The transcript from this week’s, MiB: Jim Chanos, Kynikos Associates, is below.
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VOICE OVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
BARRY RITHOLTZ, HOST, MASTERS IN BUSINESS: This week on the podcast, what can I say, an extra special guest, Jim Chanos of Kynikos Associates. There are few people in the world who understands the side of the street that he works on better than Jim.
He is a famed investigator into financial fraud. He has been a short seller for pretty much his entire career on a fundamental basis. He understands why companies go out of business and what the signs are that investors should be looking for. He teaches a class at Yale on financial fraud. There really is no one better to discuss the world of short selling and fraud than Jim Chanos. So with no further ado, my conversation with Jim Chanos.
VOICE OVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
RITHOLTZ: My extra special guest this week is Jim Chanos of Kynikos Associates. He is famous for exposing a number of financial frauds, including Baldwin-United. He was a critic of Drexel Burnham, and he, of course, was famously short Enron, which eventually went bust in a firestorm of accounting fraud and problems. Jim Chanos, welcome back to Masters in Business.
JIM CHANOS, KYNIKOS ASSOCIATES: Always good to be back, Barry.
RITHOLTZ: Next time we do this, we’ll have to do it in-person. But for now, we’ll operate remotely and I wouldn’t get to see you wince when we talk about certain subjects. But for people who may not be familiar with you, explain exactly what Kynikos does and how you work.
CHANOS: Well, we’re celebrating our 35th anniversary this year. So what — I set up the firm in 1985 to basically provide hedge services for high-net-worth individuals. It then morphed into institutional investors.
And basically, we construct short portfolios based on fundamentals for investors who want to hedge their portfolios or go more long by being short. And so, the ethos of the firm was, I like to joke that I’m in the insurance business and what we’re trying to do is construct better hedges than just the passively hedging a portfolio using futures or ETFs. And we’re still doing it 35 years later.
RITHOLTZ: Do you tailor your short selections to a specific portfolio so you’re hedging across the board the sort of risks they have? How narrow and specific can you get?
CHANOS: Well, so we have — we have funds that are open to a broader group of investors who are qualified. And there, we have our core portfolio, whether it’s a US-only or a global portfolio, of which the U.S. is a subset.
But we also run managed accounts for large investors who have specific needs or specific restrictions. We can’t do certain things, we can’t do certain geographies, we have to be above certain market caps and so on.
And again, it’s up to the client, the idea is to is to provide the service that the client needs and wants for their needs. So we try to let the client do the asset allocation and we will dial up or dial down the short exposure as needed. In our funds, however, of course, we need to do that.
RITHOLTZ: Quite interesting. So 35 years, that’s a good long run. How has the art of short selling changed over that time period?
CHANOS: Well, it’s changed in a couple of ways. I mean the biggest change and most obvious change is the massive reduction in interest rates that have occurred over that period that’s sort of generational or more.
And that, of course, reduces returns because part of the return on the short side is the rebate you get from the prime brokers in the cash received from the short sale. There’s a misconception out there that short selling is costly. In fact, short selling actually produces income to the extent of the rate on short term rates.
So it hasn’t produced much income in the last few years given where short rates are, but back in 1985, we were starting with a 6 percent or 7 percent 8 percent head start every year because the short sale proceeds invested in cash or T-Bills yielded high single digits. So that’s number one, and that’s sort of beyond our control.
The other more interesting development is how we and other investors, I think, process information. And this applies to the long side as well. But on the short side, you really had to go out and find information in the ‘80s. If you had a 10-Q hot off the presses, if you will, from a filing, you might have information ahead of someone for two or three days. Today, information, as you know, comes at you at a fire hose.
CHANOS: And so it’s not the obtaining of information, it’s the analyzing and processing of the information and the sifting of information that I think gives you an edge in fundamental investing.
Of course, then with the advent of much more machine learning and algorithmic traders, you have basically, computers looking for word changes and looking for various different patterns at a rate at which humans can’t even comprehend.
So in some ways, generating alpha on the short side or the long side really involves sort of thinking beyond a — what the immediate information is, or more importantly, if the information being presented to you, which is often the case in my world, is intentionally misleading. And I think that’s one of the few edges that short sellers have in this environment where the computers can read things faster than you can, often that information is being gamed.
RITHOLTZ: Quite interesting. So you mentioned big machine learning, Big Data, A.I., algorithmic trading. There seems to be an infinite amount of competition on both the long-only side and the active side. What sort of competition exists on your sort of street on the short selling side?
CHANOS: Well, after 35 years and basically a bull market and certainly 10 years of a bull market, the last 10 years, as you might imagine, there aren’t a lot of people doing what I do. I think longer term, that’s probably a good thing, but the number of people who actually want to engage in fundamental short selling usually can sit around the dinner table and sometimes does.
RITHOLTZ: Well, that sounds like an interesting meal I’ll have to work my way into an invitation the next time, there’s one of those. So given the small amount of competition, what makes each short seller unique or everybody looking at the same things and taking the same positions if you’re all fundamental or are some of the short sellers out there a little more technically oriented?
