1 00:00:02,520 --> 00:00:07,040 Speaker 1: Bloomberg Audio Studios, podcasts, radio news. 2 00:00:07,840 --> 00:00:10,480 Speaker 2: The legendary Wall Street short sellar Jim Chainos also spoke 3 00:00:10,520 --> 00:00:12,840 Speaker 2: out about private credit not so long ago. He said, 4 00:00:12,920 --> 00:00:16,200 Speaker 2: quote now, with the advent of private credit, institutions are 5 00:00:16,239 --> 00:00:19,000 Speaker 2: putting money into this magical machine that gives you equity 6 00:00:19,079 --> 00:00:23,240 Speaker 2: rates of return for senior debt exposure, which again should 7 00:00:23,239 --> 00:00:25,680 Speaker 2: be the first red flag. We rarely get to see 8 00:00:25,680 --> 00:00:28,960 Speaker 2: how the sausage is made. Jim Chanos joins us now. 9 00:00:29,000 --> 00:00:31,360 Speaker 2: He is president and managing partner of Chenos and Company. 10 00:00:31,480 --> 00:00:33,920 Speaker 2: He is here with us exclusively. Good to see you again, Jim. 11 00:00:34,000 --> 00:00:36,000 Speaker 1: It just good to be here. Thanks for having me. 12 00:00:36,159 --> 00:00:38,360 Speaker 2: So you heard what the CEO Barkley said about this 13 00:00:38,640 --> 00:00:41,320 Speaker 2: idea of whether it's one bad actor or some aspect 14 00:00:41,360 --> 00:00:44,600 Speaker 2: of circumstances that leads people in companies to behave a 15 00:00:44,600 --> 00:00:46,760 Speaker 2: certain way. What does your spidey sense tell you? 16 00:00:47,240 --> 00:00:50,200 Speaker 3: Well, I teach a course on the history of financial fraud, 17 00:00:50,240 --> 00:00:52,440 Speaker 3: as you know, and one of the themes of the 18 00:00:52,520 --> 00:00:56,320 Speaker 3: course is that the fraud cycle follows the financial cycle 19 00:00:56,360 --> 00:00:59,680 Speaker 3: with a lag, and the more extreme the financial cycle 20 00:01:00,240 --> 00:01:05,360 Speaker 3: i e. The bigger the bull market, usually more fraud 21 00:01:05,520 --> 00:01:10,400 Speaker 3: is follows thereafter with a leg, so you don't really 22 00:01:10,440 --> 00:01:13,880 Speaker 3: see the large amounts of fraud till after the cycle turns. 23 00:01:14,280 --> 00:01:18,320 Speaker 3: This is early and a lot of consumer credit metrics 24 00:01:18,319 --> 00:01:20,360 Speaker 3: are still kind of holding up. But we are starting 25 00:01:20,400 --> 00:01:24,559 Speaker 3: to get some canaries in the coal mine in subprime auto. 26 00:01:24,640 --> 00:01:28,640 Speaker 3: As you mentioned, the first brand's case is kind of 27 00:01:28,640 --> 00:01:32,319 Speaker 3: mind blowing given what they were hiding, and I suspect 28 00:01:32,319 --> 00:01:34,600 Speaker 3: we'll see more, but I don't think we're going to 29 00:01:34,600 --> 00:01:37,720 Speaker 3: see a tidal wave of it until the actual financial 30 00:01:37,760 --> 00:01:41,160 Speaker 3: cycle turns. Then I think we're going to see a 31 00:01:41,160 --> 00:01:41,560 Speaker 3: lot of it. 32 00:01:41,720 --> 00:01:43,720 Speaker 4: And how extreme is this current financial cycle. 33 00:01:44,600 --> 00:01:45,679 Speaker 1: This one's pretty extreme. 