Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Joining us now is a man known for his bearish
Speaker 2: best best known for it one of the few sleast
Speaker 2: standing activists short sellers really left out there. That is
Speaker 2: Carson Block, founder and CIO of Muddy Waters Capital, and
Speaker 2: would love to start with you on the environment here
Speaker 2: for a minute, because there is a lot of conversation
Speaker 2: about how difficult it can be to short in this market,
Speaker 2: particularly whether you call it a melt up, whether you
Speaker 2: call it a bull market, you certainly see even the
Speaker 2: unprofitable names or even some of the potentially troubled names
Speaker 2: moving higher. How do you feel.
Speaker 3: It's never been a good time to be a short seller?
Speaker 2: I suppose.
Speaker 3: But a lot of what drives stocks these days, and
Speaker 3: your previous guest guest was talking about factors, and that's
Speaker 3: the thing. It's really so much of what moves stocks
Speaker 3: is really just flows into and out of index funds,
Speaker 3: so mainly into index funds. So as a short seller,
Speaker 3: you have to be attuned to that, and really you
Speaker 3: have to stay away from names that have significant passive
Speaker 3: ownership because effectively that just shrinks the supply of the stock.
Speaker 3: And when you have inflows into those passive funds. They
Speaker 3: will buy those at any price. So that is something
Speaker 3: that has warped the environment and caused a disconnect between
Speaker 3: fundamentals and the prices of the stocks.
Speaker 1: Carson, that's really interesting. We heard something similar from David
Speaker 1: Einhorn talking about how these passive flows have sort of
Speaker 1: just fundamentally changed markets. I do want to bring you
Speaker 1: some sound from our interview with Jim Chainos a month
Speaker 1: ago on the Close. You had some interesting things to
Speaker 1: say about the state of short selling.
Speaker 4: I've called this the golden age of fraud.
Speaker 3: So there's just so many coming, so many companies now
Speaker 3: that are playing games that are to try and take
Speaker 3: advantage of investors.
Speaker 4: So we need short sellers more than.
Speaker 1: Ever, the golden age of fraud. Of course, Jim Chanos's
Speaker 1: perspective that we need short sellers more than ever. But
Speaker 1: talk to me about the fundraising environment. I mean, is
Speaker 1: there investor demand for those short sellers.
Speaker 3: Well, when I began raising money, so I was first
Speaker 3: in the activist short seller, didn't have a fund and
Speaker 3: then we launched and my initial conversation, so we're talking
Speaker 3: twenty fourteen, twenty fifteen, were a lot of them flowed
Speaker 3: in the following way, which is, oh, you know, we're
Speaker 3: we're concerned about the valuations, we're concerned about the market.
Speaker 3: We want short exposure, but we just don't want to
Speaker 3: lose money when the market goes up. And it's like, well,
Speaker 3: you can't really have it both ways, guys. And since
Speaker 3: then the environment's only gotten worse. I mean, Jim, you know,
Speaker 3: Jim is shut down his hedge funds because, yeah, investors,
Speaker 3: investors don't want to pay the price for that insurance
Speaker 3: policy that is your traditional short selling strategy. They don't
Speaker 3: you know, they don't care about alpha. And you know,
Speaker 3: i'd say that also one of the things to Jim's
Speaker 3: point about the Golden Age of fraud. Yes, there are
Speaker 3: more companies playing more games. You know, a lot of
Speaker 3: them are in the gray zone. You don't know whether
Speaker 3: it's over the line or not, so they're not going
Speaker 3: to get prosecuted in this environment, and some are over
Speaker 3: the line. But you know, I think that twenty thirteen
Speaker 3: was a tipping point where on the longside, investors stopped
Speaker 3: being remunerated for caring about risk and it became just
Speaker 3: about buying narrative. And so the alongside investors who didn't
Speaker 3: make that transition. Who still cared about risk, Well they
Speaker 3: became the butt of jokes or deride it as value investors.
Speaker 3: And I think that that's one of the transitions that
Speaker 3: David Einhorn went through, was realizing that you have to
Speaker 3: look at things differently than you know, than you used to.
