WEBVTT - Carson Block Talks Short Selling, Politicians

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

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<v Speaker 2>Joining us now is a man known for his bearish

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<v Speaker 2>best best known for it one of the few sleast

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<v Speaker 2>standing activists short sellers really left out there. That is

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<v Speaker 2>Carson Block, founder and CIO of Muddy Waters Capital, and

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<v Speaker 2>would love to start with you on the environment here

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<v Speaker 2>for a minute, because there is a lot of conversation

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<v Speaker 2>about how difficult it can be to short in this market,

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<v Speaker 2>particularly whether you call it a melt up, whether you

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<v Speaker 2>call it a bull market, you certainly see even the

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<v Speaker 2>unprofitable names or even some of the potentially troubled names

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<v Speaker 2>moving higher. How do you feel.

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<v Speaker 3>It's never been a good time to be a short seller?

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<v Speaker 2>I suppose.

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<v Speaker 3>But a lot of what drives stocks these days, and

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<v Speaker 3>your previous guest guest was talking about factors, and that's

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<v Speaker 3>the thing. It's really so much of what moves stocks

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<v Speaker 3>is really just flows into and out of index funds,

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<v Speaker 3>so mainly into index funds. So as a short seller,

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<v Speaker 3>you have to be attuned to that, and really you

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<v Speaker 3>have to stay away from names that have significant passive

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<v Speaker 3>ownership because effectively that just shrinks the supply of the stock.

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<v Speaker 3>And when you have inflows into those passive funds. They

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<v Speaker 3>will buy those at any price. So that is something

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<v Speaker 3>that has warped the environment and caused a disconnect between

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<v Speaker 3>fundamentals and the prices of the stocks.

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<v Speaker 1>Carson, that's really interesting. We heard something similar from David

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<v Speaker 1>Einhorn talking about how these passive flows have sort of

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<v Speaker 1>just fundamentally changed markets. I do want to bring you

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<v Speaker 1>some sound from our interview with Jim Chainos a month

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<v Speaker 1>ago on the Close. You had some interesting things to

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<v Speaker 1>say about the state of short selling.

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<v Speaker 4>I've called this the golden age of fraud.

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<v Speaker 3>So there's just so many coming, so many companies now

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<v Speaker 3>that are playing games that are to try and take

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<v Speaker 3>advantage of investors.

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<v Speaker 4>So we need short sellers more than.

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<v Speaker 1>Ever, the golden age of fraud. Of course, Jim Chanos's

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<v Speaker 1>perspective that we need short sellers more than ever. But

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<v Speaker 1>talk to me about the fundraising environment. I mean, is

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<v Speaker 1>there investor demand for those short sellers.

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<v Speaker 3>Well, when I began raising money, so I was first

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<v Speaker 3>in the activist short seller, didn't have a fund and

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<v Speaker 3>then we launched and my initial conversation, so we're talking

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<v Speaker 3>twenty fourteen, twenty fifteen, were a lot of them flowed

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<v Speaker 3>in the following way, which is, oh, you know, we're

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<v Speaker 3>we're concerned about the valuations, we're concerned about the market.

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<v Speaker 3>We want short exposure, but we just don't want to

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<v Speaker 3>lose money when the market goes up. And it's like, well,

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<v Speaker 3>you can't really have it both ways, guys. And since

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<v Speaker 3>then the environment's only gotten worse. I mean, Jim, you know,

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<v Speaker 3>Jim is shut down his hedge funds because, yeah, investors,

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<v Speaker 3>investors don't want to pay the price for that insurance

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<v Speaker 3>policy that is your traditional short selling strategy. They don't

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<v Speaker 3>you know, they don't care about alpha. And you know,

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<v Speaker 3>i'd say that also one of the things to Jim's

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<v Speaker 3>point about the Golden Age of fraud. Yes, there are

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<v Speaker 3>more companies playing more games. You know, a lot of

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<v Speaker 3>them are in the gray zone. You don't know whether

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<v Speaker 3>it's over the line or not, so they're not going

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<v Speaker 3>to get prosecuted in this environment, and some are over

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<v Speaker 3>the line. But you know, I think that twenty thirteen

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<v Speaker 3>was a tipping point where on the longside, investors stopped

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<v Speaker 3>being remunerated for caring about risk and it became just

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<v Speaker 3>about buying narrative. And so the alongside investors who didn't

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<v Speaker 3>make that transition. Who still cared about risk, Well they

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<v Speaker 3>became the butt of jokes or deride it as value investors.

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<v Speaker 3>And I think that that's one of the transitions that

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<v Speaker 3>David Einhorn went through, was realizing that you have to

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<v Speaker 3>look at things differently than you know, than you used to.