CHANOS: Well, again, if we’re going to just speak about fundamental short selling, most of it is done within the guise of long/short funds. So our competition …
RITHOLTZ: Explain that a bit like a 130-30 or something like that?
CHANOS: Yeah, or just a traditional — you know, some of the well-known names that we all know in the hedge fund world, you know, have teams that look for shorts. So that’s really our competition and we consider them to be very good competition. And then you have people, of course, that specialize. You can look at someone like Carson Block that is focused internationally …
CHANOS: … and non-China. We’ve generally been generalists. We look all around the globe. Typically, we’ve always looked in the mid to large cap area. There are an awful lot of short sellers who’ve done very well focusing on small caps and micro caps. That’s never been our world. And so, you know, we’ve generally avoided for a lot of reasons, but there are people that do that.
And then you have the whole new world of activist short selling where people go out and publish on their Web site or on social media their research, you know, for everybody to see. And we’ve — our view on that is that we’ve, as you know, selectively disclose our ideas as we see fit but don’t publish long reports nor do we publish on the vast majority of our positions. We may — we may be public than 5 percent to 10 percent of our positions at any one time.
RITHOLTZ: So you raised a very interesting question here about short positions. Explain to the general investing audience why short sellers don’t like to be public with their short positions.
CHANOS: Well, there’s a — there’s a lot of reasons for a lot of them having to do with issue or retaliation, number one. One of the — there’s lots of asymmetries on the short side and one of them is that corporate managements don’t like to be held to account by short sellers by and large. And, of course, we’ll use shareholder funds — corporate funds to harass or litigate against short sellers in the — in the guise of trying to protect the company. And so that’s number one and that just raises various different agency risks for someone that does that.
And number two, I mean, like all things being equal, I think, as any businessman, you’d rather keep proprietary what you’d like to keep proprietary and only tell you — and issue public what you have to or choose to.
And I think that that’s — one of the — one of the odd paradoxes, right, of that is, is that I’ve always wondered why the money management industry has not thought back on the — on the SEC’s disclosure rules for long investors who are not in an activist campaign or not in a corporate control campaign because there were all kinds of people that follow investors in their portfolios. And for investors who don’t turn their portfolios over a lot, they’re, in effect, giving away their intellectual property for free.
CHANOS: And the industry has never really challenged that and I don’t know why.
RITHOLTZ: Let’s talk a little bit about the challenges of being short in a market that seems to want to do nothing but go up except for very brief periods. What have we, quadrupled from the lows of ’09 to the highs of 2020?
CHANOS: I think that …
RITHOLTZ: How do you maintain short positions into the teeth of that?
CHANOS: Well, so, there’s a big misconception about our business and that we run most of our accounts either actually hedged or benchmark long. So again, it gets back to the whole idea that we’re providing a hedge and not necessarily being directional for most investors.
So — and we started doing this in the mid ‘90s, and the idea being that we’re long the market in effect and short our stocks. And so, we’re relatively market-agnostic. And just generally, we’re trying to create alpha from our short positions either going down in actuality or underperforming relatively. So the idea …
RITHOLTZ: And …
CHANOS: I assume that the market will go up over time as most investors do. The problem is the failure rate among individual corporations is quite high. And so the idea is to try to win all those out from a broad portfolio.
RITHOLTZ: Quite interesting. So given that, what do you use as a benchmark?
CHANOS: Well, for the most part, for our U.S. funds, it’s the S&P 500. It’s simplest and still at the end of the day most indices will track it one way or the other with variations in certain years and then we use the MSCI for the global portfolio.
RITHOLTZ: That’s really, really interesting. So you mentioned you began with a mostly high-net-worth clientele and that’s morphed into an institutional client base. How have those changes come about and how has it affected what you do?
CHANOS: So the reason that it’s come about is that in the ‘80s, the hedge fund industry was still generally the purview of high-net-worth families and individuals. And it only really became — it wasn’t until the ‘90s that institutions and investment boards and corporate boards got more comfortable with using hedge funds and other alternatives as part of their portfolio.
And so we began to see a growth in institutional investing in the ‘90s, particularly towards the end of the ‘90s. And then — and then you had sort of the golden era of hedge funds, which was 2000 to 2006.
When hedge funds sort of made their shops (ph) in the long/short equity world, by being short, the right things in 2000 to 2002, being short the dotcom bubble stocks and telecom and a lot of the things that got taken to extremes and being long value, and so hedge funds made money on both sides of their book for a number of years and then, of course, the money flooded in.
And then the — and then basically, the — it all came crashing down for the hedge fund industry in long/short in ’07, ’08 and ’09 when hedge funds did not hedge or did not hedge as much as they should have and got caught just as much as most investors did in the — in the bear market of ’08, ’09. And it’s …
RITHOLTZ: That …
CHANOS: … been a tough swag (ph) ever since.
RITHOLTZ: Right. I very much recall something you said in one of our prior conversations. If you go back 25, 30 years, there were 500 or so hedge funds and they all created alpha. Today, there’s 11,000 hedge funds and it’s more or less still those 500 hedge funds that are the alpha generators. Still accurate?