Speaker 3: So that's that's the problem. Like, yes, the market needs
Speaker 3: most short sellers more than ever given the amount of
Speaker 3: games that are being played. But if alongside doesn't care,
Speaker 3: then you know, this can continue until it doesn't.
Speaker 4: Basically, So Carson, that's the sort of markets explanation. I
Speaker 4: wonder about the political issue because during the Biden administration,
Speaker 4: the Department of Justice and the SEC have opened investigations
Speaker 4: into short sellers, accusing them of market manipulation.
Speaker 3: You would think that the.
Speaker 4: Democrats should appreciate, you know, speaking truth to power, holding
Speaker 4: corporate America accountable, pulling back the curtain and showing that
Speaker 4: it's not a wizard, it's a dude back there, you know.
Speaker 4: So do you expect anything different if we were to
Speaker 4: have a second Trump adminis stration or do all politicians
Speaker 4: hate short sellers?
Speaker 3: Well, it's interesting because when just small correction and nobody
Speaker 3: has been accused of market manipulation yet so.
Speaker 4: To be just investigations by right have been open. Yeah.
Speaker 3: Yeah, So I mean, look, we were you know, we
Speaker 3: received subpoenas and you know, search warrant back in twenty
Speaker 3: twenty one, which, yeah, that's the data. You know, I'm
Speaker 3: sure my then eight year old son will never forget.
Speaker 3: So yeah, I've got a you know, I've got a
Speaker 3: real personal issue with with this. But I think one
Speaker 3: of one of the things that I that I realized
Speaker 3: was at the SEC when they were making these cases
Speaker 3: in twenty ten to twenty thirteen ish, based on work
Speaker 3: that activis short sellers had done. Well, a lot of
Speaker 3: those people left the agency and they now bill twenty
Speaker 3: three hundred dollars an hour working for big law firms.
Speaker 3: So I'm not sure that the agency has much of
Speaker 3: an institutional memory of how helpful short sellers have been
Speaker 3: to it. And when you look on the whistleblowers side,
Speaker 3: you know, there's that SEC whistleblower program. It seems that
Speaker 3: the SEC is now trying to actually, you know, contrary
Speaker 3: to the law, there's no law that states you're differently
Speaker 3: situated if you're a short seller versus company inside or
Speaker 3: who's blowing the whistle. But it seems like the SEC
Speaker 3: is trying to make it harder for whistle blowers to
Speaker 3: actually get paid when the SEC has recoveries. So I
Speaker 3: chalk it up to no institutional memory. Number one and
Speaker 3: number two, there's this populism, right, there's political populism, but
Speaker 3: that's infiltrated the markets, and I think Elon Musk is
Speaker 3: really the first to recognize that in the markets and
Speaker 3: use that to push Tesla up. But I think that
Speaker 3: that part of that populist message. It's easy to demonize
Speaker 3: short sellers as part of the populist message and somehow
Speaker 3: call us the suits. You know, that was a really
Speaker 3: weird moment in twenty one when that started happening.
Speaker 1: Well, Carson wrapping it all together. I mean, you think
Speaker 1: about the regulatory overhang, the political demonization it sounds like
Speaker 1: you'd call it of short sellers, and then the fact
Speaker 1: that you have those market dynamics, all of that passive
Speaker 1: money coming in. I mean, do you see the short
Speaker 1: selling industry shrinking from here? What's the outlook?
Speaker 3: Well, you have to differentiate the traditional short sellers who
Speaker 3: are not talking about the stocks they're short and they're
Speaker 3: typically going to be short fifty to eighty names for
Speaker 3: fundamental reasons. Melting ice cubes from what we do, which
Speaker 3: is we look for companies that have been generally, you know,
Speaker 3: really greatly misrepresenting the information they give to investors, if
Speaker 3: not outright lining. I think the former that's a very
Speaker 3: difficult business right now, because you know, it's just again
Speaker 3: there's this inclination to buy narratives and allocators don't really
Speaker 3: want to lose money waiting for paying for this that
Speaker 3: insurance policy. For what we do, there's still, as Jim
Speaker 3: makes clear, right there are plenty of companies that are problematic.