34 00:01:45,880 --> 00:01:49,280 Speaker 3: I mean we're now really sixteen years into a bull 35 00:01:49,360 --> 00:01:54,920 Speaker 3: market in credit inequities, it's getting more speculative. We saw 36 00:01:55,840 --> 00:01:59,360 Speaker 3: a mini speculative blow off in twenty twenty one, we're 37 00:01:59,360 --> 00:02:04,320 Speaker 3: seeing it again in twenty twenty five. Standards get reduced, 38 00:02:04,400 --> 00:02:07,640 Speaker 3: as I like to say, people's sense of disbelief erodes 39 00:02:07,720 --> 00:02:08,280 Speaker 3: over time. 40 00:02:08,639 --> 00:02:11,520 Speaker 1: They begin to believe things. You know they're too good to. 41 00:02:11,440 --> 00:02:15,000 Speaker 3: Be true because there's pressure to put investors' money to work, 42 00:02:15,240 --> 00:02:17,799 Speaker 3: and I think some of that's happening now in private credit. 43 00:02:18,600 --> 00:02:22,080 Speaker 2: So the stock market has barely blinked. With all these 44 00:02:22,360 --> 00:02:25,120 Speaker 2: blow ups, the credit market kind of dismissed them as 45 00:02:25,160 --> 00:02:29,440 Speaker 2: idiosyncratic until Jamie Dimond warned about the prospect of more cockroaches, 46 00:02:29,520 --> 00:02:31,519 Speaker 2: and then that kind of got people's attention just a 47 00:02:31,560 --> 00:02:31,960 Speaker 2: little bit. 48 00:02:32,000 --> 00:02:32,280 Speaker 4: Here. 49 00:02:32,840 --> 00:02:34,880 Speaker 2: At what point does this become something that the credit 50 00:02:34,919 --> 00:02:36,440 Speaker 2: market starts to panic over. 51 00:02:36,720 --> 00:02:37,280 Speaker 1: Well, we don't. 52 00:02:37,320 --> 00:02:39,840 Speaker 3: We haven't seen it yet, as you as you say, 53 00:02:40,639 --> 00:02:46,480 Speaker 3: credit spreads are still almost record lows. So people are 54 00:02:46,520 --> 00:02:51,120 Speaker 3: still partying, you know, it's the punch bowls being taken away. 55 00:02:51,800 --> 00:02:53,960 Speaker 3: Only a couple of people may have noticed it yet, 56 00:02:54,000 --> 00:02:57,880 Speaker 3: but so far it's still it's still partying like it's 57 00:02:57,960 --> 00:03:00,520 Speaker 3: nineteen ninety nine, and the credit markets for the most part. 58 00:03:00,800 --> 00:03:03,200 Speaker 2: What I found really fascinating was that Jamie Diamond didn't 59 00:03:03,280 --> 00:03:06,400 Speaker 2: really target private credit in his comments. 60 00:03:06,440 --> 00:03:07,919 Speaker 4: He kind of just made the comments generally. 61 00:03:08,000 --> 00:03:10,760 Speaker 2: Yet the industry got kind of defensive when he spoke 62 00:03:10,840 --> 00:03:12,960 Speaker 2: up are these firms justified in doing so? 63 00:03:13,080 --> 00:03:13,600 Speaker 4: I mean, you. 64 00:03:13,520 --> 00:03:16,720 Speaker 2: Point out that they have promised these equity like returns 65 00:03:17,000 --> 00:03:19,320 Speaker 2: that raises questions about the economics of their business. 66 00:03:19,520 --> 00:03:20,960 Speaker 1: Yeah, there's two things that bother me. 67 00:03:21,280 --> 00:03:25,040 Speaker 3: The way private credit is being sold to investors, and 68 00:03:25,080 --> 00:03:27,760 Speaker 3: I sit on investment committee, so I see this and 69 00:03:29,120 --> 00:03:31,840 Speaker 3: really it's one of these too good to be true 70 00:03:31,919 --> 00:03:34,960 Speaker 3: type promises. We're going to give you senior debt exposure, 71 00:03:35,200 --> 00:03:39,320 Speaker 3: often secured somehow, but with equity rates of return double 72 00:03:39,320 --> 00:03:42,600 Speaker 3: digit type returns, which makes you wonder about the underlying 73 00:03:42,640 --> 00:03:43,680 Speaker 3: credits themselves. 