CHANOS: I mean I think generally, I don’t know about the specific numbers anymore, but I think directionally and the magnitude, that’s still a pretty accurate statement. What the problem, of course, until I think very recently is that you just had a lot of fairly, you know, reasonably sophisticated money trading against each other.
And the reason you get lots of alpha at different parts of the market segment is because you get unsophisticated investors who come in and start providing capital and start doing dumb things with their money.
And that was certainly the case in 1999 and 2000 where retail investors stopped buying mutual funds and start speculating in stocks directly, taking things up to just incredible valuations. And for the most part, in this last bull market, we saw as mostly an institutional or passive-driven market until really the fourth quarter of last year, 2019, and the first couple months of 2020, where I saw retail investors come back in a big way as if someone flipped the switch in October, November of last year. And all of a sudden, story (ph) stocks began doing what they did in 1999 and early 2000. And that, for us, was a — was a bit of a warning sign.
RITHOLTZ: Yeah, the 10-year bull market, we’ll do that on the mom and pop side. But I’m curious on the institutional side. You’re known as somebody who identifies corporate fraud or malfeasance or companies that are potentially going to go bankrupt. What sort of a spike do you see following an event like ’08, ‘09 or what’s happened so far in 2020?
CHANOS: Well, it’s interesting. In ‘99 and 2000 and ’08, ’09, the reactions were a lot different. The 2000 to ’02 bear market was drawn out. It was every bit as vicious as ’08, ’09 and people kind of forget that, Nasdaq was down 80 percent from the peak in 2000 to ’02 and the S&P was down 40 percent, so very similar kinds of drawdowns that we saw in ’08, ’09.
In ’08, ’09, it seemed to be mostly compressed into one year, the fateful year of ’08 where it was more spread out over two years in 2000 to 2002. And what we saw in — we saw just basically some sharp rallies in both bear markets but in 2000 to ’02, the rallies were weaker and weaker and we’re sold each and every time. In ’08, ’09, it seemed to me the value seemed a lot sharper at the time but shorter given the compressed nature of what we’re seeing.
You know, as to what just happened in March, April, I have no idea yet. I don’t know that anybody else does. We’ll see. I mean certainly, the willingness to speculate has come back very quickly in the month of April from what we saw in March.
And in that, I think as any observer of the market will tell you, that is at least a little bit disconcerting given how fast people are willing to sort of overlook what appears to be happening to the economy with the assumption that everything will be just fine come 2021. And certainly, that might be the case, but it might not, we just don’t know,
RITHOLTZ: Well, we’ll get to the markets and the academy in a little bit. I’m intrigued by the — your reference of rallies during a bear market. I recall very vividly watching a stock you were short, Enron, fall for a year, a year solid, and it did not move in a straight line. It would drop 15 percent, 20 percent and then rally back almost two thirds, three quarters of what it lost.
How challenging is it to sit in a position like that that you’re short and it feels like you’re getting — even though you’re on the right side of the trade it feels like you’re getting your face ripped off every day?
CHANOS: Yeah, it’s — and those rallies test your conviction. And the idea is that if the fundamentals haven’t changed or certainly getting worst, you know, you just have to keep your conviction and watch your risk levels like anything else.
But yes, it does seem to me and to others that companies that are particularly controversial and going into what might be their terminal phase tend to have increased trading volatility. And that is just we take as a given, so we give these things a little bit more wide parameter when they — when they begin to have problems.
But yes, I mean I remember — I remember a number of situations in the last 20 years where the company ended up going bankrupt and yet there was a series of 40 percent and 50 percent rallies along the way that would have you believe that everything was fine and they’d solve their problems, when in fact, they never had.
RITHOLTZ: My big take away from being short specific companies in ’08, ’09 was to learn to marry a put as opposed to merely being short naked to stock. I wish I had learned that before the crisis as opposed to after, but such is life.
RITHOLTZ: Let’s talk a little bit about where we are in the state of the economy and the state of the market. It’s the end of April 2020, this market has recovered a substantial portion of the selloff that began in February 2020. Are the markets being optimistic, too optimistic, or are they seeing something that the rest of us might not be seeing?
CHANOS: Well, obviously, it’s too early — it’s always too early to tell, but what I would say is that we’ve been saying that I think market participants, whether you’re a bull or bear, writing off 2020 as, you know, just a massive, massive deceleration and decline in the economy, and really, the markets will look forward to figuring out, “Okay, what a business is worth based on sort of a normalized rate of return?”
And that’s where things get interesting because if you look at — if you look at where the markets have come back to, we were supposed to — we were supposed to make about $175 on the S&P this year, that’s out the window. I think the number was roughly about $170 last year.
And so, the estimates I’ve now seen for 2021 have the S&P back to the sort of $170 number but that’s starting to come down. So, we basically discounted back a recovery, i.e. for lack of a better term, a full recovery in 2021. And I’m just not so sure that at least in the case of some businesses that that optimism might be a little bit misplaced.