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<v Speaker 3>So that's that's the problem. Like, yes, the market needs

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<v Speaker 3>most short sellers more than ever given the amount of

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<v Speaker 3>games that are being played. But if alongside doesn't care,

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<v Speaker 3>then you know, this can continue until it doesn't.

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<v Speaker 4>Basically, So Carson, that's the sort of markets explanation. I

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<v Speaker 4>wonder about the political issue because during the Biden administration,

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<v Speaker 4>the Department of Justice and the SEC have opened investigations

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<v Speaker 4>into short sellers, accusing them of market manipulation.

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<v Speaker 3>You would think that the.

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<v Speaker 4>Democrats should appreciate, you know, speaking truth to power, holding

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<v Speaker 4>corporate America accountable, pulling back the curtain and showing that

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<v Speaker 4>it's not a wizard, it's a dude back there, you know.

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<v Speaker 4>So do you expect anything different if we were to

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<v Speaker 4>have a second Trump adminis stration or do all politicians

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<v Speaker 4>hate short sellers?

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<v Speaker 3>Well, it's interesting because when just small correction and nobody

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<v Speaker 3>has been accused of market manipulation yet so.

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<v Speaker 4>To be just investigations by right have been open. Yeah.

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<v Speaker 3>Yeah, So I mean, look, we were you know, we

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<v Speaker 3>received subpoenas and you know, search warrant back in twenty

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<v Speaker 3>twenty one, which, yeah, that's the data. You know, I'm

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<v Speaker 3>sure my then eight year old son will never forget.

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<v Speaker 3>So yeah, I've got a you know, I've got a

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<v Speaker 3>real personal issue with with this. But I think one

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<v Speaker 3>of one of the things that I that I realized

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<v Speaker 3>was at the SEC when they were making these cases

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<v Speaker 3>in twenty ten to twenty thirteen ish, based on work

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<v Speaker 3>that activis short sellers had done. Well, a lot of

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<v Speaker 3>those people left the agency and they now bill twenty

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<v Speaker 3>three hundred dollars an hour working for big law firms.

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<v Speaker 3>So I'm not sure that the agency has much of

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<v Speaker 3>an institutional memory of how helpful short sellers have been

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<v Speaker 3>to it. And when you look on the whistleblowers side,

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<v Speaker 3>you know, there's that SEC whistleblower program. It seems that

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<v Speaker 3>the SEC is now trying to actually, you know, contrary

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<v Speaker 3>to the law, there's no law that states you're differently

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<v Speaker 3>situated if you're a short seller versus company inside or

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<v Speaker 3>who's blowing the whistle. But it seems like the SEC

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<v Speaker 3>is trying to make it harder for whistle blowers to

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<v Speaker 3>actually get paid when the SEC has recoveries. So I

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<v Speaker 3>chalk it up to no institutional memory. Number one and

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<v Speaker 3>number two, there's this populism, right, there's political populism, but

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<v Speaker 3>that's infiltrated the markets, and I think Elon Musk is

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<v Speaker 3>really the first to recognize that in the markets and

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<v Speaker 3>use that to push Tesla up. But I think that

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<v Speaker 3>that part of that populist message. It's easy to demonize

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<v Speaker 3>short sellers as part of the populist message and somehow

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<v Speaker 3>call us the suits. You know, that was a really

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<v Speaker 3>weird moment in twenty one when that started happening.

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<v Speaker 1>Well, Carson wrapping it all together. I mean, you think

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<v Speaker 1>about the regulatory overhang, the political demonization it sounds like

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<v Speaker 1>you'd call it of short sellers, and then the fact

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<v Speaker 1>that you have those market dynamics, all of that passive

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<v Speaker 1>money coming in. I mean, do you see the short

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<v Speaker 1>selling industry shrinking from here? What's the outlook?

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<v Speaker 3>Well, you have to differentiate the traditional short sellers who

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<v Speaker 3>are not talking about the stocks they're short and they're

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<v Speaker 3>typically going to be short fifty to eighty names for

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<v Speaker 3>fundamental reasons. Melting ice cubes from what we do, which

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<v Speaker 3>is we look for companies that have been generally, you know,

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<v Speaker 3>really greatly misrepresenting the information they give to investors, if

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<v Speaker 3>not outright lining. I think the former that's a very

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<v Speaker 3>difficult business right now, because you know, it's just again

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<v Speaker 3>there's this inclination to buy narratives and allocators don't really

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<v Speaker 3>want to lose money waiting for paying for this that

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<v Speaker 3>insurance policy. For what we do, there's still, as Jim

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<v Speaker 3>makes clear, right there are plenty of companies that are problematic.

