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Jim Chanos on Financial Fraud (Podcast) · Masters in Business

0:02
Speaker 1: This is Master's in Business with Barry Ridholts on Bloomberg Radio.
0:07
Speaker 1: This week on the podcast What Can I Say, an
0:11
Speaker 1: extra special guest Jim Chano Safina Coast Associates. There are
0:16
Speaker 1: few people in the world who understand the side of
0:21
Speaker 1: the street that he works on better than Jim. He
0:24
Speaker 1: is a famed investigator into financial fraud. He has been
0:29
Speaker 1: a short seller for pretty much his entire career. On
0:34
Speaker 1: a fundamental basis, he understands why companies go out of
0:39
Speaker 1: business and what the signs are that investors should be
0:44
Speaker 1: looking for. He teaches a class at Yale on financial fraud.
0:48
Speaker 1: There really is no one better to discuss the world
0:52
Speaker 1: of short selling and fraud than Jim Chanos. So, with
0:56
Speaker 1: no further ado, my conversation with Jim Chainos, This is
1:04
Speaker 1: Masters in Business with Barry Ridholts on Bloomberg Radio. My
1:09
Speaker 1: extra special guest this week is Jim Chanos of Kinkos Associates.
1:13
Speaker 1: He is famous for exposing a number of financial frauds,
1:17
Speaker 1: including Boldwin United Uh. He was a critic of Drexel
1:23
Speaker 1: Burnham and he of course was famously short and Ron,
1:27
Speaker 1: which eventually went bust in a firestorm of accounting, fraud
1:33
Speaker 1: and problems. Jim Chanos, Welcome back to Masters in Business.
1:40
Speaker 1: Always good to be back, Barry UM. Next time we
1:43
Speaker 1: do this, we'll have to do it in person, but
1:45
Speaker 1: for now we'll we'll operate remotely and UH, I won't
1:49
Speaker 1: get to see you WinCE UM when we talk about
1:53
Speaker 1: certain subjects. But for people who may not be familiar
1:57
Speaker 1: with you, explain exactly what kind of coast does and
2:01
Speaker 1: how you work. Well, we're celebrating our thirty fifth anniversary
2:06
Speaker 1: UH this year. So UH what I set up the
2:10
Speaker 1: firm in to basically provide hedge services for UH high
2:16
Speaker 1: net worth individuals. IT it then morphed into institutional investors
2:21
Speaker 1: and basically we construct short portfolios based on fundamentals for
2:26
Speaker 1: investors who want to hedge their portfolios or or go
2:31
Speaker 1: more long by being short. UM. And so the the
2:34
Speaker 1: ethos of the firm was was I like to joke
2:37
Speaker 1: that that I mean the insurance business UM. And what
2:40
Speaker 1: we're trying to do is construct better hedges than than
2:44
Speaker 1: just passively UH hedging a portfolio using futures or et
2:50
Speaker 1: fs and UH and we're still doing it thirty five
2:53
Speaker 1: years later. Do you tailor your short selections to a
2:58
Speaker 1: specific portfolio. Oh, so you're edging across the board the
3:03
Speaker 1: sort of risk they have. Do how narrow and specific
3:06
Speaker 1: can you get? Well, so we have we have funds
3:09
Speaker 1: that are are open to to a broader group of
3:12
Speaker 1: investors who are qualified and and there we we have
3:16
Speaker 1: our core portfolio, whether it's a US only or a
3:19
Speaker 1: global portfolio of which the US is a subset. But
3:23
Speaker 1: we also run managed accounts for large investors who have
3:26
Speaker 1: specific needs or specific restrictions. Uh, we can't do certain things.
3:34
Speaker 1: We can't do certain geographies, we have to be above
3:36
Speaker 1: certain market caps, and so on and and again it's
3:39
Speaker 1: up to the client. The idea is to is to
3:42
Speaker 1: provide the service that the client needs and wants um
3:46
Speaker 1: for for their needs. So we we try to let
3:48
Speaker 1: the client do the asset allocation um and and we
3:52
Speaker 1: will dial up or dial down the short exposure as
3:55
Speaker 1: needed in our funds. However, of course we need to
3:58
Speaker 1: do that. Quite quite interesting. So thirty five years that's
4:03
Speaker 1: a good long run. How has the art of short
4:06
Speaker 1: selling changed over that time period. Well, it's changed in
4:12
Speaker 1: a couple of ways. I mean, the the the biggest
4:15
Speaker 1: change and most obvious change is the massive reduction and
4:20
Speaker 1: interest rates that have occurred over that period, the sort
4:22
Speaker 1: of generational or more UM and and that of course,
4:27
Speaker 1: UH reduces returns because part of the return on the
4:32
Speaker 1: short side is the rebate you get from the prime
4:34
Speaker 1: brokers in the cash received from the short sale. UM.
4:39
Speaker 1: There's a misconception out there that short selling is costly.
4:42
Speaker 1: In fact, short selling actually produces income to the extent
4:47
Speaker 1: of the rate on short term rates. So it hasn't
4:51
Speaker 1: produced much income in the last few years, given where
4:54
Speaker 1: short rates are. But back in we were starting with
4:58
Speaker 1: a six or seven or eight sent head start every
5:01
Speaker 1: year because the short cell proceeds UH invested in cash
5:06
Speaker 1: or T bills yielded high single digits. So that's number one,
5:09
Speaker 1: and that's that's sort of beyond our control. UM. The
5:13
Speaker 1: other more interesting development is how how we and other
5:18
Speaker 1: investors I think process information and UH and and this
5:22
Speaker 1: applies to the long side as well. But on the
5:25
Speaker 1: short side, UH you really UH had to go out
5:28
Speaker 1: and and find information. In the eighties, if you had
5:31
Speaker 1: a ten queue hot off the presses, if you will,
5:35
Speaker 1: from a filing, you might have the information ahead of
5:38
Speaker 1: someone for two or three days. UM. Today, information, as
5:42
Speaker 1: you know, comes at you at a fire hose, and
5:44
Speaker 1: so it's not the obtaining of information, UM, it's the
5:49
Speaker 1: the analyzing and processing of the information and the sifting
5:54
Speaker 1: of information that I think gives you an edge in
5:57
Speaker 1: fundamental investing. UM. Of course, then with the advent of
6:01
Speaker 1: much more machine learning and algorithmic traders, you have uh,
6:07
Speaker 1: basically computers looking for word changes and looking for various
6:10
Speaker 1: different patterns at a rate at which humans can't even comprehend.
6:15
Speaker 1: So in some ways, generating alpha on the short side
6:20
Speaker 1: or the long side really involved sort of thinking beyond
6:23
Speaker 1: a you know what the immediate information is UM, or
6:27
Speaker 1: more importantly, if the information being presented to you, which
6:30
Speaker 1: is often the case in my world, is intentionally misleading.
6:34
Speaker 1: And I think that's one of the few edges that
6:36
Speaker 1: short sellers have in this environment where the computers can
6:39
Speaker 1: read things faster than you can. UM, often uh that
6:43
Speaker 1: information is being gamed. Huh. Quite quite quite interesting. So
6:48
Speaker 1: so you mentioned UM, big machine learning, big data AI,
6:53
Speaker 1: algorithmic trading. There seems to be an infinite amount of
6:57
Speaker 1: competition on both a long only side and the active side.
7:03
Speaker 1: What sort of competition exists on your side of the street,
7:07
Speaker 1: on the short selling side, well after thirty or five
7:10
Speaker 1: years and basically a bull market, and certainly ten years
7:15
Speaker 1: of a bull market, UH, the last ten years, as
7:18
Speaker 1: you might imagine, there aren't a lot of people doing
7:21
Speaker 1: what I do. UM. I think longer term that's probably
7:24
Speaker 1: a good thing. But the number of people who actually
7:28
Speaker 1: want to engage in fundamental short selling UH usually can
7:32
Speaker 1: fit around a dinner table and sometimes does. Well. That
7:36
Speaker 1: sounds like an interesting meal. I'll have to work my
7:38
Speaker 1: way into an invitation the next time there's one of those.