RITHOLTZ: So, let’s stay with that theme. If we’re looking at originally 2020 profits on the S&P 500 of $170, first question is, where do you really see that number shaking out by the time 2020 is over? And second, what sectors are going to be the biggest pain points of that decrease in profitability?
CHANOS: So, I mean, you know, for 2020, it’s anyone’s guess, and I think we’ll see a lot of the kitchen sink phenomenon that management teams will realize that Wall Street is giving them a pass for this year. So, they’re going to — they’re going to load whatever costs they can in the rest of this year.
Where I am a little bit more skeptical is in terms of ongoing profitability in 2021. I will be surprised, but it certainly could happen. But I will be very surprised if we’re at 2019 levels of profitability in 2021.
And certainly, for some industries, I think it’s going to be a lot more challenged whether you’re, you know, in the — in the travel or leisure business, the restaurant business, a variety of other things companies are relying on, sort of robust supply chains are going to have problems.
And consumer behavior may change. We don’t know yet. I mean we’re — everyone is in lockdown. And what kind of permanent changes are there going to be, you know, in a post-pandemic world? I don’t know that we know for sure.
And then on top of that, I think we’d be remiss if we didn’t talk about not only the political side but the political clasp (ph) of Corporate America from another round of bailouts. And I really think it will be hard pressed for Corporate America to keep a 21 percent corporate tax rate going forward, for example.
And that makes a huge difference that we did some numbers. And that $170 2019 level on the S&P 500 drops down to $135 if you change the tax rate back to 35 percent, which is, what, one of the parties is certainly advocating. And so you could just simply get a rescission of the Trump tax cuts as one possible alternative that would change earnings power for the intermediate term, you know, rather permanently.
RITHOLTZ: Quite interesting. Here’s the pushback I hear to that, and it goes something like this. After September 11th, we heard that nobody was going to fly again, that travel was going to be a problem, real estate in New York and big cities were going to be affected, and we ended up not seeing that sort of response after six months or so. Might we see the same sort of recovery?
CHANOS: Absolutely and we certainly might, but after — I mean I think we understood that 9/11 was the instance of wrong place wrong time, right? I mean so there were — there were countries and peoples who’ve lived with terrorist attacks such as the U.K. and Israel and other places for decades, right, and we had a — we had a basic template there that those economies generally shrugged off terrorist events that were, you know, bombings and that sort of thing.
The U.S. being the U.S., we handle this a little differently, we went to war. But I think that there was a sense that, “Okay, you were in the wrong square or wrong building.” You know, that is a sad thing, but a pandemic is something quite different because it transmits.
And so I think that that’s why this is — this is so different and I think is going to be with people for a while in the way they change their behaviors. Again, I certainly expect that most activity will go back to somewhat normal, but Corporate America generally is a very leveraged entity.
And we’ve had years and years and years and years of cost cutting, we’ve had interest rates go down to 0 percent, we’ve cut corporate tax rates dramatically, so you have — you have operating margins and net margins that are about as good as they’ve ever been.
Keep in mind that revenue growth has not been great in the last 10 years. And so you had — you had a global economy that was slowing before coronavirus and we haven’t even gotten to my favorite country, China, yet.
And so there — small changes in activity here could have disproportionate impacts on profitability for lots of different industries, and yet, it would seem to be back to normal, you know, as we go about our day-to-day lives. It just might be the Corporate America is not as profitable as it used to be.
RITHOLTZ: So you referenced China, let’s briefly look at what’s going on there. How significant is this pandemic to that giant, populous nation? And what is their business community look like, what is their investment climate look like in the years once we get past this pandemic?
CHANOS: Yeah, I think that one of the underappreciated things that’s happened during this pandemic has been a dramatic hardening of US-China relations that has occurred for a lot of reasons, including the pandemic itself.
But keep in mind, last month, China expelled a number of Western journalists from the country. We’ve had this war of words between the Trump administration and China regarding the pandemic source.
But — and this had happened last year when we were having the trade talk travails, I think it would have been far more newsworthy, but it’s been kind of been put on the back page. But I think that the West’s view and even Europe’s view of China has hardened dramatically in the last few months. I know, certainly, the Democratic — the Democrat’s view of China has also hardened in the last handful of months.
So we have a situation where we’re getting a little bit more adversarial politically, so for whatever that means for ongoing trade talks. But I also think that Corporate America has kind of learned this lesson with the tariffs and everything else that there’s an increasing nationalism at work here and that bringing your supply chain out of China may make some sense.
On top of all that, China still remains the — to me, the big credit story globally. We just took — updated our — looked at all the Chinese large banks, for example, and they basically grew their assets last year anywhere from 10 percent to 15 percent, sort of as they have been.
So, you know, every year, China seems to grow its debt at some multiple of nominal GDP. And we’ve joked that this can’t keep going on forever, but so far, it has. But now, we see just monstrous amount of debts, mortgage debt, personal debt, corporate debt, in the Chinese economy. And that’s something that China still is going to have to grapple with going forward. They haven’t had to do so, you know, in a major way, but at some point, it will — it will happen. Chinese apartments are still the most important asset class in the world in my view.