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<v Speaker 3>The question always is is whether investor apathy Investors in

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<v Speaker 3>a given name, whether they're so apathetic that the problems

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<v Speaker 3>that we find won't matter to them, And when you

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<v Speaker 3>have an environment in which there's no enforcement that contributes

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<v Speaker 3>to it.

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<v Speaker 2>Carson, I want to switch gears a little bit and

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<v Speaker 2>talk about sectors, because you have been clearly targeting certain

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<v Speaker 2>areas and one of very high interest to investors right now,

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<v Speaker 2>that is a commercial real estate market. You've had this

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<v Speaker 2>short when it comes to b XMT Blackstones Mortgage Trust,

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<v Speaker 2>and it has been down about ten percent on the year.

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<v Speaker 2>Clearly you've made some money, But to what end are

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<v Speaker 2>you looking to short this stock? They they have one

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<v Speaker 2>point seven billion of liquidity. How much further are you

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<v Speaker 2>going to go here?

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<v Speaker 3>Well, our thesis from when we unveiled it in December

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<v Speaker 3>of last year is that in the second half of

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<v Speaker 3>this year, the XMT is going to cut the dividends.

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<v Speaker 3>So we're generally not forward looking in what we do,

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<v Speaker 3>but our BXMT short is different and it was based

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<v Speaker 3>on this information asymmetry. We got a hold of CLO data,

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<v Speaker 3>so CLO loan data, which that's apparently emblematic of bxmts

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<v Speaker 3>clos of what's on bxmt's balance sheet. So I mean

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<v Speaker 3>a lot of these loans are in trouble there BXMT

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<v Speaker 3>has not shrewed them up in terms of the risk ratings.

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<v Speaker 3>So we believe that as more and more of these

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<v Speaker 3>loans are allowed to pick pay in kind, that in

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<v Speaker 3>the second half of this year, BXMT is going to

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<v Speaker 3>have to cut the dividends. So that's what we're playing

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<v Speaker 3>for in that short.

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<v Speaker 2>If you think about what's happening now and this idea

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<v Speaker 2>that you could see an interest rate cut. Does that

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<v Speaker 2>make the situation simpler for BXMT and other rates? Do

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<v Speaker 2>you think that this is a trade that you would

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<v Speaker 2>continue into other areas? Is higher for longer pressure on

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<v Speaker 2>loan books trade?

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<v Speaker 3>So when in December when we went public with this,

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<v Speaker 3>I mean our view was that unless there were a

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<v Speaker 3>roughly three hundred basis points drop in Sofur within the

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<v Speaker 3>next month or two this the BXMT would have to

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<v Speaker 3>cut the dividends. So we've seen no declunt, we've seen

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<v Speaker 3>no decrease in Sofur and you know, maybe you're going

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<v Speaker 3>to get a twenty five basis point cut, you know

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<v Speaker 3>before the end of the year, maybe fifty basis points.

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<v Speaker 3>It doesn't matter in our view because the problem is

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<v Speaker 3>the borrowers had been protected from the interest rate rises

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<v Speaker 3>because they put into place these they call rate caps.

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<v Speaker 3>They're effectively interest rate swaps. And as those swaps burned

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<v Speaker 3>off last year and burning off this year, now they're

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<v Speaker 3>exposed to the much higher interest rates. So that's what

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<v Speaker 3>we think is to straw that's going to break the

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<v Speaker 3>camel's back here.

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<v Speaker 4>What do you think about banks? Shnale's had a banner

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<v Speaker 4>day with the big ones. Are there any that you

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<v Speaker 4>would short, especially those that are exposed a lot to

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<v Speaker 4>commercial real estate or multifamily.

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<v Speaker 3>Man well but well, certainly there are some regional banks

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<v Speaker 3>that that could be interesting. In the past, in twenty

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<v Speaker 3>sixteen we were short Bank OZK, which has a lot

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<v Speaker 3>of exposure basically to niche cre doing construction lending now.

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<v Speaker 3>At that time, it was also partly to say, look,

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<v Speaker 3>this is trading at two and a half times book

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<v Speaker 3>because everybody thinks there's no risk here. It's such a

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<v Speaker 3>great bank. I'm not current on that one, but if

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<v Speaker 3>one were inclined, I would look at that.

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<v Speaker 1>All right, Carson, that's good place to leave it. Unfortunately,

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<v Speaker 1>we're up against the clock. Have to have you back

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<v Speaker 1>on soon. That is Carson Block of Muddy Waters Capital,

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<v Speaker 1>and this is Bloomberg