showed you a big down quarter but now we're getting to the point where a lot of these funds are really mature and the actual returns themselves are not going to be mid-teens with low volatility.

22:51They're going to be high single digits, low double digits. And we can look at the S &P and say, okay, I'm doing better than that and I'm liquid and I'm not paying fees. And so I suspect that private equity and ultimately private credit are going to be where hedge funds found themselves 10 to 15 years ago having to justify their existence after having a pretty good run from the late 90s to the GFC. I suspect that's where we are in private equity. It'll still be a very lucrative business, but I just think it's golden days are over where it was just a free lunch of mid-team returns with no volatility.

23:31Does anyone ever ask you what you're bullish on should I ask I look I we're long equities right we're long stuff a lot of people in the audience are long give us an example well I mean we're long indices so we're long general corporate America I just you know I just hate the stuff I'm short I thought you weren't supposed to get emotional every once in a while so it's a there's one other thing though I do want to mention And that is I was talking to someone earlier today and I think one of the things that's underappreciated by investors right now and one of the things that's been the most interesting to me is how corporate profit margins have held up, which used to be very mean reverting, as you know.

24:17And the more work we've done on this, the more we're kind of convinced that the capital spending boom we're seeing due to tech and specifically AI is looking very much akin into the global internet build-out, networking build-out in the late 90s. And the problem there, of course, is that if you buy my chips from NVIDIA, or you were buying my networking equipment at Cisco and Lucent, that's revenue for me and profit. But for you, it's capitalized expense, right? It's written off over time. And that has a big, big boost until people pull their orders. and that's what we saw in 2001 2002 that gdp dropped about one to two percent in the recession of oh one oh two does anybody know what corporate profits did in that and that was an investment driven recession consumers didn't feel it at all earnings were down about 45 i think from peak to trough in the s p they were down about the same a little bit more in the global financial crisis But of course GDP collapsed.

25:27So here's a little interesting thought experiment right now Nvidia's revenues are about one half of 1 % of US GDP about 140 billion dollars and our GDP is about 29 trillion Okay Anyone tell me what Cisco and Lucent the two companies that you needed when building out your internet network in 1999 2000 didn't mean know what their combined revenues as percent of gdp was in 2000 no using your phones and chat it was a half a percent it was uh it was roughly 50 billion dollars total on gdp of 10 trillion so those revenues stopped growing at some point shortly thereafter actually shrunk a little bit so the investment boom we're seeing right now we've seen before and it's not just chips right it's caterpillar it's people building the data centers it's it's people building new utilities i mean it's there is a ecosystem around the ai boom that is considerable as there was for tmt back in 99 and 2000 but it is a riskier revenue stream, because if people pull back, they can pull back CapEx very easily.

26:50Projects can get put on hold for six months or nine months, and that immediately shows up in disappointing revenues and earnings forecasts if it happens. We're not there yet, but that's one of the risks out there that I think a lot of people are underestimating. So one of the reasons that we like talking to you, And a consistent thing that I've noticed in the almost 10 years of doing this podcast, it's always you learn a lot talking to people who are really steeped in accounting and that people who are knowledgeable about accounting just, I don't know. They seem to have more interesting things to say than a lot of other people.

27:27Will AI be able to do accounting, some of these sort of understandings of, you know, whatever, capitalized expenses? And like, is this coming for the accounting profession? I know about coming for the accounting profession. That's a good question. I think that AI that we've seen and used is getting better and better at pulling numbers together and making sense of them. It's not quite there yet. When I've done it, I find lots and lots of errors. Not so much in the numbers themselves, but the implications of the numbers. The AI is still not getting that great. But it's going to, I think, ultimately.

28:01And the question will be for sort of tonight's conversation and keeping in the theme is, Where we made a lot of money on the short side Idiosyncratically after dot-com some sort of oh three to oh nine We're in analog businesses that saw their business digitize So if you were selling an analog product that became digital you were in a lot of trouble think like Kodak Blockbuster of yellow pages those kinds of businesses, right that suddenly just didn't have to exist and and there's going to be a raft of them post-AI, and people are already kind of starting to think that through, but there will be industries that are collecting what I call agency rents that will suddenly not be able to collect those agency rents, and we're trying to keep an eye on that, but I do think that the issue isn't so much the quantitative numbers that AI will be able to generate and give you ratios and things like that, although Bloomberg does a pretty good job of that already, right?

29:02Thank you. The databases. But interpreting it. And we're not there yet in terms of understanding what an increase in receivables are. It's three times revenue or increase in cost of goods sold relative to inventory. But it'll get there. It'll get there within the next couple of years. So one of the things I always wanted to ask you was how you think about, I guess, the time frames of some of your short bets. Because it seems to me like, you know, we can sit here and talk about how crazy cap rates are for office buildings in New York and subprime loans and Carvana and how stupid Bitcoin treasury companies are.