Jim Chanos on Who's Getting Caught Swimming Naked

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1:27Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal. And I'm Tracy Alloway. Tracy, I guess one good thing about market crash, I don't know if it's even good because I like when lines go up no matter what, but you know, people always say, oh, this can't go on forever. And they're talking about some specific trend or here's a scam or here's a bezel in the economy that will exist as long as the lines go up. Things get revealed in a downturn. Things that were unsustainable are shown to definitively be unsustainable when the downturn hits. Right. What's that old Buffett quote when you don't see who's swimming naked until the tide starts to go out?

2:06And I think we are probably at that moment. And I got to say, in terms of who likes when lines go down. You know who likes when lines go down? Short sellers. That's right. They definitely do. Especially when it's been like 15 years since a line has gone down and so many short sellers have had such a brutal time. Maybe we'll put swimming naked in the headline of this. Instead of dead bodies floating to the top. Maybe it's a little, we'll have to figure out. Anyway, let's just jump right to it. We've had him on the show in the past, someone we always enjoy talking to. He is going to tell us about what bodies are going to float to the surface.

2:42And those bodies happen to be naked, too. He's going to tell us what naked bodies are floating to the surface. Jim Chanos, founder of Chanos & Company, longtime investor, short seller. Thank you for coming back on OddLots. No, thanks for having me. It's my pleasure. I only recently learned that Scott Bessent, I say I only recently learned as if I look this up, I heard it from you as you were walking into the studio. He worked for you. Yeah, he was my first analyst. I taught him everything he knew up to a point, I guess. Up to a point. Okay. All right. I'm just going to ask basic questions to start, but what has the past week or so, let's see, we're recording this on April 9th.

3:19At 11.28 a.m. Yeah. We have to be that specific on the time now because things change so quickly. What has the past week been like for you? Well, we're not in the business of running outside money anymore. So that ended a couple of years ago, but we do advise clients and then of course run our own money. So since 1996, we've always been hedged, but we've seen obviously substantial alpha in the last couple of weeks. I.e. the stuff we're short has gone down much more than the market. We tend to be long in the market passively. And that usually happens, right? When the market shifts gears, a lot of the more questionable story stocks, frauds, hypes begin to underperform.

4:05And that was not the case until really about the tariff, the Liberation Day. And now it's really kicked in. If I'm an asset allocator, is that why I allocate to someone who specializes in short selling? Not because they're going to give me positive returns month after month after month, but that it allows me to be more comfortably long risk assets in my other investment because I have this knowledge that I'll get outsized returns from you when they go down? Yeah. In our business model over 40 years, basically it morphed into the idea that fundamental shorts allow you to be more long. And that's really, at the end of the day, your shorts are financing your long portfolio.

4:53If your shorts don't go up or go down, it enables you to have a long portfolio that actually will outperform. I mean, it is true that before this month, being a short seller did not seem that fun for like the past 10 years. And we've done episodes on the hard life of being a short seller. Are the gains now enough to offset like a decade of lines going up? Well, again, the lines are going up, but it was all a matter of if you're selling insurance, as I was and advise people to do now. The idea was, is the insurance working? And the insurance was working really for even post-global financial crisis for quite a while.

5:45And then starting about 2018, 2019, and right into the GameStop episode in the first quarter of 2021, it didn't work at all. but it has worked since GameStop. And even though the market's made new highs, you know, as recently I think it's January, the short side has not been too bad. I mean, Bloomberg has an index, the most shorted basket, which you can take a look at if you're a Bloomberg subscriber. Thank you for the plug. My pleasure. And it has done relatively well relative to the market since early 2021. Let's talk about some areas of the market. Let's just jump right into it. I think actually the last time we had you on, I'm looking at this, was November.

6:36It was FTX. That's right. It was actually before FTX imploded officially, but after we did the infamous box episode. But you know what? The last time we talked to you was November 23rd, 2022. right as FTX was uploading. But another point in the history here that's important, November 30th, 2022 was when ChadGPT came out, and then we got this incredible AI wave, and people started piling everything into NVIDIA and all these data center plays, et cetera. And in a previous odd lots, and I don't remember what that was, you've talked about data centers before and some brutal data center economics. Terrible.

7:18One of the things that we've seen in this downturn, see, I'm putting this all together. This is not totally incoherent. One of the things that we've seen in this downturn is some really sharp reversals for the big AI plays that were big. Those were just so hot. And so I'm curious now, you've talked about data centers, et cetera. Tell us where you're seeing some of this stuff right now. So the AI bet is an uncertain bet. We don't know what the returns on this massive investment is going to be yet. And even the MAG-7 will tell you. It's uncertain. We think it's going to be worth the risk, but it's an uncertain payout.