74 00:03:44,240 --> 00:03:47,360 Speaker 1: That's number one. And then related to that is how. 75 00:03:47,320 --> 00:03:50,680 Speaker 3: Much leverage is being used within the vehicles to juice 76 00:03:51,520 --> 00:03:54,080 Speaker 3: the equity like rate of return. And then the other 77 00:03:54,120 --> 00:03:58,920 Speaker 3: thing that concerning to me is the explosion now in 78 00:03:59,040 --> 00:04:04,400 Speaker 3: captive regulation subsidiaries by the largest largest players in this. 79 00:04:05,840 --> 00:04:08,520 Speaker 1: Area, owning insurance companies. 80 00:04:08,560 --> 00:04:12,600 Speaker 3: And where there really isn't a true arms length difference 81 00:04:12,640 --> 00:04:15,360 Speaker 3: between the people buying the credit and the people selling 82 00:04:15,360 --> 00:04:18,240 Speaker 3: the credit to them, and that is worrisome. 83 00:04:18,440 --> 00:04:20,479 Speaker 1: That's something we saw in the Drexel days. 84 00:04:20,480 --> 00:04:23,400 Speaker 3: By the way, one of the things that got us 85 00:04:23,400 --> 00:04:26,280 Speaker 3: so concerned in nineteen eighty eight and eighty nine in 86 00:04:26,320 --> 00:04:30,560 Speaker 3: the Drexel junk bond kingdom was the fact that more 87 00:04:30,600 --> 00:04:34,719 Speaker 3: and more of Mike Bilkins's clients had regulated subsidiaries like 88 00:04:34,800 --> 00:04:42,240 Speaker 3: savings and loans insurance companies, thrifts, trust companies where they 89 00:04:42,320 --> 00:04:46,840 Speaker 3: were buying the same credit that in effect others in 90 00:04:46,920 --> 00:04:51,600 Speaker 3: the Kingdom were selling without a lot of arm's length disclosure. 91 00:04:52,000 --> 00:04:54,440 Speaker 1: And so that is something to keep our eye on, 92 00:04:54,480 --> 00:04:55,599 Speaker 1: I think, is the. 93 00:04:55,520 --> 00:04:58,920 Speaker 3: Use of captive regulated subs to buy this stuff. 94 00:04:59,200 --> 00:04:59,920 Speaker 4: Yeah, it's your point. 95 00:05:00,040 --> 00:05:02,120 Speaker 2: Private credit has kind of become the a Girl of 96 00:05:02,200 --> 00:05:05,799 Speaker 2: asset classes. Everyone talks about it. Every asset management firm 97 00:05:06,080 --> 00:05:08,039 Speaker 2: wants to be able to offer. Every bank seems to 98 00:05:08,080 --> 00:05:09,920 Speaker 2: want to get in after missing out. 99 00:05:10,600 --> 00:05:12,599 Speaker 1: Sort of like private equity five to ten years ago. 100 00:05:12,600 --> 00:05:15,160 Speaker 2: Exactly, everyone's a stakeholder, so it feels like everyone's kind 101 00:05:15,160 --> 00:05:18,840 Speaker 2: of incentivized to make sure that whatever happens stays an 102 00:05:18,839 --> 00:05:20,520 Speaker 2: idiosyncratic story and nothing. 103 00:05:20,240 --> 00:05:23,840 Speaker 3: More right or hedge funds fifteen years ago. Yeah, look, 104 00:05:24,440 --> 00:05:29,520 Speaker 3: these things are being sold aggressively. It's a wonderful product 105 00:05:29,560 --> 00:05:34,080 Speaker 3: for people that have targeted rates of return needs, endowments, 106 00:05:34,600 --> 00:05:39,440 Speaker 3: pension funds. But again, it's just something that worries me 107 00:05:39,760 --> 00:05:43,280 Speaker 3: when equity rates to return are promised on credit instruments. 108 00:05:43,720 --> 00:05:45,560 Speaker 3: Usually there's something you're not seeing. 