7:41
Speaker 1: So so, given given this small amount of competition, UM,
7:48
Speaker 1: what makes each short seller unique? Are everybody looking at
7:52
Speaker 1: the same things and taking the same positions? If you're
7:56
Speaker 1: all fundamental or are some of the short sellers out
8:00
Speaker 1: there a little more technically oriented. Well, again, if we're
8:04
Speaker 1: gonna just speak about fundamental short selling, most of it
8:07
Speaker 1: is done within the guys of long short funds. So
8:11
Speaker 1: are like or or something like that, or just a
8:16
Speaker 1: traditional you know, some of the well known names that
8:19
Speaker 1: that that we all know in the hedge fund world,
8:21
Speaker 1: you know, have teams that that look for shorts. So
8:24
Speaker 1: that's that's really our competition. Then we consider them to
8:29
Speaker 1: be very good competition. UM. And then you have people,
8:33
Speaker 1: of course that specialized. You can look at someone like
8:35
Speaker 1: Carson Block that that has focused internationally and non China. UM.
8:40
Speaker 1: We've generally been generalists. We look all around the globe. UM.
8:44
Speaker 1: Typically we've always looked in the mid to large cap area.
8:47
Speaker 1: There's an awful lot of short sellers who have done
8:50
Speaker 1: very well focusing on on small caps and microcaps UM
8:54
Speaker 1: that that's never been our world. And so you know,
8:56
Speaker 1: we've generally avoided it for a lot of reasons. But
8:59
Speaker 1: they're people that do that. And and and then you
9:01
Speaker 1: have the whole new world of activist short selling where
9:05
Speaker 1: people go out and and and and publish UM two
9:08
Speaker 1: on their website or on social media UH their research UM,
9:13
Speaker 1: you know, for for everybody to see. And and we've
9:17
Speaker 1: our view on that is is that we've, as you know,
9:19
Speaker 1: selectively disclose our ideas as we see fit. But but
9:22
Speaker 1: don't publish long reports, nor do we publish on on
9:27
Speaker 1: the vast majority of our UH positions. We may we
9:31
Speaker 1: may be public don five to ten percent of our
9:34
Speaker 1: positions at any one time. So you raise a very
9:37
Speaker 1: interesting question here about short positions explain to the general
9:44
Speaker 1: investing audience why short sellers don't like to be public
9:49
Speaker 1: with their short positions. Well, there's a there's a lot
9:53
Speaker 1: of reasons for a lot of them having to do
9:55
Speaker 1: with issuer retaliation. Number one. UM. One of the there's
9:59
Speaker 1: lots of asymmetry on the short side, and one of
10:02
Speaker 1: them is that corporate managements don't like to be held
10:05
Speaker 1: to account by short sellers by and large, and often
10:08
Speaker 1: we'll use shareholder funds corporate funds to harass or litigate
10:14
Speaker 1: against short sellers UM in the in the guise of
10:18
Speaker 1: of of trying to protect the company. And so that's
10:21
Speaker 1: number one, and that just raises various different agency risks
10:25
Speaker 1: for for someone that does that. UM. And number two,
10:29
Speaker 1: I mean, like all things being equal, I think, as
10:33
Speaker 1: any businessman, you'd rather keep proprietary what you'd like to
10:36
Speaker 1: keep proprietary, and only take an issue public what luck
10:41
Speaker 1: you have to or choose to And uh, I think
10:44
Speaker 1: that that's UM. One of the one of the one
10:47
Speaker 1: of the odd paradoxes of that is is that I've
10:50
Speaker 1: always wondered by the money management UM industry has not
10:54
Speaker 1: fought back on the on the SEC's disclosure rules for
10:58
Speaker 1: long investors UM who are not in an activist campaign
11:03
Speaker 1: or are not in a corporate control campaign UM, because
11:07
Speaker 1: there were all kinds of UH people that follow investors
11:11
Speaker 1: UH in their portfolios. And and for investors who don't
11:14
Speaker 1: turn their portfolios over a lot, they're in effect giving
11:17
Speaker 1: away their intellectual property for free. And the industry has
11:22
Speaker 1: never really challenged that. And I I don't know why.
11:26
Speaker 1: Let's talk a little bit about the challenges of being
11:30
Speaker 1: short in a market that seems to want to do
11:33
Speaker 1: nothing but go up except for very brief periods. What
11:38
Speaker 1: have we quadrupled from the lows of oh nine to
11:42
Speaker 1: the highs? How do you maintain short positions into the
11:47
Speaker 1: teeth of that? Well, so there's a big misconception about
11:52
Speaker 1: our business in that we run most of our accounts
11:56
Speaker 1: either actually hedged or benchmarked long. So so again it
12:01
Speaker 1: gets back to the whole idea that we're providing a
12:03
Speaker 1: hedge and not necessarily being directional for most investors. So
12:09
Speaker 1: and we started doing this in the mid nineties UH,
12:12
Speaker 1: and and the idea being that were long the market
12:15
Speaker 1: in effect and short our stocks, and so we're relatively
12:19
Speaker 1: market agnostic UM. And and just generally we're trying to
12:25
Speaker 1: create alpha from our short positions either going down UH
12:31
Speaker 1: in in actuality or or underperforming relatively. So the idea
12:37
Speaker 1: I assume that the market will go up over time,
12:39
Speaker 1: as most investors do. The problem is the failure rate
12:44
Speaker 1: among individual corporations is quite high and and so the
12:48
Speaker 1: idea is to try to winnow those out from a
12:51
Speaker 1: broad portfolio. Quite quite interesting. So given that, what do
12:57
Speaker 1: you use as a benchmark, Well, for the most part,
13:00
Speaker 1: for our US funds, it's the smp UM. It's it's
13:03
Speaker 1: simplest and still at the end of the day, most
13:06
Speaker 1: indices will will track it one way or the other,
13:10
Speaker 1: with variations in certain years UM. And then we use
13:14
Speaker 1: the M s c I for the global UH portfolio. Huh.
13:18
Speaker 1: That's really really interesting. So you mentioned you began with
13:22
Speaker 1: a mostly um high net worth clientele and that's morphed
13:27
Speaker 1: into an institutional client base. How have those changes come
13:33
Speaker 1: about and how has it affected what you do? So
13:37
Speaker 1: the reason that that it's come about is that in
13:41
Speaker 1: the eighties, the hedge fund industry was still generally the
13:45
Speaker 1: purview of high net worth families and individuals, and it
13:49
Speaker 1: only really became UH it wasn't until the nineties that
13:55
Speaker 1: institutions and investment boards and corporate boards got more comfortable
14:01
Speaker 1: with using hedge funds and other alternatives as part of
14:04
Speaker 1: their portfolio UM and so we we began to see
14:08
Speaker 1: a growth in institutional investing in the nineties, particularly towards
14:12
Speaker 1: the end of the nineties. And then and then you
14:14
Speaker 1: had sort of the golden era of hedge funds, which
14:17
Speaker 1: was two thousand two to two thousand and six, when
14:22
Speaker 1: hedge funds sort of made their chops in the long
14:25
Speaker 1: short equity world by being short the right things in
14:29
Speaker 1: two thousand to two thousand two, being short the dot
14:33
Speaker 1: com bubble stocks and telecom and you know a lot
14:36
Speaker 1: of the things that got taken to extremes and being
14:38
Speaker 1: long value and so hedge funds made money on both
14:41
Speaker 1: sides of their book for a number of years. And
14:44
Speaker 1: then of course the money flooded in UM and then
14:48
Speaker 1: the and then basically the UH. It all came crashing
14:52
Speaker 1: down for the hedge fund industry in long short in
14:55
Speaker 1: oh seven, O eight o nine, when UH hedge funds
14:59
Speaker 1: did not head or did not hedge as much as
15:01
Speaker 1: they should have and got caught just as much as
15:04
Speaker 1: most investors did um in the in the bare market
15:07
Speaker 1: of eight oh nine, and it's better. It's been a
15:11
Speaker 1: tough flog ever since. I very much recall something you
15:14
Speaker 1: said in one of our prior conversations. If you go
15:17
Speaker 1: back thirty years, there were five hundred or so hedge
15:21
Speaker 1: funds and they all created alpha. Today there's eleven thousand
15:24
Speaker 1: hedge funds, and it's more or less still those five
15:28
Speaker 1: hundred hedge funds that are the alpha generators still still accurate.