7:58And I'll leave that up to people who are much more well-versed in technology than I am. Our view was that the old legacy data centers that were built to basically handle the cloud, not AI, were in trouble. and were a bad business to begin with and have gotten only worse. And that was the bet. It's still the bet. I think it's a really, I've called it one of the worst business models I've ever seen because the CapEx is enormous. You got to keep replacing the air conditionings and the racks and the networking equipment to keep these centers running. And the returns on capital are just abysmally low.

8:37So we kind of said, all right, AI is a thing. It's an uncertain thing. Market loved it. Now the market's questioning it. But we do know that the old data centers, the ones that have been around now for 10, 20 years. Yeah, Equinax, Digital Realty, Digital Bridge. Yeah. Those have really challenged business models. So one of the things that happened recently is CoreWeave did its IPO. And it had initially targeted$2.7 billion. And it came in at$1.5 billion. And the interesting thing to me is part of that was a really big order from NVIDIA. And NVIDIA is very interwoven with CoreWeave's model. Since we're already talking about floating bodies and people swimming naked, I'm going to try to be as distasteful as I can.

9:28But how incestuous is the relationship between CoreWeave and NVIDIA? So for those of us that are a little bit older than you two, I mean, we remember some of the round tripping that was going on in telecom equipment back in 99 and 2000 with Nortel and Lucent providing financing for its customers and then selling things into those customers on cheap terms. And the whole thing unwound very quickly when the dot-com bubble and telecom bubble imploded. I put a tweet out that got some notice where I saw NVIDIA not only was doing the core weave kind of deals, but had just bought a distributor of theirs.

10:09And that was also a little worrisome. It's only a small part of their business. It's not material. But when you start to see this stuff on the margin where companies are increasingly round-tripping with their customers or financing their customers or buying in their inventory via distributors, you begin to wonder if it's just on the margin, that's fine. But as we all know, on the margin is everything, right? If you miss your earnings by a couple of pennies, your stock can be devastated. And if they're doing deals like this to basically make sure they make or beat numbers, then we have the old 1998, 99, 2000 dynamic at work where companies are stretching to make numbers.

10:56That has not been the case up until now, right, through 2023, 2024. Demand's been amazing. Yeah. Blow out numbers. But it's something to keep an eye on at the shift. So in other words, the insinuation here is not that there's something per se bad, but history says that when you see stuff like this to keep the rally going. Aggressive moves with your customers and your distributors. Because that's what everyone's been wondering, right? And I guess like all of the stuff with the trade turmoil has like, like, we actually, it's kind of amazing because I think we've gone two weeks without talking about AI, which maybe is something that we could be a little bit thankful for in some sense.

11:39But were the trade war to go away tomorrow. Yeah. And we were returned to what we were talking about in January. I saw your post earlier today about if tariffs run away like this and all the other stuff that is suddenly concerning. But this would be the concern. Yeah. Look, on the margin, again, on the margin, I think these numbers are not material. They deal with CoreWeave, the distributor they're bought, but it's something to keep an eye on. Tracy, I just want to do, by the way, some of these names are just for listeners. Digital Realty is below where it was, like at its 2020 peak after having plunged from about$195 to$133.

12:16CoreWeave is actually just slightly above its IPO price of$40. That was a crazy day. Wow, hanging in there. It's at$41.35 right now. So one of the things that happened in the early 2000s with the telecoms and internet bubble is I think a lot of people expected some of these companies to fail. But I guess the bet was maybe a handful of them would be huge winners from the development of the internet. And it's true. We have Google come out of this. If you invested in Google, Amazon, you made a lot of money. Is there any possibility of that happening when it comes to AI? Do you see a winner? Oh, I mean, I think there's going to be a lot of winners.

12:57If it's as revolutionary as a technology as it appears to be, we'll see all kinds of new business models and probably a company that we might know, like NVIDIA or whatever, succeeding, or maybe a couple of companies we don't know yet that will take advantage of it. But the flip side to be the glass half empty guy is that what everyone also forgets about the internet was that it destroyed as many businesses as it brought forward. And any business that was in the analog business that went digital. So you actually had a physical product that went digital was absolutely devastated like Kodak or Blockbuster Video or the Yellow Pages, what have you.

13:40And I suspect that AI will be very similar. we'll see. So you're not a hater. No, no. I'm open-minded about it. I think it really is an amazing technology. And I think you're going to have to see both sides of the coin for capitalism. It'll probably devastate a number of business models as well. What's the path to monetization for these AI companies? Because you already pointed out, the cost of capital is really high. Yeah. I don't know. And we still haven't seen the aha moment as we did with the internet with online retailing and communities like America Online where suddenly your aunt was on it and then getting emails and paying money for it and getting emails You have mail

14:45Your best bottling plant employs 3 ,300 people. How do you get 3 ,300 people working at peak efficiency? Your best store has reduced waste, water, and energy usage. How do you make every store like your best store? Your best property has every guest raving. How do you make every property like your best property? The answer is Ecolab. Better performance, better outcomes, better impact. Ecolab. Now every location is your best location. How many vendors does it take to meet all your organization's food needs? Just one. EasyCater, the workplace food platform that lets teams order from a huge variety of restaurants, over 100 ,000 nationwide, all through a single vendor.