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RITHOLTZ: We were talking earlier about the challenge of being short in the face of a rising market when we see the government reaction to a crisis, when we see the Fed adding a couple of trillion dollars to their balance sheet and Congress passing the CARES Act, which was over $2 trillion. I guess we’re going to have to start calling that CARES Act 1 because it looks like there’s more and more of that coming. What does that do to the market? What does that do to the economy? And how do you feel about being short in the face of almost $5 trillion in stimulus?
CHANOS: Well, first of all, remember, we’re — as I mentioned, we’re also long the S&P and the MSCI.
RITHOLTZ: Got it.
CHANOS: So again, we try to focus on how central bank activity impacts certain industries and our stocks. But I think that one thing I will say, you know, regarding the CARES Act and the PPP payroll assistance programs is that once again, the federal government has been asked to backstop business.
And I don’t want to get into the semantics and the — and the ideology of whether or not this is capitalism or not capitalism. I have my views on that as everybody else does. But what I do think is that it means that if the U.S. taxpayer is going to stand behind Corporate America for every unanticipated risk, and I do look askance at people who say, “Well, nobody could have foreseen this, so therefore, you know, everybody deserves a bailout of some certain amount.” My point on that is that the real risks are always the ones you don’t foresee because if you do foresee them, you mitigate them or insure against them.
And so if the taxpayer is once again going to be on the hook for trillions of dollars to support businesses and support their employees, and I certainly think we should be supporting their employees, I’m not — I’m not as convinced on the rest of the corporate bailouts.
Well, then certainly, I think that the taxpayer deserves a premium going forward, and that corporate tax rates should in fact go higher because, in fact, that should be, in effect, the insurance premium that is paid to the U.S. taxpayer every year to cover these blanket risks that keeps showing up every 10 years.
And so — and I think that’s going to be a very strong case to the American public that if you’re going to stay behind Corporate America with the U.S. Treasury and also the Federal Reserve by either currency then you should be compensated for it. And I think that — that I think is going to be a pretty strong argument.
RITHOLTZ: Yeah, I’m fascinated how not only are there no atheists in foxholes, but there are no Austrians or libertarians during financial crises. It’s amazing how suddenly everybody becomes pro-bailout at the first sign of trouble.
But you raise a really interesting question about the upcoming election. Is this going to be essentially a referendum on how President Trump has handled the coronavirus or is this a bigger ideological debate between labor and capital, between taxpayers and bailouts?
CHANOS: Yeah. So I have this view that, you know, labor is kind of — I don’t know if it’s a Marxist view or whatever, but I do believe that we’ve seen in the U.S. these sort of long waves of capital versus labor, and labor became ascendant with the new deal in the — in the ‘30s.
And we took a much more — a much more status approach toward helping workers. Some countries took the status approach too far in the — in the late ‘30s, we ended up in war.
But that all changed with the great inflation of the ‘60s and ‘70s and the fact that business was on its rear end and capital had been treated pretty shabbily particularly from the late ‘60s to the late ‘70s, and with the election of Margaret Thatcher in ’79 in the U.K. and Ronald Reagan in the U.S. in the ’80, the pendulum began to swing back and we began cutting capital gain taxes, central banks aggressively– the Paul Volcker fought inflation. And we saw returns on corporate assets, you know, begin to appreciate dramatically.
And, of course, we also know that median wages and labor rates pretty much hit their peak in the late ‘70s. And so, I think that there was — has been a long sense punctuated by acceleration in the global financial crisis that the little guy was being left behind, the worker was being left behind.
And I think in an interesting way, Donald Trump tapped into that in 2016. I just don’t think that he really meant it. And i.e., it was just a message to get elected as opposed to following through with policies that would really, really changed that.
With this latest set of bailouts, I think when fear turns to anger, as it inevitably will, as we sort of look at, you know, who got bailout money, who took money they shouldn’t, we’re already seeing some of that. I think that that anger is going to be stoked even more.
And so the question is, do we finally see policies like a rising minimum wage, higher corporate taxations, higher rates on capital gains, end of carried interest? That is a lot less capital-friendly and a lot more labor-friendly coming out of this. And that’s I think going to be one of the most important political economy questions that investors will have to think about.
RITHOLTZ: That’s quite interesting. I think you are dead on when you referenced Trump’s brilliant messaging in 2016. There’s a footnote discussion about whether when he first began running, he really wanted to win or it was just a brilliant marketing ploy.
But he has tapped into a form of nationalistic popularism that certainly resonates with 30 percent to 40 percent of the electorate. So really, what is the 2020 election about if not the incumbent? It sounds like you think there is a longer cycle and the pendulum is swinging from one extreme and is beginning to reverse and heading the other direction. Am I misstating that?
CHANOS: I think there is. I mean if you look at certain U.S. polling things, I mean look at the support for a national health care program. It’s broad, it’s dramatic, and it cuts across party lines.