Speaker 3: The question always is is whether investor apathy Investors in
Speaker 3: a given name, whether they're so apathetic that the problems
Speaker 3: that we find won't matter to them, And when you
Speaker 3: have an environment in which there's no enforcement that contributes
Speaker 3: to it.
Speaker 2: Carson, I want to switch gears a little bit and
Speaker 2: talk about sectors, because you have been clearly targeting certain
Speaker 2: areas and one of very high interest to investors right now,
Speaker 2: that is a commercial real estate market. You've had this
Speaker 2: short when it comes to b XMT Blackstones Mortgage Trust,
Speaker 2: and it has been down about ten percent on the year.
Speaker 2: Clearly you've made some money, But to what end are
Speaker 2: you looking to short this stock? They they have one
Speaker 2: point seven billion of liquidity. How much further are you
Speaker 2: going to go here?
Speaker 3: Well, our thesis from when we unveiled it in December
Speaker 3: of last year is that in the second half of
Speaker 3: this year, the XMT is going to cut the dividends.
Speaker 3: So we're generally not forward looking in what we do,
Speaker 3: but our BXMT short is different and it was based
Speaker 3: on this information asymmetry. We got a hold of CLO data,
Speaker 3: so CLO loan data, which that's apparently emblematic of bxmts
Speaker 3: clos of what's on bxmt's balance sheet. So I mean
Speaker 3: a lot of these loans are in trouble there BXMT
Speaker 3: has not shrewed them up in terms of the risk ratings.
Speaker 3: So we believe that as more and more of these
Speaker 3: loans are allowed to pick pay in kind, that in
Speaker 3: the second half of this year, BXMT is going to
Speaker 3: have to cut the dividends. So that's what we're playing
Speaker 3: for in that short.
Speaker 2: If you think about what's happening now and this idea
Speaker 2: that you could see an interest rate cut. Does that
Speaker 2: make the situation simpler for BXMT and other rates? Do
Speaker 2: you think that this is a trade that you would
Speaker 2: continue into other areas? Is higher for longer pressure on
Speaker 2: loan books trade?
Speaker 3: So when in December when we went public with this,
Speaker 3: I mean our view was that unless there were a
Speaker 3: roughly three hundred basis points drop in Sofur within the
Speaker 3: next month or two this the BXMT would have to
Speaker 3: cut the dividends. So we've seen no declunt, we've seen
Speaker 3: no decrease in Sofur and you know, maybe you're going
Speaker 3: to get a twenty five basis point cut, you know
Speaker 3: before the end of the year, maybe fifty basis points.
Speaker 3: It doesn't matter in our view because the problem is
Speaker 3: the borrowers had been protected from the interest rate rises
Speaker 3: because they put into place these they call rate caps.
Speaker 3: They're effectively interest rate swaps. And as those swaps burned
Speaker 3: off last year and burning off this year, now they're
Speaker 3: exposed to the much higher interest rates. So that's what
Speaker 3: we think is to straw that's going to break the
Speaker 3: camel's back here.
Speaker 4: What do you think about banks? Shnale's had a banner
Speaker 4: day with the big ones. Are there any that you
Speaker 4: would short, especially those that are exposed a lot to
Speaker 4: commercial real estate or multifamily.
Speaker 3: Man well but well, certainly there are some regional banks
Speaker 3: that that could be interesting. In the past, in twenty
Speaker 3: sixteen we were short Bank OZK, which has a lot
Speaker 3: of exposure basically to niche cre doing construction lending now.
Speaker 3: At that time, it was also partly to say, look,
Speaker 3: this is trading at two and a half times book
Speaker 3: because everybody thinks there's no risk here. It's such a
Speaker 3: great bank. I'm not current on that one, but if
Speaker 3: one were inclined, I would look at that.
Speaker 1: All right, Carson, that's good place to leave it. Unfortunately,
Speaker 1: we're up against the clock. Have to have you back
Speaker 1: on soon. That is Carson Block of Muddy Waters Capital,
Speaker 1: and this is Bloomberg