15:31In addition to all that variety, EasyCater also gives you full visibility of your organization's food spend with invoicing, centralized reporting, and seamless integration with expense management systems, all on one platform. EasyCater, your business tool for food. To learn more, visit easycater.com slash podcast. Let's pivot because you have been fond over the years to talk about this sort of myth that private equity is something more than just adding leverage to companies and that there's this perceived stability. Yeah, it's very nice. You don't have to look at your marks every day. It really is just leverage.

16:09And I'm looking at a share price, the shares of like Apollo, for example, I guess maybe the private credit. That was at 189.30 on December 9th. That's at 109. Blackstone shares look pretty similar. We're talking like 40 % declines. That was at 200. It's at 118 right now. That's below where it was in late 2021. Private assets are like the story that Tracy and I keep coming back to. What is your takeaway from this really intense selling in these names? Yeah, I mean, I'm a little surprised at how intense the selling has been so quickly. But look, I mean, I agree with Cliff Asnes, who's done a great job talking about this.

16:51This is volatility laundering. And the idea that these funds don't have the same risks as equity funds have is, to me, preposterous. you're buying businesses on leverage. And we're now seeing that as it's becoming increasingly hard for them to bring these deals public or get exits. And again, on the margin, you're seeing a little bit of odd behavior in some of the private equity funds in trying to entice their investors to stick around. We'll have to see. I mean, up until now, for the last 15 years, getting back to the beginning of our conversation, sell-offs have been relatively short and sharp.

17:30So if you held off on marking your portfolio down, you generally were rewarded by not having to take the mark, right? The markets kept going. And the nightmare scenario for private equity and arguably private credit will be a long period of lackluster or no equity returns with higher interest rates. Can you actually just, when you said, oh, at the margins, we're starting to see some janky behavior with regards to their partner LPs. What's going on out there? Yeah, there was a story, I think, on Bloomberg just yesterday or the day before where one of the funds was asking investors if they wanted to sell their LP investment in one of the funds or transfer it.

18:16They had to get permission from the GP. In order to get permission, they had to agree to put money into the next fund. And that story caught my eye. And so, you know, when you start to see that, and now we're starting to see time series of fund performance that is starting to become more lackluster, right? Rolling 10-year returns on private equity are beginning to converge with that of the regular equity market. To your point about the length of the sell-off, I mean, we've established that one of the competitive advantages of doing private credit versus public is you're not forced to take the marked market losses so soon.

18:54You can hold on for longer, theoretically. We're seeing a lot of people right now talk about emergency moves from the Fed, maybe a cut sooner than the market had expected a week or two ago. Do interest rates matter for private credit at the moment? How much of a buffer would lower rates actually provide here? Well, I think spreads matter more. And we've seen a widening out of credit spreads. So I think that one of the reasons people think the Fed is going to ease is because of that, right? Weakness, not because of low inflation. And so you're seeing a relatively very quick increase in credit spreads over the past two weeks.

19:38I mean, it's really moved. So I don't think that that's the panacea that people are expecting, at least not yet, even with a Fed ease, because junk credit is rates are going up. Right. The Fed could do something just about like the sheer mechanical breakdown if it's happening. The plumbing. The plumbing. People love to talk about the plumbing of the treasury market. The basis trade. I read something today about the basis trade. Thank you. Thank you for reading. Pause right there, listeners. Jim Chanos is a reader of the Odd Lots newsletter, which means you should be too. What does a GP of a private fund do when the IPO window is slammed shut, when there really is not a lot of M &A, so basically very few opportunities for liquidity or distribution or anything like that?

20:34What kind of moves do they make? You better practice your writing of a heartfelt apology letter to your LPs because the IRRs you've been telling them that the fund has been getting prior to its windup are going to turn out to be way overstated to the actual returns. So, look, it's problematic. I mean, investors are going to get back stakes in private companies that they might not want. Oh, so distributions in kind. Yeah, exactly. And so if you can't cash out. And so, yeah, I think it's going to be problematic for a number of funds. I mean, I'm sure there'll be plenty that'll do fine. But the days of saying, well, I'm going to earn 14%, 15 % with very little volatility, so this is a free lunch, I think, or over.

21:19The other narrative that pops up from time to time is this idea of dry powder, that there are a bunch of funds out there who have been holding cash for a long time, just waiting to snap up distressed assets once everything finally crashes. Is that real? I don't know. I mean, you'd have to get into the sort of weeds of every specific fund. But I mean, if they've been holding cash for years and years and years, they certainly weren't earning that 14 % and 15 % investors were hoping for. So I don't know how the accounting works on that. But I'm sure, look, there is some unused capacity in the private equity world.