109 00:05:45,960 --> 00:05:47,520 Speaker 2: Let's talk about something that may or may not be 110 00:05:47,560 --> 00:05:49,599 Speaker 2: worrying to you, which is what's happening in big tech. 111 00:05:50,040 --> 00:05:52,279 Speaker 2: They are investing tens of billions of dollars to build 112 00:05:52,320 --> 00:05:55,320 Speaker 2: out data centers to boost their AI capabilities. They announce 113 00:05:55,360 --> 00:05:57,640 Speaker 2: partnerships where they take equity stakes in each other and 114 00:05:57,640 --> 00:06:00,960 Speaker 2: buy stuff from each other. Is this so called circular 115 00:06:01,040 --> 00:06:03,240 Speaker 2: funding a problem in and of itself? 116 00:06:03,240 --> 00:06:04,200 Speaker 4: Does it raizor antenna? 117 00:06:04,600 --> 00:06:06,839 Speaker 3: Well, what we've told clients because we went through the 118 00:06:06,880 --> 00:06:09,719 Speaker 3: first time we saw this in ninety nine, two thousand 119 00:06:09,720 --> 00:06:12,000 Speaker 3: and two thousand and one, where there was a lot 120 00:06:12,560 --> 00:06:16,080 Speaker 3: of circular financing and vendor financing. Back then it was 121 00:06:16,120 --> 00:06:20,919 Speaker 3: the telecoms, but the customers that were taking that vendor 122 00:06:20,920 --> 00:06:25,240 Speaker 3: financing from the Loosens and Nortel's of the world were 123 00:06:25,240 --> 00:06:31,080 Speaker 3: predominantly profitable. The Celex raised about forty five billion over 124 00:06:31,120 --> 00:06:34,760 Speaker 3: five years competitive local exchange cares. They had a flawed 125 00:06:34,760 --> 00:06:38,200 Speaker 3: business model, most of them went broke, and then the 126 00:06:38,240 --> 00:06:41,880 Speaker 3: fiber optic guys did build outs and most of them 127 00:06:42,960 --> 00:06:45,960 Speaker 3: had to be restructured or went bankrupt. But we were 128 00:06:46,000 --> 00:06:50,120 Speaker 3: talking about one hundred billion dollars of vendor financing over 129 00:06:50,160 --> 00:06:53,240 Speaker 3: the five years or so that it was happening, which 130 00:06:53,360 --> 00:06:56,000 Speaker 3: was a lot at the time, but it pales into 131 00:06:56,040 --> 00:06:58,839 Speaker 3: comparison with some of the numbers were starting to hear 132 00:06:58,920 --> 00:07:03,080 Speaker 3: about both this year, next year, twenty seven, twenty eight 133 00:07:03,960 --> 00:07:08,480 Speaker 3: for the capital needs of the AI companies, and that's 134 00:07:08,839 --> 00:07:10,000 Speaker 3: you know, that's a red flag. 135 00:07:10,320 --> 00:07:11,080 Speaker 4: It's a red flag. 136 00:07:11,120 --> 00:07:16,040 Speaker 2: I mean, is circular financing funding an unmistakable sign of 137 00:07:16,080 --> 00:07:17,160 Speaker 2: market over exuberance. 138 00:07:17,440 --> 00:07:22,000 Speaker 3: Well, similar to my concerns about private credit owning regulated 139 00:07:23,160 --> 00:07:27,080 Speaker 3: investing subsidiaries, one of the things that has caught my 140 00:07:27,160 --> 00:07:30,400 Speaker 3: eye that is concerning now is we're starting to see 141 00:07:30,400 --> 00:07:35,320 Speaker 3: the advent of so called SPVs, which are entities and 142 00:07:35,400 --> 00:07:37,680 Speaker 3: this comes from the end run era and the global 143 00:07:37,680 --> 00:07:41,680 Speaker 3: financial crisis, entities that are specifically set up to hold assets, 144 00:07:42,040 --> 00:07:45,040 Speaker 3: borrow against those assets, and take it off balance sheets. 