Look at the support for higher minimum wage. Again, it’s broad, it’s dramatic, it cuts across party lines. There’s a number of these issues that cut across party lines that I think the heads of the parties have tried to sort of ignore that because obviously, there’s lots of — you know, lots of donor interests for it to be ignored.
But there really is a view out there. And I think another set of bailouts is only going to make this sense that we’ve had since the global financial crisis of unfairness of how taxpayers were bailing out, you know, guys who shouldn’t have been bailed out. We’re going to see that again in a major way I think after 2020. And you ignore that at your own peril.
I keep, you know, telling people this is the set of circumstances we have now for corporate returns and Corporate America is about as good as it’s going to get. I mean it’s going to be really hard after years and years of cutting interest rates, cutting taxes, cutting costs, going global, slashing labor rates.
You know, this is — this is pretty good, and there are lots of reasons to believe that you will revert to the mean in some of those — some of those items. And that could have just huge implications, as I mentioned earlier, for corporate profitability.
RITHOLTZ: So I recall in 2016, you were a pretty big donor to the Democrats. Who did you like originally in the Democratic primary and what do you think of the race now that it’s become head-to-head between Trump and Biden?
CHANOS: Well, I mean as I think you know, I mean I’m a longtime friend and supporter of the Vice President, so I actually wrote in his name in 2016. And so, I want to be consistent.
RITHOLTZ: Wait, was that in — was that in New York or in Florida because if it was in New York …
CHANOS: It was in New York, the New York voting.
RITHOLTZ: All right.
RITHOLTZ: So we’ll let you — we’ll let it go. If it was in Florida, there’s going to be thin wagging (ph).
CHANOS: (Inaudible). Yeah, I …
CHANOS: And I — and I did so with that in mind both as a New York voter. But look, I think that — I think for lots of reasons that we don’t need to get into, he’s a far better candidate. Not least of which I think we’re going to need given the polarity in this country. I think we’re going to need a period of healing not only internally but externally with our allies.
And I think Vice President Biden is far better able to do that and then turn this over to the next generation of Democratic leaders, which I think he will do. But it’s going to be — look, it’s going to be an interesting election. I think that all accounts are — you know, it’s a pretty tight race as of spring of 2020. A lot can happen in the next six months as we know. It’s also going to boil down to a handful of states.
Although I did see one interesting thing that made me –that gave me a little bit of pause and that is, someone pointed out that there are eight states that Trump took in 2016 that are basically, right now, in the toss-up category within margin of error. There are no states that Hillary took in 2016 that are in that same category.
RITHOLTZ: That makes a lot of sense. You — I have to go back to a part of your statement earlier because it sounded like you were hinting that you think Biden is going to be, assuming he’s elected, only planning on staying one term. Did I — did I pick up that?
CHANOS: No, you …
RITHOLTZ: Turn it over to the next generation?
CHANOS: You are — you are — you’re putting words in my mouth. I did not say that. However …
RITHOLTZ: Okay, yes.
CHANOS: I think that — I think that his vice president selection will be made with that obviously in mind. And I think that I would be very surprised if the vice president chooses someone who’s 75 years old to be his running mate.
RITHOLTZ: So not Elizabeth Warren or Bernie Sanders?
CHANOS: I suspect it wouldn’t be, but I don’t know anything.
RITHOLTZ: All right.
CHANOS: I suspect — I suspect it will be a younger woman.
RITHOLTZ: So like an Amy Klobuchar or someone of that generation?
CHANOS: Probably. As I say, I don’t know anything and so I think we’ll know that within the next month or so. But I suspect, it will be a younger woman.
RITHOLTZ: So how concerned are you as a Democrat about Biden’s reputation as a gaffe machine?
CHANOS: So, the things that endear people to Joe Biden I don’t think have changed and I don’t think the Vice President has changed. He is a plain talker. He says what’s in his head and his heart and I think that the people — actually the people that liked Joe Biden liked him for that.
And, you know, then, again, can we just compare him to who’s in the white House now? And so like for anyone that always raises that issue, I’ve also seen — you know, spent time with the Vice President and will tell you, you know, I’ve seen the man very recently by heart repeat legal opinions.
For example, Scalia’s legal opinion on handguns that was written back a number of years ago, in a debate on gun control he had at my apartment, I saw the Vice President literally recite verbatim paragraphs in that opinion.
And this is someone who — who’s been in office for a long, long time both in the Senate and as Obama’s Vice President. He knows things and he knows people who know things. And he’s based his decision on science.
And again, I mean this is — this is what I think most of us, whatever your political leanings, kind of expect of people in the highest office in the land, and to me, that that would be a refreshing change. But as I say, it’s going to be a tight — it’s going to be a tight — it’s going to be a tight election and it’s going to come down to the wire.
RITHOLTZ: So I completely disagree with you and I will save my rebuttal for the next time we have you at dinner. I have two last political questions I have to ask. One is, you mentioned the President has his own tendency towards gaffes.
I’ve heard a lot of people say, nothing sticks to this president time and time again as both a candidate and an elected official. He does things that would have absolutely torpedoed any other candidate. What are your thoughts on that? I have some of my own. How has he managed to become the Teflon Don?