15:33
Speaker 1: I mean, I think generally, I don't know about the
15:35
Speaker 1: specific numbers anymore, but I think directionally in magnitude, that's
15:40
Speaker 1: still a pretty accurate statement. Um. You know what. The problem,
15:45
Speaker 1: of course, until I think very recently, is that you
15:49
Speaker 1: just had a lot of fairly, you know, reasonably sophisticated
15:53
Speaker 1: money trading against each other. Um And And the reason
15:57
Speaker 1: you get lots of alpha at different uh parts of
16:01
Speaker 1: the market segment is because you get unsophisticated investors who
16:05
Speaker 1: come in and start providing capital and start doing dumb
16:08
Speaker 1: things with their money. And that was certainly the case
16:10
Speaker 1: in n and two thousand, where where retail investors stopped
16:15
Speaker 1: buying mutual funds and started speculating in stocks directly taking
16:20
Speaker 1: things up, you know, to just incredible valuations. And for
16:24
Speaker 1: the most part in this last bull market, we saw
16:28
Speaker 1: it as mostly a institutional or passive driven market until
16:34
Speaker 1: really the fourth quarter of last year and the first
16:39
Speaker 1: couple of months of where I saw the retail investors
16:44
Speaker 1: come back in a big way. Um, it's as if
16:47
Speaker 1: someone flipped the switch in October November of last year
16:51
Speaker 1: and and all of a sudden story stocks began doing
16:54
Speaker 1: what they did in early early two thousand and that
16:59
Speaker 1: for us was a was a bit of a warning sign. Yeah,
17:02
Speaker 1: the tenure bull market will will do that on the
17:06
Speaker 1: mom and pop side. But I'm curious on the institutional side.
17:11
Speaker 1: You're known as as somebody who identifies corporate fraud or
17:16
Speaker 1: mouth seasance or companies that are potentially going to go bankrupt.
17:21
Speaker 1: What sort of a spike do you see following an
17:25
Speaker 1: event like oh, eight oh nine, or what's happened so
17:29
Speaker 1: far in well, it's interesting in in um in oh
17:34
Speaker 1: uh in nine and two thousand or oh, you know nine,
17:37
Speaker 1: the reactions were a lot different. Um, the two thousand
17:42
Speaker 1: to oh to bear market was drawn out, it was
17:46
Speaker 1: every bit as vicious as as O eight oh nine.
17:49
Speaker 1: People kind of forget that Mastak was down from the
17:53
Speaker 1: peak in two thousand to O two and the S
17:56
Speaker 1: and P was down, so very similar kinds of draw
18:00
Speaker 1: downs that we saw in in O eight oh nine.
18:03
Speaker 1: In O a oh nine, it seemed to be mostly
18:05
Speaker 1: compressed into one year, the faithful year of oh eight UM,
18:10
Speaker 1: where it was more spread out over two years in
18:13
Speaker 1: in two thousand to two thousand and two, UM, and
18:18
Speaker 1: what we saw in in UH we saw just basically
18:22
Speaker 1: sharp rallies in both bear markets. But uh uh in
18:26
Speaker 1: in two thousand to two two O two UM, the
18:31
Speaker 1: rallies were weaker and weaker and were sold each and
18:36
Speaker 1: every time. UM. You know, eight O nine it seemed
18:39
Speaker 1: to be the value seemed a lot sharper at the time,
18:41
Speaker 1: but shorter given the compressed nature of what we're seeing,
18:46
Speaker 1: you know, As to what just happened in March April,
18:48
Speaker 1: I have no idea yet. I don't know that anybody
18:50
Speaker 1: else does. We'll see, I mean, uh, certainly the willingness
18:55
Speaker 1: to speculate has come back in a very quickly in
18:59
Speaker 1: the month of April from what we saw in March
19:02
Speaker 1: and UH. In that I think, as any observer of
19:05
Speaker 1: the market will tell you, UM, that is at least
19:09
Speaker 1: a little bit disconcerting, given how fast people are willing
19:12
Speaker 1: to sort of overlook what what appears to be happening
19:15
Speaker 1: to the economy, um, with the assumption that everything will
19:18
Speaker 1: be just fine, um come and certainly that might be
19:24
Speaker 1: the case, but it might not. We just don't know. Well, well,
19:27
Speaker 1: we'll get to the markets in the economy in a
19:29
Speaker 1: little bit. I'm intrigued by the your reference of rallies
19:36
Speaker 1: during a bear market. I recall very vividly watching a
19:40
Speaker 1: stock you were short and ron fall for a year,
19:46
Speaker 1: a year solid, and it did not move in a
19:49
Speaker 1: straight line. It would drop and then rallied back almost
19:55
Speaker 1: two thirds three quarters of what it lost. How challenging
20:00
Speaker 1: is it to sit in a position like that that
20:03
Speaker 1: you're short and it feels like you're getting even though
20:06
Speaker 1: you're on the right side of the trade, it feels
20:08
Speaker 1: like you're getting your face ripped off every day. Yeah,
20:11
Speaker 1: it's and and those rallies test your conviction. Um. And
20:16
Speaker 1: the idea is that if if the fundamentals haven't changed,
20:20
Speaker 1: they're certainly getting worse. You know, you you just have
20:23
Speaker 1: to to keep your conviction and watch your risk levels
20:27
Speaker 1: like anything else. UM. But yes, it does seem to
20:30
Speaker 1: to uh to me and to others that that companies
20:34
Speaker 1: that are particularly controversial UM and and and and going
20:38
Speaker 1: into what might be their their terminal phase UM tend
20:43
Speaker 1: to have increased trading volatility. And UH that that is
20:47
Speaker 1: just we take as a given. So we give these
20:50
Speaker 1: things a little bit more wide parameter um when they
20:53
Speaker 1: when they begin to to have problems. But yes, I
20:57
Speaker 1: mean I remember, I remember number of situations, uh in
21:02
Speaker 1: the last twenty years where the company ended up going bankrupt,
21:08
Speaker 1: and yet there was a series of forty and fifty
21:11
Speaker 1: rallies along the way that would have you believe that
21:15
Speaker 1: everything was was fine and they solved their problems, when
21:18
Speaker 1: in fact they never had. My my big takeaway from
21:22
Speaker 1: being short specific companies in O eight oh nine was
21:26
Speaker 1: to learn to marry a put as opposed to merely
21:29
Speaker 1: being short naked the stock. I wish I had learned
21:32
Speaker 1: that before the crisis as opposed to after. But such
21:36
Speaker 1: as life, let's talk a little bit about where we
21:41
Speaker 1: are in the state of the economy and the state
21:44
Speaker 1: of the market. It's the end of April this market
21:49
Speaker 1: has recovered a substantial portion of the sell off that
21:53
Speaker 1: began in February. Are the markets being optimistic too optimists
22:00
Speaker 1: stick or are they seeing something that the rest of
22:03
Speaker 1: us might not be seen? Well, obviously, you know it's
22:08
Speaker 1: too early. It's always too early to tell, UM. But
22:12
Speaker 1: what I would say is that, UM, you know, we've
22:17
Speaker 1: we've been saying, UH that I think market participants, whether
22:21
Speaker 1: you're a bull or bear, writing off UM as as
22:26
Speaker 1: you know, just just a massive, massive deceleration uh and
22:31
Speaker 1: decline in the economy. And and really the markets will
22:34
Speaker 1: look forward to to figuring out, okay, what what our
22:36
Speaker 1: business is worth based on sort of a normalized UM
22:40
Speaker 1: rate of return. And that's where things get interesting because
22:44
Speaker 1: if you look at if you look at where the
22:46
Speaker 1: markets have come back to, UM, we were supposed to
22:50
Speaker 1: we were supposed to make about a hundred and seventy
22:54
Speaker 1: seventy five dollars on the SNP this year. That that's
22:57
Speaker 1: out the window. UM. I think the number was roughly
23:00
Speaker 1: a hundred seventy last year. UM. And and so the
23:05
Speaker 1: estimates I've now seen for one, uh, have the SMP
23:09
Speaker 1: back to the sort of a hundred seventy dollar number,
23:13
Speaker 1: but that's starting to come down. Um, so we've basically
23:19
Speaker 1: discounted back a recovery for lack of better term, a
23:24
Speaker 1: full recovery in one. And I'm just not so sure that,
23:28
Speaker 1: at least in the case of some businesses, that that
23:31
Speaker 1: optimism might be a little bit misplaced. So so let's
23:35
Speaker 1: stay with that theme. If we're looking at originally profits
23:40
Speaker 1: on the SMP five hundred of a hundred and seventy dollars,
23:43
Speaker 1: first question is where do you really see that number
23:47
Speaker 1: shaking out by the time is over? And second, what
23:52
Speaker 1: sectors are going to be, uh the biggest pain points
23:58
Speaker 1: of that decrease in profitability? So, I mean, you know,
24:04
Speaker 1: for twenty it's Anyone's guests, and I think we'll see
24:07
Speaker 1: a lot of the kitchen sinc phenomenon. That management teams
24:11
Speaker 1: will realize that wall streets giving them a past for
24:13
Speaker 1: this year, so they're gonna they're gonna load whatever costs
24:17
Speaker 1: they can in the rest of this year. UM. Where
24:21
Speaker 1: I am a little bit more skeptical is is terms
24:24
Speaker 1: of ongoing profitability in one. I will be surprised it
24:30
Speaker 1: certainly could happen, but I will be very surprised if
24:33
Speaker 1: we're at twenty nine levels of profitability in UM, and
24:38
Speaker 1: certainly for some industries, I think it's gonna be a
24:41
Speaker 1: lot more challenged, whether you're you know, in the in
24:44
Speaker 1: the travel or leisure business, the restaurant business, UM, a
24:48
Speaker 1: variety of other things companies rely on on UM sort
24:52
Speaker 1: of robust UM UH. Supply chains are gonna have problems
24:57
Speaker 1: and and consumer behavior may change. We don't know yet.
