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This is an exclusive "Hedgeye Investing Summit" interview between short seller Jim Chanos, President & Founder of Kynikos Associates, and Hedgeye CEO Keith McCullough.
To watch other "Hedgeye Investing Summit" interviews, click here.
Below are key excerpts transcribed from the conversation.
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Keith McCullough: I’m excited to invite back to HedgeyeTV a great friend of Yale hockey and one of the great alumni of Yale out there, Jim Chanos. Thank you for spending some time with us today. I know our audience is excited about this discussion.
Jim Chanos: Good to be back.
McCullough: I’ve been short-selling for 20 years and you’ve been doing it for a lot longer than that. We’re in this moment in time where all these different narratives compete with actual numbers. This is an exciting moment in time for making short-selling great again. I wanted to take your pulse on the type of short-selling environment we have relative to the ones we’ve seen before.
Chanos: For a lot of us short-sellers in the last 10 years, exhaustion is setting in. Things have gotten, in our corner of the world, sillier and sillier. What we’re seeing now is really the advent of all kinds of questionable business models being promoted and going public.
It’s not about Apple (AAPL). It’s about space travel. It’s a big difference in terms of the speculative environment a few years ago versus today. You have a much more speculative element in the markets since late last year. You saw retail participation spike late last year, pre-COVID and it’s continued right on through this year.
It’s made this year so fantastic. The swings in the marketplace on really questionable business, things you or I would laugh about 10 years ago. I think about 1999 and 2000. They’re not only doing it again, they’re doing it in magnitudes of greater amounts.
McCullough: You’ve seen outright frauds and bankruptcies being chased. I’ve never seen anything like this in 20 years.
Chanos: In more shall we say “normal markets,” pretty strong evidence of wrong-doing at a company will generally put a valuation black cloud over something and the bulls and bears can argue about it. But in this environment, similar to certain periods in the past, the advent of a negative story is actually a positive. It’s a positive factor. Short interest is a positive factor. People pointing out accounting irregularities is a positive factor.
It’s only when companies admit to wrongdoing themselves, a la Wirecard or Luckin, that you get the re-rating and then it happens all at once. Right now, companies are getting the benefit of the doubt and that’s unusual.
McCullough: That’s a fact. Jim always talks in numbers, even if it is wrapped in narrative. High short interest as a factor exposure has been an epic long. It’s up 22.5% in the past six months. That’s a big thing for us to fight.
When I see a company like Nikola (NKLA), which isn’t even a debate, most bubbles are obvious when you look backwards. They stop going up, they make a lower high and then go down and then go down faster. That’s what the Nasdaq started to do here. That’s what a lot of these story stocks started to do here today.
Do you think it’s going to be tough sledding into the end of the year or do you think it’s going to be open hunting season again finally?
Chanos: Well, first of all, let me correct you Keith. Nikola hasn’t revealed any fraud this week.
McCullough: Fair point (laughter)
Chanos: I think it’s on firmer ground than you might think. Look no one ever knows. I remember in March of 2000 the market just started going down. There wasn’t a catalyst. The Fed had not raised rates suddenly. There was no corporate announcement. But come around mid-March and the market just started going down.
It was an intergalactic bull market peak we just didn’t know it yet.
Who knows. I try to avoid picking tops and bottoms, but things are getting sillier and sillier and sillier.
You mentioned the bankruptcy stocks. We’ve got this incredible SPAC mania going on where companies that couldn’t go public or dream of passing an underwriters test now are able to go public seamlessly through a SPAC. I think we’re up to 4-5 filings a day now.
The one thing I do know from my last 40 years is that given enough time Wall Street will do a really great job of creating supply for people that want to pay up for questionable or worthless assets.
McCullough: Wall Street creating supply. That’s a great way to look at it. Now, Wall Street is also great at creating demand for something politically. You had some thoughts on this Kudlow reveal. You could see this happening, you just needed it to be reported so you could have the names and the numbers. That’s disgusting. I think it’s disgusting.
Do you agree with that? We actually have an administration that’s trying to prop the fricking stock market every day.
Chanos: What that [New York Times] story crystalized for me is the political divergence that we have. The feeling out there among the general public that the game is rigged. Look, David Tepper, who is mentioned in the article and is a friend, mentioned on CNBC around the Super Bowl, that he was getting concerned about Coronavirus. Lots of big hedge funds were beginning to talk about it, at the very end of January and early February.
But the problem is—and what crystalized that story—is the feeling that the public was getting one set of briefings from White House spokesmen, “Not to worry—it’s mostly contained, or all contained” and then donors and insiders were getting a different set of more worrisome briefings inside the White House.
It gets to the whole idea that’s out there, both on the left and the right, that there are two systems here. There’s a system for the corporate class and financial class, and then there’s a system for everybody else. COVID has just made that worse.
It obviously gets back to ‘would you rather be right or righteous, or make money? It also gets back to the tail risk, if you really want to be a wise guy about it, in that torches and pitchforks are undervalued. You continue this type of political animus where the 1% or the elite are brought under the tent, and everybody else is left to fend for themselves—history tells us that is not a tenable position for a long period of time.