145 00:07:45,920 --> 00:07:48,680 Speaker 3: So you just showed an equity investment as opposed to 146 00:07:49,080 --> 00:07:51,280 Speaker 3: the massive amount of debt that's being taken on. 147 00:07:51,920 --> 00:07:54,240 Speaker 1: And that again. 148 00:07:54,120 --> 00:07:58,040 Speaker 3: Is something that worries us because if there's one sort 149 00:07:58,040 --> 00:08:01,480 Speaker 3: of consistent theme that we're seeing amongst the players that 150 00:08:01,600 --> 00:08:05,840 Speaker 3: know this the best in video Microsoft companies like that 151 00:08:06,400 --> 00:08:08,720 Speaker 3: is they seem to now be willing to do anything 152 00:08:08,760 --> 00:08:12,840 Speaker 3: to get the actual equipment off their books and either 153 00:08:12,920 --> 00:08:17,840 Speaker 3: keep it in the footnotes or use innovative financing to 154 00:08:17,920 --> 00:08:22,560 Speaker 3: sell it. And I think they're concerned about depreciating lives 155 00:08:23,760 --> 00:08:25,760 Speaker 3: and some of the accounting on this, as well as 156 00:08:25,800 --> 00:08:28,520 Speaker 3: just the immense capital needs that they don't want to 157 00:08:28,520 --> 00:08:30,320 Speaker 3: put directly on their balance sheets. 158 00:08:30,400 --> 00:08:31,520 Speaker 4: So how do you HYDI against this? 159 00:08:32,960 --> 00:08:36,040 Speaker 3: Look, I mean, it's driving the market right AI is 160 00:08:36,080 --> 00:08:39,120 Speaker 3: the displacement of this cycle. Right If the Internet was 161 00:08:39,800 --> 00:08:44,400 Speaker 3: the displacement idea of the nineties, certainly it's AI right now. 162 00:08:44,760 --> 00:08:47,880 Speaker 3: And if AI goes, there's not going to be a 163 00:08:47,880 --> 00:08:52,520 Speaker 3: lot of places to hide because it's so embedded right 164 00:08:52,559 --> 00:08:56,200 Speaker 3: now in the psyche of investors. So we better hope 165 00:08:56,200 --> 00:09:00,640 Speaker 3: it works, and because if not, there might be some 166 00:09:00,720 --> 00:09:01,960 Speaker 3: disappointment down the road. 167 00:09:02,280 --> 00:09:04,920 Speaker 2: You've pointed out that the AI driven capital spending boom 168 00:09:04,920 --> 00:09:07,560 Speaker 2: we're seeing today is comparable to the Internet build out 169 00:09:07,559 --> 00:09:11,120 Speaker 2: in the late nineties. So when companies start tapping the 170 00:09:11,120 --> 00:09:13,160 Speaker 2: brakes a little bit, pulling back on their spending by 171 00:09:13,280 --> 00:09:15,480 Speaker 2: just a bit, how quickly will that show up in. 172 00:09:15,440 --> 00:09:19,520 Speaker 4: Earnings and margins? Given where we are in this market. 173 00:09:19,720 --> 00:09:22,280 Speaker 3: So the problem in two thousand and two thousand and 174 00:09:22,280 --> 00:09:26,640 Speaker 3: one was basically wasn't really vendor financing. As I said, 175 00:09:26,679 --> 00:09:29,120 Speaker 3: that was all in about one hundred billion dollars over 176 00:09:29,200 --> 00:09:32,920 Speaker 3: five years. The real problem was double and triple ordering 177 00:09:33,160 --> 00:09:36,920 Speaker 3: of equipment, where people put in orders for routers and 178 00:09:37,000 --> 00:09:42,280 Speaker 3: network equipment and capacity and then basically all at once. 179 00:09:42,520 --> 00:09:44,760 Speaker 3: In late two thousand and early two thousand and one, 180 00:09:44,840 --> 00:09:47,839 Speaker 3: they pulled back, we don't need all these routers, we 181 00:09:47,840 --> 00:09:49,920 Speaker 3: don't need all these switches, we don't need all this 182 00:09:50,000 --> 00:09:54,800 Speaker 3: fiber optic gear, and order books just collapsed and S 183 00:09:54,840 --> 00:09:58,360 Speaker 3: and P earnings dropped forty percent from peak to trough. 