25:00
Speaker 1: I mean, where everyone's in lockdown UM and and what
25:04
Speaker 1: kind of permanent changes are there going to be UM,
25:07
Speaker 1: you know, in a post pandemic world. I don't know
25:10
Speaker 1: that we we we know for sure. And then on
25:12
Speaker 1: top of that, I think we'd be remiss if we
25:15
Speaker 1: didn't talk about not only the political side, but the
25:19
Speaker 1: political costs to corporate America from another round of bailouts.
25:23
Speaker 1: And and I really think it will be hard pressed
25:26
Speaker 1: for corporate America to keep corporate tax rate going forward,
25:31
Speaker 1: for example, And that makes a huge difference that we
25:34
Speaker 1: did some numbers, and and that hundred and seventy dollar
25:39
Speaker 1: level on the SMP five drops down to a hundred
25:42
Speaker 1: and thirty five dollars UM if you change the tax
25:46
Speaker 1: right back to which is what one of the parties
25:50
Speaker 1: is certainly advocating UM. And so you could just simply
25:54
Speaker 1: get a recision of the Trump tax cuts UM as
26:00
Speaker 1: one possible alternative that would change earnings power for the
26:05
Speaker 1: intermediate term, you know, rather permanently. Huh. Quite quite interesting.
26:11
Speaker 1: Here's the pushback adhere to that, and it goes something
26:14
Speaker 1: like this. After September eleventh, we heard that nobody was
26:18
Speaker 1: going to fly again, that travel was going to be
26:20
Speaker 1: a problem, real estate in in New York and big cities,
26:24
Speaker 1: We're going to be affected. And we ended up not
26:27
Speaker 1: seeing that sort of response after six months or so,
26:32
Speaker 1: might we see the same sort of recovery? Absolutely, and
26:36
Speaker 1: and and we we certainly might. Um. But after I mean,
26:40
Speaker 1: I think we understood that nine eleven was was the
26:45
Speaker 1: instance of wrong place, wrong time, right. I mean, so
26:49
Speaker 1: so there were there were countries and people who lived
26:52
Speaker 1: with terrorist attacks, such as the UK and Israel and
26:56
Speaker 1: other places for decades, right, and and we we we
27:00
Speaker 1: had a we had a basic template there that those
27:04
Speaker 1: economies generally shrugged off terrorist events that were you know,
27:10
Speaker 1: bombings and that sort of thing. Um. In the US
27:14
Speaker 1: being the US, we we we handled a little differently.
27:16
Speaker 1: We went to war. But UM. But but I think
27:20
Speaker 1: that that there was a sense that Okay, UM, you
27:23
Speaker 1: you know you're in the wrong, wrong square, wrong building.
27:27
Speaker 1: You know that that that is a sad thing. But UM,
27:31
Speaker 1: a pandemic is something quite different because it transmits. And
27:36
Speaker 1: so I think that that's why this is, this is
27:39
Speaker 1: so different UM, and I think is going to be
27:44
Speaker 1: with people for a while and the way they changed
27:46
Speaker 1: their behaviors. Again, I certainly expect that most activity will
27:50
Speaker 1: go back to somewhat somewhat normal. But corporate America generally
27:58
Speaker 1: is a very leveraged er D and and we've had
28:02
Speaker 1: years and years and years and years of cost cutting.
28:04
Speaker 1: We've had interest rates go down to zero percent, We've
28:08
Speaker 1: cut corporate tax rates dramatically. So you have you have
28:13
Speaker 1: operating margins and net margins that are about as good
28:16
Speaker 1: as they've ever been. Keep in mind that revenue growth
28:18
Speaker 1: has not been great in the last ten years and
28:21
Speaker 1: so UM, you had had global economy that was slowing
28:25
Speaker 1: before coronavirus UM. And we haven't even gotten to my
28:28
Speaker 1: favorite country, China yet, and so uh, there are small
28:33
Speaker 1: changes in activity here UM could have disproportionate impacts on
28:38
Speaker 1: profitability for lots of different industries, and yet it would
28:41
Speaker 1: seem to be back to normal, you know, as we
28:44
Speaker 1: go about our day to day lives. It just might
28:46
Speaker 1: be that corporate America is not as profitable as it
28:49
Speaker 1: used to be. So you referenced China. Let's briefly look
28:54
Speaker 1: at what's going on there. How significant is this pandemic
28:59
Speaker 1: to that giant, populous nation and what does their business
29:05
Speaker 1: community look like, what does their investment climate look like
29:09
Speaker 1: in the years once we get past this pandemic. Yeah,
29:13
Speaker 1: I think that that one of the underappreciated things that's
29:16
Speaker 1: happened during this pandemic has been a a dramatic hardening
29:22
Speaker 1: of U. S. China relations Um. That that has occurred,
29:27
Speaker 1: um for a lot of reasons, including the pandemic itself.
29:30
Speaker 1: But um, you keep in mind last month China expelled
29:34
Speaker 1: a number of Western journalists from the country. We've had
29:38
Speaker 1: this war of world words between the Trump administration and
29:42
Speaker 1: China regarding the pandemic source. Um. But and if this
29:46
Speaker 1: had happened last year when we were having the trade
29:48
Speaker 1: talk travails, I think it would have been a far
29:51
Speaker 1: more newsworthy But it's been kind of been put on
29:53
Speaker 1: the back page. But I think that the West's view
29:58
Speaker 1: and even Europe's view of China has hardened dramatically in
30:02
Speaker 1: the last few months. UM. I know certainly the democratic
30:06
Speaker 1: the democrats view of China has also hardened, uh in
30:10
Speaker 1: the last handful of months. So we have a situation
30:14
Speaker 1: where we're getting a little bit more adversarial politically, so
30:17
Speaker 1: for whatever that means for for ongoing trade talks. UM.
30:21
Speaker 1: But I also think that that corporate America has kind
30:24
Speaker 1: of learned its lesson with the tariffs and everything else,
30:27
Speaker 1: that there's an increasing nationalism at work here, and that
30:30
Speaker 1: bringing your supply chain out of China may make some sense. UM.
30:35
Speaker 1: On top of all that, China is still remains to
30:40
Speaker 1: me the big credit story globally. UM. We just took
30:43
Speaker 1: an updated our look at all the Chinese large banks,
30:46
Speaker 1: for example, and they basically grew their assets last year
30:50
Speaker 1: anywhere from ten to fift sort of as they have
30:53
Speaker 1: been UM. So you know, every year, uh, China seems
30:57
Speaker 1: to grow uh it's debt at some multiple of nominal GDP.