CHANOS: Well, Barry, I mean, you have to remember, in U.S. political history, 40 percent of the country will vote for a potted plant because it’s not the other guy.
CHANOS: You know, in all of the biggest landslide elections, the loser got around 40 percent of the vote. I think McGovern got 38 as I recall. But I mean it just — it is — we are to extent, you know, it’s your guy right or wrong in the United States and so that number usually coalesces around 40 percent.
And so I think that for people that are going to try to put — try to put rationalization as to why people support one candidate or another, you know, despite whatever they do, you can kind of start at 40 percent and then figure it out.
And what that means is that this election is going to come down to independence again. And one of the things that struck me in the 2016 election in the exit polling was that if you look at people that disliked both candidates …
CHANOS: … they tended to then vote for Donald Trump.
RITHOLTZ: Right, right.
CHANOS: And I …
RITHOLTZ: So I — so I just saw an article yesterday that said, over the past two months, the number of 2020 undecideds has just about doubled which is quite fascinating.
CHANOS: Yeah. So I think that once we get out of our bunkers and we — there’s a bit of a normalized campaign, I think you’ll see the differences, I suspect you will. And let’s not forget, I mean this last election also came down to about 80,000 votes in five states.
CHANOS: And it was a much closer run thing than I think others would have you believe.
RITHOLTZ: Oh, yeah. He threaded the needle and you had the call-me (ph) situation a week or two before the election. And his margin of victory in those five states was actually smaller than the votes that Jill Stein got.
CHANOS: Exactly. And so, again, I think that, you know, we do a lot of conclusions from that, but on the other hand, I suspect the Biden campaign — kind of know the Biden campaign understands this, understands the battleground states. I think that they will not make some of the mistakes the Clinton campaign made and we’ll see. But it will, again, be a close thing.
RITHOLTZ: Last political question before we move on, had the coronavirus pandemic erupted a year earlier? Would Andrew Cuomo be the Democratic nominee?
CHANOS: I’ll pass. I’m a friend of the governors as well, so I’m going to pass on that question.
RITHOLTZ: All right. Well, you could — you could pass that along to me — to him on my behalf and tell him that’s what I’m thinking. All right. So let’s do our favorite questions we ask all of our guests.
You’re under lockdown, you happen to be in Florida. What are you streaming these days? Tell us what you’re watching on Netflix, what are you listening to in podcasts? What are you doing to keep entertained during this shelter in place?
CHANOS: Well, I mean, first of all, I’ve been teaching my Yale class on financial fraud remotely this spring, so one day a week I’ve had to — I’ve had to get acquainted with my class remotely and do my lectures.
In terms of entertainment, I will tell you one thing late that we have watched recently that apropos of our political discussion that I really, really have gotten into is the new series on FX, Mrs. America, which is the story of Phyllis Schlafly and the STOP ERA movement versus the National Organization for Women, Gloria Steinem, Bella Abzug, Betty Friedan.
And it’s just a great 1970s period piece. Cate Blanchett plays Phyllis Schlafly, and it’s well done. As someone who went through that as a kid of the ‘70s, I’ve gotten a kick — I’ve gotten a kick out of — out of that series recently.
And I just finished — I just finished a great boxes since I’m stuck in Miami. I finished a great book, a financial history book, which I would highly recommend to your listeners on the great Florida land boom that is just a fantastic history of the first credit bubble of the roaring ‘20s, which was the Florida land boom and the Miami Beach land bubble from 1920 to 1925 that preceded the great crash. And it’s just a great history of Florida and a great history of sort of speculation gone mad before the hurricane hit and dashed all those hopes. So it’s a terrific financial read.
RITHOLTZ: So let’s stay with books because the — one of the last times we had you on, you recommended a book that I ended up not only loving but recommending to a bunch of people who also loved it, and that was, “A World Lit Only by Fire”. Just a fascinating …
CHANOS: Oh, yeah.
RITHOLTZ: Just a fascinating history. Tell us some other favorite books you like to recommend. What else are you reading?
CHANOS: I’ll give you one — I’ll give you one from my bookshelf that I dust off every few years and I picked it up again. It’s on my nightstand. I’m going to try to get through it hopefully when my class ends in a few weeks.
But every four or five years, I come back to the great Carl Sagan’s book, “The Demon-Haunted World”. And I can’t — and I can’t — I don’t know if you know it, but …
CHANOS: … it’s a terrific book by Sagan, one of the last he wrote before he passed away about how we think about things as a — as humanity and why we believe certain things we do in the absence of evidence.
And he goes into, you know, whether it’s witchcraft or belief in ghosts or whatever it might be, belief in — you know, what makes it particularly topical is the belief in cures with no evidence as we’ve seen more recently with the coronavirus and why people are willing to glom on to stuff.
And it’s just a wonderful — a wonderful book about kind of why we are who we are when it comes to belief in the supernatural and in a variety of other sort of beliefs we have. It makes me think every time I reread the book.