184 00:09:58,600 --> 00:10:02,880 Speaker 3: The SMP dropped about forty per there was a mild recession. 185 00:10:02,960 --> 00:10:06,280 Speaker 3: GDP dropped about one percent for two quarters. It really 186 00:10:06,400 --> 00:10:09,120 Speaker 3: was not like the global financial crisis or even eighty 187 00:10:09,240 --> 00:10:12,319 Speaker 3: nine to ninety when we had a banking crisis, but 188 00:10:12,640 --> 00:10:15,400 Speaker 3: it was terrible for corporate profits because there was so 189 00:10:15,640 --> 00:10:21,960 Speaker 3: much basically steroidal of profit participation profit margins from all this. 190 00:10:22,600 --> 00:10:24,440 Speaker 3: So that's what we're kind of keeping an eye on, 191 00:10:24,559 --> 00:10:29,040 Speaker 3: is order books and looking for any signs that suddenly 192 00:10:29,080 --> 00:10:33,000 Speaker 3: maybe we don't need all of these router GPUs or 193 00:10:33,160 --> 00:10:35,480 Speaker 3: all of these data centers or what have you. 194 00:10:36,080 --> 00:10:38,160 Speaker 4: And it's not just things tied to AI. 195 00:10:38,320 --> 00:10:40,640 Speaker 2: I look at the fifty five billion dollar takeout of 196 00:10:41,040 --> 00:10:44,640 Speaker 2: electronic arts marking the biggest LBO ever. It's deal making 197 00:10:44,679 --> 00:10:47,400 Speaker 2: like it's two thousand and seven, going beyond the order 198 00:10:47,440 --> 00:10:50,080 Speaker 2: books of the big tech companies. As an inherent skeptic, 199 00:10:50,280 --> 00:10:52,040 Speaker 2: what are you watching for to get a sense of 200 00:10:52,600 --> 00:10:54,319 Speaker 2: how and when the music stops? 201 00:10:54,480 --> 00:10:58,000 Speaker 3: Well again, we want to see the underlying profitability of 202 00:10:58,400 --> 00:11:02,160 Speaker 3: the engine, rightI I come up with a profitable business model, 203 00:11:02,200 --> 00:11:05,080 Speaker 3: because right now, if you think about it, open AI 204 00:11:05,280 --> 00:11:10,040 Speaker 3: is I think seventy roughly two thirds of all queries 205 00:11:10,160 --> 00:11:13,319 Speaker 3: and are open AI. And they're going to do thirteen 206 00:11:13,400 --> 00:11:16,920 Speaker 3: billion of revenues this year, thirty billion next year, you know, 207 00:11:17,040 --> 00:11:20,200 Speaker 3: with capital spending needs and the hundreds of billions of dollars. 208 00:11:20,600 --> 00:11:21,880 Speaker 1: So at some point. 209 00:11:21,840 --> 00:11:24,920 Speaker 3: Someone's got to come up to say, we actually have 210 00:11:25,400 --> 00:11:29,040 Speaker 3: a model that will directly lead to cash flow and 211 00:11:29,080 --> 00:11:32,840 Speaker 3: profits so we can service the debt that we're taking 212 00:11:32,880 --> 00:11:35,480 Speaker 3: on to build the data centers and build the infrastructure. 