31:04
Speaker 1: And we joked that this can't keep going on forever,
31:08
Speaker 1: but so far it has. But now we see just
31:12
Speaker 1: monstrous amount of debt, mortgage debt, personal debt, corporate debt
31:17
Speaker 1: in the Chinese economy. And that's something that China still
31:21
Speaker 1: is going to have to grapple with going forward. Um.
31:24
Speaker 1: They haven't had to do so in a in a
31:27
Speaker 1: major way, but at some point it will, it will happen. Um.
31:31
Speaker 1: Chinese apartments are still the most important asset class in
31:34
Speaker 1: the world in my view. We were talking earlier about
31:37
Speaker 1: the challenge of being short in the face of a
31:41
Speaker 1: rising market. When we see the government reaction to a crisis,
31:46
Speaker 1: when we see the Fed adding a couple of trillion
31:49
Speaker 1: dollars to their balance sheet and Congress passing the Cares Act,
31:54
Speaker 1: which was over two trillion dollars, I guess we're gonna
31:56
Speaker 1: have to start calling that Cares Act one because it
31:59
Speaker 1: looks like there's more and more of that coming. What
32:02
Speaker 1: does that do to the market, What does that do
32:04
Speaker 1: to the economy? And how do you feel about being
32:07
Speaker 1: short in the face of almost five trillion dollars in stimulus? Well, Well,
32:13
Speaker 1: first of all, remember we're, as I mentioned, we're also
32:16
Speaker 1: a long the S and P and the MSc. I
32:19
Speaker 1: so UM, so again we try to focus on how
32:23
Speaker 1: central bank activity impacts certain industries in our stocks. UM.
32:29
Speaker 1: But I think that that one thing I will say,
32:33
Speaker 1: you know, regarding the Cares Act and the p p
32:36
Speaker 1: P Payroll Assistance Program, is that once again the federal
32:41
Speaker 1: government has been asked to backstop business. And I don't
32:44
Speaker 1: want to get into, um the semantics and the and
32:49
Speaker 1: the ideology of of whether or not this is capitalism
32:52
Speaker 1: or not capitalism. UM. I have my views on that,
32:55
Speaker 1: as everybody else does. But what I do think is
32:59
Speaker 1: that it means that if the U. S. Taxpayer is
33:03
Speaker 1: going to stand behind corporate America for every unanticipated risk
33:09
Speaker 1: and and I do look as coons at people say, well,
33:13
Speaker 1: nobody could have foreseen this, so therefore, you know, everybody
33:16
Speaker 1: deserves a bailout of some certain amount. UM. My point
33:20
Speaker 1: on that is is that the real risks are always
33:22
Speaker 1: the ones you don't foresee, because if you do foresee them,
33:26
Speaker 1: you mitigate them or insure against them. UM. And so
33:31
Speaker 1: if the taxpayer is once again going to be on
33:33
Speaker 1: the hook for trillions of dollars UM to support businesses
33:38
Speaker 1: and support their employees, and I certainly think we should
33:42
Speaker 1: be supporting their employees, I'm not I'm not as convinced
33:46
Speaker 1: on on the rest of the corporate bailouts. UM. Well,
33:50
Speaker 1: then certainly I think that the taxpayer deserves a premium
33:53
Speaker 1: going forward UM, and and that corporate tax rates should
33:57
Speaker 1: in fact go higher, because in fact that should be
34:01
Speaker 1: the in effect the insurance premium that is paid to
34:04
Speaker 1: the U. S. Taxpayer every year UM to cover these
34:07
Speaker 1: blanket risks that keep showing up every ten years and so.
34:11
Speaker 1: And I think that's gonna be a very strong case
34:14
Speaker 1: to the American public UM that if you're going to
34:17
Speaker 1: end mind um corporate America with the U. S. Treasury
34:23
Speaker 1: and also the Federal Reserve by e the currency UM,
34:27
Speaker 1: then you should be compensated for it. And I think
34:30
Speaker 1: that that, I think is going to be a pretty
34:32
Speaker 1: strong argument. Yeah, I'm I'm fascinated how not only are
34:36
Speaker 1: there no atheists and foxholes, but there are no Austrians
34:41
Speaker 1: or Libertarians during financial crises. It's amazing how suddenly everybody
34:45
Speaker 1: becomes pro bail out at the first sign of trouble.
34:50
Speaker 1: But you raise a really interesting question about the upcoming election.
34:56
Speaker 1: Is this gonna be essentially a referendum and how President
35:01
Speaker 1: Trump has handled the coronavirus or is this a bigger
35:07
Speaker 1: ideological debate between labor and capital, between taxpayers and bailouts. Yeah. So,
35:17
Speaker 1: so I had this view that that, you know, labor
35:20
Speaker 1: is kind of I don't know if it's a Marxist
35:25
Speaker 1: view or or or whatever, but I do believe that
35:28
Speaker 1: that we've seen in the US these sort of long
35:31
Speaker 1: waves of capital versus labor, and labor became ascendant with
35:38
Speaker 1: the New Deal in the in the in the thirties, UM,
35:41
Speaker 1: and we took a much more, a much more status
35:45
Speaker 1: approach towards helping workers. UM. Some countries took the status
35:50
Speaker 1: approach too far in the in the late thirties and
35:52
Speaker 1: we end up at war. But but that all changed
35:56
Speaker 1: um with with the great inflation of the sixties and
35:59
Speaker 1: seventies and the fact that business was on its rear
36:03
Speaker 1: end and capital had been treated pretty shabbily UM, particularly
36:07
Speaker 1: from the late sixties to the late seventies, and with
36:09
Speaker 1: the election of Margaret Thatcher in seventy nine in the
36:12
Speaker 1: UK and Ronald Reagan in the U s and the
36:14
Speaker 1: eighty the pendulum began to swing back and we we
36:18
Speaker 1: began cutting capital gains taxes, central banks aggressively. The Paul
36:23
Speaker 1: Volker fought inflation UM and and we we saw returns
36:28
Speaker 1: on corporate assets, you know, begin to appreciate dramatically. And
36:33
Speaker 1: of course we also know that median wages and labor
36:36
Speaker 1: rates pretty much hit their peak in the late seventies UM.
36:41
Speaker 1: And so I think that that there was been a
36:44
Speaker 1: long since punctuated by acceleration in the global financial crisis,
36:51
Speaker 1: that the little guy was being left behind, the worker
36:53
Speaker 1: was being left behind. And I think in a in
36:55
Speaker 1: a in an interesting way, Donald Trump tapped into that
36:59
Speaker 1: in twenties sixteen. I just don't think, uh that he
37:02
Speaker 1: really meant it um and and I e it was
37:06
Speaker 1: just a message to get elected as opposed to following
37:09
Speaker 1: through UM with policies that we're going to really really
37:14
Speaker 1: change that um with this latest set of bailouts UM.
37:19
Speaker 1: I think when when fear turns to anger, as it
37:22
Speaker 1: inevitably will, as we sort of look at at you know,
37:25
Speaker 1: who got bailout money, who who took money they shouldn't,
37:28
Speaker 1: we're already seeing some of that UM. I think that
37:32
Speaker 1: that that that anger is going to be stoked even more.
37:36
Speaker 1: And so the question is do we finally see policies
37:40
Speaker 1: like a rising minimum wage, higher corporate taxations, higher rates
37:44
Speaker 1: on capital gains, end of carried interest um. That is
37:48
Speaker 1: a lot less um capital friendly and a lot more
37:52
Speaker 1: labor friendly coming out of this, And that's I think
37:56
Speaker 1: gonna be one of the most important political economy questions
38:00
Speaker 1: that investors will have to think about. Huh, that's quite interesting.