RITHOLTZ: I have that book on my shelf and I haven’t read it in, I don’t know, 20-something years, but I’m going to pull that off. And I’m also going to give you a related recommendation. I’m trying to remember his name, but the name of the book is called, “Heretics of Science”. The author is a journalist I think out of Australia or the U.K., and he embeds himself with the wackiest of groups trying to figure out the flat-earthers and the answer anti-vaxxers and just the KKK, like one group after another that is very much looked askance at by the general public.
And his conclusion more or less is, all of these folks have a very fundamental error in their basic world’s model in their head and it’s like aiming for the moon. If you’re off by a couple of inches, you miss by millions of miles.
And extrapolating a little bit of flat earth into the rest of the world, you end up with fairly normal otherwise people who believe absolutely insane things. You, of all people, would like it because you’re in the business of figuring out what’s true, what’s false, and why people sometimes believe things that just are kind of wacky.
CHANOS: I will — I will order it today. Thank you for that recommendation. So it reminds …
RITHOLTZ: (Inaudible). Right.
CHANOS: It reminds me of that great study and I think there was a book out of the University Chicago in the late ‘50s where the researchers embedded themselves into a group that believed aliens were to come down and end the world.
And as it became — with a series of dates for the end of the world, and as the dates came and went without the end of the world, the movement lost more and more members. But there was an interesting observation that those that remained in the movement hardened their views as opposed to loosen their views on the series of predictions that the alien would come down and whisk them away and end the world’s for everybody else.
And that as people — as people were shown evidence, of course, that this was not true, that affected a number of believers. But the believers that remained actually hardened their view against the set of facts.
RITHOLTZ: The boomerang effect.
CHANOS: And some of that as well.
RITHOLTZ: Yeah, the boomerang effect. And when we talk about it doesn’t matter which political party or which belief system. That core 40 percent has some cognitive dissonance and doesn’t want to admit error and they just double down no matter how much evidence you throw at them. If anything, it just makes them believe it all the more.
CHANOS: Yeah, yeah. And that has — that has implications for not only markets but politics and lots of other things.
RITHOLTZ: All right. So let’s get to our final two questions before we have to let you go. What sort of advice would you give to a recent college grad or one of your Yale students who was interested in a career in either finance or the fine art of fraud detection and short selling?
CHANOS: I don’t. When — look, I — when I — when I got in the Wall Street in 1982, nobody — no — or 1980, excuse me, nobody wanted to be there. The guy who hired me in Chicago was bemused that I was looking for a job in the investment world with the Dow at 750 and having gone nowhere since 1966.
And I made more money in the previous summer working in a steel mill for two and a half months that I made my first full year on Wall Street. That’s how — that’s how out of favor Wall Street was in 1980, and we talked about the pendulum was about to swing but I didn’t know it.
We’re at the other end of that extreme right now whereby finances paid immensely well for the last 40 years. We’ve seen the financialization of the economy, we’ve seen lower tax rates, we’ve seen all those things.
And I’ve got to think that being a money manager whether you’re a long-only guy or a short seller, a hedge fund manager, a private equity guy, I think it’s just going to be a lot tougher going forward than the last 40 years has been. And I’m just not so sure the rates of return are going to be there. Having said all that, if something is still — you know, convinced you want to do, I think you have to adjust your expectations as to how remunerative it’s going to be going forward.
RITHOLTZ: And our final question, what do you know about the world of investing hedge funds short selling today that you wish you knew when you began back in 1980? That’s literally 40 years ago.
CHANOS: Yeah. I — well, what I really wish is I would have just bought some zero coupon Treasuries in 1981 at 14 percent and, you know, just went to the beach, but I was that prescient. I think that one of the things I certainly wish I had known was to be far more open in what I looked at as investing opportunities. I was a pretty US-centric guy until 2005, which is pretty late 20 years into our fund and we did our first global fund in 2005.
And I wish I had really spent more time looking at things like Japan in the late ‘80s and other places, Latin America in the ‘90s. But it’s to keep your business open and don’t pigeonhole yourself too much.
There’s a reason you should be good at something specific, but once you — once you attain that knowledge or that experience, be willing to — be willing to look at lots of different opportunities in that — in that world.
RITHOLTZ: We have been speaking with Jim Chanos. He is the Founder and President of Kynikos Associates. If you enjoy this conversation, well, look up an intro down an inch on Apple iTunes. You can see any of the 330 or so such prior conversations we’ve had over the past nearly six years.
We love your comments, feedback and suggestions. Write to us at firstname.lastname@example.org. Give us a review on Apple iTunes. You can check out my weekly column on bloomberg.com/opinion. Follow me on Twitter @Ritholtz. Sign up for our daily reading list @ritholtz.com.
I would be remiss if I did not thank the crack staff that helps me put these little conversations each week. Charlie Vollmer is my audio engineer/producer. Michael Boyle is my booker/producer. Michael Batnick is my head of research. Atika Valbrun is our project director. I’m Barry Ritholtz. You’ve been listening to Masters in Business on Bloomberg Radio.
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