21:59them. But on the other hand, that doesn't get you your returns. Buying companies and adding value to them is where the returns are. So if there were funds and firms holding dry powder and asset prices get marked down a lot, that should be a good thing for them. It just seems, I mean, the issue to me, and I've sort of talked about this in various ways, is that for the last 15 years, you're a dummy if you had dry powder, right? The market has told you over and over again. Right? So this is why I'm always, I'm kind of skeptical that there could even possibly be much. And it's interesting, you know, look, we're like two weeks into, or no, it's been a week since Liberation Day.

22:40But you go a few weeks before that, obviously the weakness started picking up. And now we're seeing, you know, we've seen this sort of dislocation in treasuries. It seems like if you have 15 years of people telling you you're a moron for holding, for being under levered, then a downturn in just sort of normal investments can metastasize into financial problems very quickly. Well, it also depends, Tracy, how you define dry powder. A lot of firms define dry powder as the ability to capital call on their limits. It's not actually cash sitting in a bank account. Yeah, that's a good point. And I think that will become much more problematic in a downturn.

23:13I'm not going to pick up the phone if I hit GDP. Yeah, look, yeah. So you're primarily a markets guy, but you are no stranger to macro. Talk to us a little bit about, I guess, the relationship between what we're seeing in markets and the real economy right now. Yeah, I mean, the transmission mechanism via tariffs will happen pretty quickly, I think. I mean, you saw Walmart warn today. Delta has pulled their guidance. Both of those were just today. I mean, it's kind of stunning how if you think about the nuts and bolts of these tariffs and how they work, despite what our president says, the importing entity pays the tariff, right?

23:54It's not a tax on China. And so you're a small, medium businessman. You just got$100 ,000 worth of product that landed at Long Beach Port from China. And your broker is saying, yeah, just come down with a cashier's check for$100 ,000 for the government and we'll release your product. A lot of businesses don't have that. And so, I mean, there's real practical aspects these tariffs that I don't think we kind of know all the implications and how it will ripple through the economy. And I suspect you'll start by May getting some pretty decent real-time feedback from businesses saying, you know, we're cutting our profit guidance.

24:35Because if they can't pass it on completely, and study after study shows they can't usually, then profit margins, which, by the way, let us not forget, are at all-time highs, are going to hit an air pocket. We have seen some companies pulling their forward guidance already, right, Jim? Yeah, Delta this morning. Walmart. Walmart. When that chart came out, when Donald Trump pulled out the chart on Liberation Day and the market immediately tanked, the view from a lot of people is like, if people actually understood the size of what these numbers are, the market would be down a lot more. Do you sense, and again, anything could happen by the time this, but on April 9th, that there is still an element of disbelief that this could actually be where our tariff schedule ends up?

25:19I think there definitely is a level of disbelief. I mean, the stock market is still at 20 times latest 12-month earnings. And I mean, they're coming down, but people still think earnings are going to be up 10 % this year. And I don't know what planet they're on. And so I think that that's number one. And the size of the tariffs was stunning. I remember I was watching the press conference after the market closed. And I don't have the best eyesight in the world. I had to get close to the TV to make sure I was reading the numbers right. I was in screenshots. Was that 50 % or 5 %? I was like, what?

25:52I know. I mean, that says a lot. The idea that it could be 50 % or 5 % at all is pretty nuts. The point you were making about profit margins, I think, is really important. And a lot of the macro impact of the tariffs depends on how corporations actually react to the tariffs. Do they choose to absorb the additional costs themselves or do they pass it on to customers? What's your sense of flexibility there? And then more generally, where do you see inflation going from here? Because obviously there is tension between prices going up in the immediate term because of the tariffs and demand being destroyed and us getting deflation.

26:34I think Walmart's warning this morning was maybe instructional in that they went out of their way to say that they were pulling their profit guidance, I believe, but told people that their revenue growth guidance was still intact for this year, which seems to me to imply that they're not going to pass on these tariffs since they get so much of their stuff from China, right? They're going to eat it. And because otherwise they would say, well, we're going to hike prices 15, 20 percent and our revenue is going to be up 15 to 20 percent. They didn't say that. They said 3 to 4 percent. But margins, you know, we don't know on margins yet.

27:11Yeah, I think this is really important because I think if you were to go back six months ago before the election, so much of the tariff conversation was this very simple minded. What does it mean for inflation in the Fed? And not this sort of deeper question of like, are you kneecapping corporate profitability in America? And what does that mean for all these different kinds of business models? I think that's the bigger risk, not inflation. If you remember, the past few years, the reason we had record corporate profits was because companies were able to pass on inflation to customers. The whole price over volume idea that we've been talking about.

27:45Thank you.