38:04
Speaker 1: I think you are dead on when you reference Trump's
38:10
Speaker 1: brilliant messaging in there. There's a footnote discussion about whether
38:16
Speaker 1: when he first began running he really wanted to win
38:19
Speaker 1: or it was just a brilliant marketing ploy. But he
38:23
Speaker 1: has tapped into a form of nationalistic popularism that certainly
38:30
Speaker 1: resonates with thirty of of the electorate. So really, what
38:37
Speaker 1: is the election about if not the incumbent? It sounds
38:43
Speaker 1: like you think there's a longer cycle. Uh, and the
38:47
Speaker 1: pendulum is swinging from one extreme, uh, and it's beginning
38:51
Speaker 1: to reverse and head in the other direction. Am I
38:54
Speaker 1: misstating that? I think there is. I mean, if you
38:57
Speaker 1: look at certain certain US bolling things. I mean, look
39:01
Speaker 1: at the support for a national healthcare program. It's broad,
39:05
Speaker 1: it's dramatic, and it cuts across party lines. Look at
39:09
Speaker 1: the support for higher minimum wage again, it's broad, it's dramatic,
39:12
Speaker 1: it cuts across party lines. There's a number of these
39:15
Speaker 1: issues that that that cut across party lines that I
39:20
Speaker 1: think the the the heads of the parties have tried
39:24
Speaker 1: to sort of ignore, um that that because obviously there's
39:28
Speaker 1: lots of you know, lots of donor interest for it
39:31
Speaker 1: to be ignored. But there really is a view out there. UM.
39:36
Speaker 1: And I think another set of bailouts is only going
39:38
Speaker 1: to make this this this uh sense that we've had
39:42
Speaker 1: since the global financial crisis of unfairness of how taxpayers
39:46
Speaker 1: were bailing out you know, guys who shouldn't have been
39:48
Speaker 1: bailed out. Um, we're gonna see that again in a
39:51
Speaker 1: major way. I think, after after and and and you
39:57
Speaker 1: ignore it at your own peril. I I keep, you know,
40:01
Speaker 1: telling people, Um, this is the set of circumstances we
40:06
Speaker 1: have now for corporate returns in corporate America is about
40:11
Speaker 1: as good as it's gonna get. I mean, it's gonna
40:13
Speaker 1: be really hard. After years and years of cutting interest rates,
40:17
Speaker 1: cutting taxes, UM, cutting costs, going global, um, slashing labor rates. UM.
40:25
Speaker 1: You know this is this is pretty good. Um And
40:29
Speaker 1: and there's lots of reasons to believe that you will
40:32
Speaker 1: revert to the mean and some of those uh, some
40:35
Speaker 1: of those items, and that could have just huge implications,
40:38
Speaker 1: as I mentioned earlier, for corporate profitability. So I recall
40:42
Speaker 1: in ten you were a pretty big donor um to
40:46
Speaker 1: the Democrats. Who did you like originally in the Democratic primary?
40:52
Speaker 1: And what do you think of the race now that
40:54
Speaker 1: it's become a head to head between Trump and Biden. Well,
40:59
Speaker 1: I mean as as as I think you know. I mean,
41:02
Speaker 1: I'm a I'm a longtime friend and supporter of the
41:05
Speaker 1: Vice president. So um, I I actually wrote in his
41:09
Speaker 1: name in twos sixteen. Uh and so um, I want
41:14
Speaker 1: to be consistent. And was that in Was that in
41:17
Speaker 1: New York or in Florida? Because it was New York?
41:20
Speaker 1: All right, so we'll let you, We'll let it go.
41:22
Speaker 1: I was in Florida. Yeah, and I and and I
41:28
Speaker 1: did so with that in mind voter as a New
41:30
Speaker 1: York voter. But but um, look, I think that I
41:35
Speaker 1: think for lots of reasons, um, that we don't need
41:39
Speaker 1: to get into He's he's a far better candidate, uh
41:42
Speaker 1: not least of which I think we're gonna need given
41:45
Speaker 1: the polarity in this country. I think we're gonna need
41:49
Speaker 1: a period of healing, not only internally but externally with
41:52
Speaker 1: our allies and UH and I think Vice President Biden
41:58
Speaker 1: UM is far better um able to do that, uh
42:03
Speaker 1: and and and then turn turn this over to the
42:05
Speaker 1: next generation UH of Democratic leaders, which I think he
42:09
Speaker 1: will do. But it's gonna be Look, it's gonna be
42:12
Speaker 1: an interesting election. I think that all all accounts arts.
42:16
Speaker 1: You know, it's it's a pretty tight race as of
42:18
Speaker 1: spring of lot can happen in the next six months,
42:21
Speaker 1: as we know that it's also going to boil down
42:23
Speaker 1: to UH to a handful of states. Although I did
42:26
Speaker 1: see one interesting thing that that made me uh, that
42:30
Speaker 1: gave me UM a little bit of pause. UM, and
42:34
Speaker 1: that is someone pointed out that, uh, there are eight
42:39
Speaker 1: states that Trump took in that are basically right now
42:45
Speaker 1: in the toss up category within margin of error. UM,
42:49
Speaker 1: there are no states that Hillary took in that are
42:55
Speaker 1: in that same category. That makes a lot of sense.
42:59
Speaker 1: You I have to go back to part of your
43:02
Speaker 1: statement earlier, because it sounded like you were hinting that
43:07
Speaker 1: you think Biden is going to be assuming he's elected,
43:10
Speaker 1: only planning on staying one term. Did I did I
43:14
Speaker 1: pick up that you turn it over to the next generation.
43:18
Speaker 1: You you are? You are? You're putting words in my mouth.
43:21
Speaker 1: I did not say that. How well, I think that
43:24
Speaker 1: I think that his vice president selection will be made
43:27
Speaker 1: with that obviously in mind. Um and I think that, Uh.
43:31
Speaker 1: I would be very surprised if the vice president uh
43:36
Speaker 1: chooses someone who's seventy five years old to be his
43:39
Speaker 1: running mate. Um so so not Elizabeth Warren or Bernie Sanders.
43:44
Speaker 1: I suspect it won't be. But I don't know anything.
43:47
Speaker 1: I suspect. I suspect it will be a younger woman.
43:50
Speaker 1: Uh huh so like an Amy Klobuchar or someone of
43:54
Speaker 1: that generation. Probably, As I said, I don't know anything,
43:58
Speaker 1: and so I think we'll own that within the next
44:00
Speaker 1: month or so. But I suspect it will be a
44:03
Speaker 1: younger woman. So how concerned are you as a Democrat
44:08
Speaker 1: about Biden's reputation as a gas machine? Uh? So, the
44:15
Speaker 1: things that endear people uh to Joe Biden, I don't
44:19
Speaker 1: think have changed, and I don't think the vice president
44:22
Speaker 1: has changed. Uh. He is a plane talker. He says
44:26
Speaker 1: what's you know? In his head and in his heart
44:29
Speaker 1: and Uh. And I think that that people, actually, the
44:33
Speaker 1: people that like Joe Biden liked him for that. Um
44:36
Speaker 1: and and and you know, then again, can we just
44:40
Speaker 1: compare him to who's in the White House now? And
44:43
Speaker 1: and so I for anyone anyone that always raises that issue,
44:48
Speaker 1: I've also seen, you know, spend time with the Vice president.
44:50
Speaker 1: Will tell you you know, I've seen the man very recently,
44:55
Speaker 1: UM by heart repeat uh legal opinion for example, um
45:02
Speaker 1: Scalia's legal opinion on handguns that was written back a
45:06
Speaker 1: number of years ago in a debate on gun control
45:09
Speaker 1: we had in my apartment. I saw the Vice President
45:11
Speaker 1: literally recite verbatim UM, paragraphs from that opinion. And and
45:18
Speaker 1: and this is someone who who has been in office
45:21
Speaker 1: for a long long time, both in the Senate and
45:24
Speaker 1: as Obama's vice president. Um. He knows things, and he
45:29
Speaker 1: knows people who know things, and he's based basic decisions
45:34
Speaker 1: on science and and and again, I mean this is
45:38
Speaker 1: this is what I think most of us, whatever your
45:42
Speaker 1: your political leanings, kind of expect of people in the
45:45
Speaker 1: highest office in the land. And to me that that
45:49
Speaker 1: would would be a refreshing change. But as I said,
45:51
Speaker 1: it's going to be a tight it's going to be
45:53
Speaker 1: a tight It's going to be a tight election, and uh,
45:56
Speaker 1: it's gonna come down to the wire. So I completely
46:00
Speaker 1: disagree with you, and I will save my rebuttal for
46:04
Speaker 1: the next time we have you at dinner. I have
46:06
Speaker 1: two last political questions I have to ask. One is
46:10
Speaker 1: you you mentioned the president has his own tendency towards gaffs.
46:15
Speaker 1: I've heard a lot of people say nothing sticks to
46:18
Speaker 1: this president time and time again. As both a candidate
46:22
Speaker 1: and an elected official, he does things that would have
46:27
Speaker 1: absolutely torpedoed any other candidate. What are your thoughts on that?
46:32
Speaker 1: I have some of my own. How has he managed
46:36
Speaker 1: to become the taflon don Well Barry. I mean, you
46:41
Speaker 1: have to remember in US political history of the country,
46:45
Speaker 1: will vote for a potted plant because it's not the
46:48
Speaker 1: other guy. Um. You know, in in all of the
46:52
Speaker 1: biggest landslide elections, the loser got around the vote. I
46:58
Speaker 1: think McGovern gott As I recall, but I mean it
47:01
Speaker 1: just it is we are to some extent, you know,
47:06
Speaker 1: it's your guy right or wrong, um in in the
47:10
Speaker 1: United States, and so that number usually coalesces around UM.
47:15
Speaker 1: And so I think that that for people that that
47:18
Speaker 1: are going to try to put trying to put rationalization
47:22
Speaker 1: as to why people support one candidate or another. Uh,
47:26
Speaker 1: you know, despite whatever they do, you can kind of
47:28
Speaker 1: start and then figure it out. Um. And And what
47:34
Speaker 1: that means is is that this election is going to
47:37
Speaker 1: come down to independence again. And one of the things
47:41
Speaker 1: that struck me in the election, in the exit polling,
47:46
Speaker 1: was that if you looked at people that disliked both candidates, um,
47:52
Speaker 1: they tended to then vote for Donald Trump. So I
47:57
Speaker 1: just saw an article yesterday that's ad over the past
48:01
Speaker 1: two months, the number of undecided has just about doubled,
48:07
Speaker 1: which is quite fascinating. Yeah. So I think that once
48:11
Speaker 1: once we get out of our bunkers and we there's
48:13
Speaker 1: a bit of a normalized campaign, I think you'll see
48:16
Speaker 1: the differences. I suspect you will. Um And And let's
48:20
Speaker 1: not forget I mean this. This last election also came
48:22
Speaker 1: down to about eighty thou votes in five states, and
48:26
Speaker 1: it was a much closer run thing than that I
48:29
Speaker 1: think others would have you believe. And yeah, he threaded
48:33
Speaker 1: the needle. And and you had the comy situation a
48:38
Speaker 1: week or two before the election, and his margin of
48:41
Speaker 1: victory in those five states was actually smaller than the
48:45
Speaker 1: vote that Jill Stein got exactly. And so so again
48:49
Speaker 1: I think that that you know, we we we drew
48:51
Speaker 1: a lot of conclusions from that. But on the other hand,
48:55
Speaker 1: I suspect the Biden campaign. I kind of no, a
49:00
Speaker 1: Biden campaign understands this, understands the battleground states. Um. I
49:05
Speaker 1: think that they will not make some of the mistakes
49:07
Speaker 1: the Clinton campaign made. And we'll see, but but it
49:11
Speaker 1: will again be be a close thing. Last political question
49:15
Speaker 1: before we move on, had the coronavirus pandemic erupted a
49:20
Speaker 1: year earlier, would Andrew Cuomo be the Democratic nominee? I'll pass.
49:28
Speaker 1: I'm a friend of the governors as well, so I'm
49:30
Speaker 1: gonna pass on that question. All right, Well you could
49:33
Speaker 1: you could pass that along to me, to him on
49:35
Speaker 1: my behalf and tell him. Um, that's what I'm thinking.
49:40
Speaker 1: All right, So let's do our favorite questions. We ask
49:42
Speaker 1: all of our guests. You're under lockdown, you happen to
49:46
Speaker 1: be in Florida. What are you streaming these days? Tell
49:50
Speaker 1: us what you're watching on Netflix? What are you listening
49:52
Speaker 1: to in podcasts? What are you doing to keep entertained
49:57
Speaker 1: during this shelter in place. Well, I mean, first of all,
50:01
Speaker 1: I've been teaching my Yale class on financial fraud remotely
50:06
Speaker 1: this spring, so uh so one day a week I've
50:10
Speaker 1: I've had to uh, I've had to get acquainted with
50:13
Speaker 1: with my class remotely and do my lectures. Um. In
50:18
Speaker 1: terms of entertainment, I will tell you one thing way
50:20
Speaker 1: that that we have watched recently, that apropo of our
50:25
Speaker 1: political discussion that I really really have gotten into is
50:28
Speaker 1: the new series on f X MRS America, which is
50:32
Speaker 1: the story of Phillish Schlafley and the Stop the e
50:36
Speaker 1: r A movement versus uh the National Organization women Gloria
50:40
Speaker 1: Stein and Bell Abs Betty for Dan and it's just
50:44
Speaker 1: this great nineteen seventies period piece. Um. Kate Blanchett plays
50:49
Speaker 1: Phillish laughly and it's uh, it's well done. As someone
50:52
Speaker 1: who went through that as a kid of the seventies,
50:55
Speaker 1: I've gotten a kick I've gotten a kick out of
50:58
Speaker 1: out of that series recently. UM, And I just finished
51:03
Speaker 1: I just finished a great book. Since I'm stuck in Miami,
51:07
Speaker 1: I finished a great book, financial history book, which I
51:10
Speaker 1: would highly recommend to your listeners on the Great Florida
51:13
Speaker 1: Land Boom. Um. That that is just a fantastic history
51:18
Speaker 1: of the first credit bubble of the Roaring twenties, which
51:22
Speaker 1: was the Florida land boom in the Miami Beach land
51:26
Speaker 1: land bubble um from n nine that preceded the Great Crash.
51:34
Speaker 1: And it's just a great history of Florida and a
51:37
Speaker 1: great history of of sort of speculation gone mad um
51:41
Speaker 1: before the hurricane hit and dashed all those hopes. And uh,
51:45
Speaker 1: it's a terrific financial read. So so let's stay with books,
51:49
Speaker 1: because the one of the last times we had you on,
51:53
Speaker 1: you recommended a book that I ended up not only loving,
51:57
Speaker 1: but recommending to a bunch of people who so loved it.
52:01
Speaker 1: And that was a world lit only by fire. Just
52:04
Speaker 1: a fascinating just just a fascinating history. Tell us some
52:09
Speaker 1: other favorite books you like to recommend? What else are
52:11
Speaker 1: you reading? I'll give you one. I'll give you one
52:14
Speaker 1: from my bookshelf that I dust off every few years. Um,
52:18
Speaker 1: and I picked it up again. It's on my nightstand
52:21
Speaker 1: and I'm gonna try to get through it, hopefully when
52:23
Speaker 1: my class ends in a few weeks. But every four
52:25
Speaker 1: or five years I come back to, uh, the Great
52:29
Speaker 1: Carl Sagan's book, The Demon Haunted World and and I can't.
52:33
Speaker 1: I don't know if you know it, but it's it's
52:36
Speaker 1: a terrific book by by Sagan, one of the last
52:40
Speaker 1: he wrote before he passed away, about how we think
52:44
Speaker 1: about things as a as um humanity and why we
52:49
Speaker 1: believe certain things we do in the absence of evidence.
52:53
Speaker 1: And he goes into you know, whether it's witchcraft or
52:55
Speaker 1: belief in ghosts or or whatever it might be, UM,
53:00
Speaker 1: lief in you know, what makes it particularly topical is
53:03
Speaker 1: is the belief in incures with no evidence, as we've
53:06
Speaker 1: seen more recently with the coronavirus, and why people are
53:09
Speaker 1: willing to to bloom onto stuff. UM. And it's just
53:13
Speaker 1: a wonderful, wonderful book about kind of why we are
53:17
Speaker 1: who we are when it comes to belief in the
53:20
Speaker 1: supernatural and uh, and and in in a variety of
53:24
Speaker 1: other sort of beliefs we have. UM. It makes me
53:29
Speaker 1: think every time I reread the book. I have that
53:32
Speaker 1: book on my shelf and I haven't read it in
53:35
Speaker 1: I don't know, twentysomething years, but I'm gonna pull that off.
53:38
Speaker 1: And I'm also gonna give you a related recommendation. I'm
53:44
Speaker 1: trying to remember his name, but the name of the
53:46
Speaker 1: book is called Heretics of Science. The author is a
53:52
Speaker 1: journalist I think out of Australia or the UK, and
53:56
Speaker 1: he embeds himself with the wackiest of coops trying to
54:01
Speaker 1: figure out the flat earthers and the anti vaxers and
54:06
Speaker 1: just the KKK, like one group after another that is
54:11
Speaker 1: very much looked askance at by the general public. And
54:15
Speaker 1: his conclusion, more or less is all of these folks
54:19
Speaker 1: have a very fundamental error in their basic worlds model
54:25
Speaker 1: in their head. And it's like aiming for the moon.
54:27
Speaker 1: If you're off by a couple of inches, you missed
54:29
Speaker 1: by millions of miles, and extrapolating a little bit of
54:33
Speaker 1: flat Earth and to the rest of the world, you
54:36
Speaker 1: end up with fairly normal. Otherwise people who believe absolutely
54:41
Speaker 1: insane things. You, of all people, would like it because
54:44
Speaker 1: you're in the business of figuring out what's true, what's false,
54:48
Speaker 1: and why people sometimes believe things that just a kind
54:53
Speaker 1: of wacky. I will I will order it today. Thank
54:57
Speaker 1: you for that recommendation, right. It reminds me of that
55:01
Speaker 1: great study and I think there was a book out
55:03
Speaker 1: of the University of Chicago in the late fifties UM
55:06
Speaker 1: where the researchers embedded themselves into a group that believed
55:11
Speaker 1: the aliens were gonna come down and end the world.
55:14
Speaker 1: And as it became with it with a series of
55:17
Speaker 1: dates for the end of the world. And as the
55:18
Speaker 1: dates came and went without the end of the world UM,
55:23
Speaker 1: the movement lost more and more members. But there was
55:26
Speaker 1: an interesting observation that those that remained in the movement
55:32
Speaker 1: hardened their views as opposed to uh loosened their views
55:36
Speaker 1: on on this this series of predictions that the alien
55:40
Speaker 1: would would come down and whisked them away and and
55:43
Speaker 1: and end the world for everybody else, and and UH
55:47
Speaker 1: that that as people as people were shown evidence of
55:51
Speaker 1: course that this was was not true. UM that affected
55:56
Speaker 1: a number of believers, but the believers that remained actually
56:01
Speaker 1: hardened their view against the set of facts and boomerang. Yeah,
56:08
Speaker 1: the boomerang effect. And when we talk about it doesn't
56:11
Speaker 1: matter which political party or which belief system, that core
56:16
Speaker 1: has some cognitive dissonance and doesn't want to admit error,
56:20
Speaker 1: and they just doubled down no matter how much evidence
56:23
Speaker 1: you throw at them. If anything, it just makes them
56:27
Speaker 1: believe it all the more. Yeah, yeah, and and and
56:31
Speaker 1: and and that has that has implications for not only markets,
56:34
Speaker 1: but politics and lots of other things. All Right, So
56:36
Speaker 1: let's get to our final two questions before we have
56:39
Speaker 1: to let you go. What sort of advice would you
56:43
Speaker 1: give to a recent college grad or or one of
56:46
Speaker 1: your Yale students who was interested in a career in
56:51
Speaker 1: either finance or the fine art of fraud detection and
56:56
Speaker 1: short selling? Don't? Um what? What? Look? I what? I
57:05
Speaker 1: When I got into Wall Street in nineteen eighty two,
57:07
Speaker 1: nobody no, in nineteen eighty excuse me, um, nobody wanted
57:12
Speaker 1: to be there. The guy who hired me in Chicago
57:15
Speaker 1: was amused that I was looking for a job in
57:17
Speaker 1: in the investment world. Um, with the Dow at seven
57:21
Speaker 1: fifty and having gone nowhere since nineteen sixty six. And
57:25
Speaker 1: I made more money, uh, in the previous summer working
57:29
Speaker 1: in a steel mill for two and a half months
57:30
Speaker 1: that I made my first full year on Wall Street.
57:33
Speaker 1: That's how That's how out of favor Wall Street was
57:36
Speaker 1: in nineteen eighty And we talked about the pendulum was
57:39
Speaker 1: about to swing. But I didn't know it. Um. We're
57:43
Speaker 1: at the other end of that extreme right now, UM,
57:46
Speaker 1: where whereby finance has paid immensely well. For the last
57:50
Speaker 1: forty years. We've seen a financialization of the economy. UM.
57:54
Speaker 1: We've seen lower tax rates, We've seen all those things.
57:58
Speaker 1: And I've got to think that that UM. Being a
58:01
Speaker 1: money manager, whether you're a long only guy, a short seller,
58:06
Speaker 1: a hedge fund manager, a private equity guy, I think
58:09
Speaker 1: it's just gonna be a lot tougher going forward than
58:13
Speaker 1: than the last forty years has been UM. And I'm
58:16
Speaker 1: just not so sure the rates of return are going
58:19
Speaker 1: to be there. UM. Having said all that, UM, if
58:23
Speaker 1: it's something you're still you know, convinced you want to do, UM,
58:27
Speaker 1: I think you have to adjust your expectations UM as
58:31
Speaker 1: to uh how remunerative it's going to be going forward.
58:36
Speaker 1: And our final question, what do you know about the
58:39
Speaker 1: world of investing, hedge funds, short selling today that you
58:43
Speaker 1: wish you knew when you began back in that's that's
58:47
Speaker 1: literally forty years ago. Yeah, I I, Well, what I
58:54
Speaker 1: really wish is I would have just bought some uh
58:57
Speaker 1: uh some some zero coupon treasuries and you know, I
59:04
Speaker 1: just went to the beach. But UH, since I was
59:07
Speaker 1: that that prescient, UM, I think that that one of
59:11
Speaker 1: the things I certainly UM wish I wish I had known,
59:17
Speaker 1: UM was to to be far more open in what
59:21
Speaker 1: I looked at as in investing opportunities. I was a
59:23
Speaker 1: pretty US centric guy, UM until two thousand and five, UM,
59:28
Speaker 1: which is pretty late, uh, twenty years into our fund,
59:32
Speaker 1: and we did our first global global fund in in
59:35
Speaker 1: you know five, and Uh, I wish I had really
59:39
Speaker 1: spent more time looking at things like Japan in the
59:42
Speaker 1: late eighties, UH, in other places Latin America in the nineties. UM.
59:47
Speaker 1: But it's to keep your business open, then, don't don't
59:51
Speaker 1: pigeonhole yourself too much. UM. There's there's a reason you
59:55
Speaker 1: should be good at something specific. But once you once
59:59
Speaker 1: you attain that UM, that knowledge or that experience, UM,
1:00:03
Speaker 1: be willing to be willing to look at lots of
1:00:05
Speaker 1: different opportunities. UM in that in that world. We have
1:00:11
Speaker 1: been speaking with Jim Chanos. He is the founder and
1:00:14
Speaker 1: president of Kinnicos Associates. If you enjoy this conversation, well
1:00:19
Speaker 1: look up an inch or down an inch on Apple iTunes.
1:00:22
Speaker 1: You can see any of the three d and thirty
1:00:25
Speaker 1: or so such prior conversations we've had over the past
1:00:29
Speaker 1: nearly six years. We love your comments, feedback and suggestions
1:00:34
Speaker 1: right to us at m IB podcast at Bloomberg dot net.
1:00:39
Speaker 1: Give us a review on Apple iTunes. You can check
1:00:43
Speaker 1: out my weekly column on Bloomberg dot com Slash Opinion.
1:00:47
Speaker 1: Follow me on Twitter at rit Halts. Sign up for
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1:00:55
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1:00:57
Speaker 1: staff that helps put together these conversations each week. Charlie
1:01:01
Speaker 1: Volmer is my audio engineer slash producer. Michael Boyle is
1:01:06
Speaker 1: my booker slash producer. Michael Batnick is my head of research.
1:01:10
Speaker 1: A Tika Valbrann is our project director. I'm Barry Ritolts
1:01:15
Speaker 1: Hugh been listening to Masters in Business on Bloomberg Radio.