213 00:11:36,160 --> 00:11:39,400 Speaker 3: And we'll have to see. I mean, what I've said 214 00:11:39,440 --> 00:11:44,480 Speaker 3: is I'd rather be long the companies that are producing 215 00:11:44,520 --> 00:11:48,200 Speaker 3: the magic from the chips than the landlords where the 216 00:11:48,240 --> 00:11:51,640 Speaker 3: chips reside. Right, So, if this is going to truly 217 00:11:51,679 --> 00:11:56,040 Speaker 3: be revolutionary, and it probably will be. I think you're 218 00:11:56,080 --> 00:11:57,920 Speaker 3: going to have to see stuff coming out of the 219 00:11:58,000 --> 00:12:03,600 Speaker 3: hyperscalers and open AI, really interesting applications that can be monetized. 220 00:12:04,280 --> 00:12:07,960 Speaker 3: I think a lot of investors, however, are basically investing 221 00:12:07,960 --> 00:12:10,920 Speaker 3: in the picks and shovels, the data centers, the equipment guys, 222 00:12:11,360 --> 00:12:12,760 Speaker 3: and I think that's at the end of the day 223 00:12:12,840 --> 00:12:14,000 Speaker 3: going to be a commodity business. 224 00:12:14,200 --> 00:12:16,319 Speaker 2: Okay, well, eventually it will be. As of now, it 225 00:12:16,360 --> 00:12:18,640 Speaker 2: hasn't gotten there yet. Jim, stay with us because we're 226 00:12:18,640 --> 00:12:20,920 Speaker 2: going to discuss a lot more, including some of your trades. 227 00:12:21,200 --> 00:12:38,280 Speaker 2: This is Bloomberg. This is Bloomberg Markets. I'm Scarlett Food. 228 00:12:38,280 --> 00:12:41,600 Speaker 2: We are back with Jim Chanos, founder of Chenos and Company. Jim, 229 00:12:41,679 --> 00:12:43,880 Speaker 2: I want to get an update on your bet against 230 00:12:44,000 --> 00:12:47,200 Speaker 2: MSTR Strategy, And to be clear, this is not a 231 00:12:47,240 --> 00:12:49,960 Speaker 2: bet in which you, Jim Chainos, are anti bitcoin. You're 232 00:12:50,040 --> 00:12:52,360 Speaker 2: kind of agnostic on where the price goes. You just 233 00:12:52,360 --> 00:12:54,080 Speaker 2: don't believe that the stock should be trading at this 234 00:12:54,160 --> 00:12:57,839 Speaker 2: hefty premium to the value of its bitcoin simply because 235 00:12:57,880 --> 00:13:01,400 Speaker 2: Strategy owns bitcoin and is raising money to buy weren't bitcoin? 236 00:13:01,679 --> 00:13:02,600 Speaker 4: Where are we at here? 237 00:13:03,040 --> 00:13:06,400 Speaker 3: So you're exactly right. I mean, we're agnostic on bitcoin. 238 00:13:06,440 --> 00:13:08,600 Speaker 3: I have no idea where bitcoin is going or what 239 00:13:08,640 --> 00:13:12,240 Speaker 3: it's worth, but we own bitcoin against. 240 00:13:11,920 --> 00:13:13,440 Speaker 1: The micro strategy short. 241 00:13:13,480 --> 00:13:17,040 Speaker 3: This was an arbitrage and we just as you know, 242 00:13:17,080 --> 00:13:20,360 Speaker 3: we just weren't and aren't believers in this whole concept 243 00:13:20,400 --> 00:13:24,920 Speaker 3: of bitcoin treasury companies trading at premium to the underlying asset. 244 00:13:25,360 --> 00:13:28,720 Speaker 3: And it's interesting, I mean, since we were on last 245 00:13:28,840 --> 00:13:31,800 Speaker 3: I mean the so called m NAB, the premium has 246 00:13:31,840 --> 00:13:34,360 Speaker 3: compressed from about one point nine to one point four. 247 00:13:35,400 --> 00:13:37,959 Speaker 3: But what's really interesting is what's happened to all the 248 00:13:38,640 --> 00:13:41,959 Speaker 3: strategy you want to be companies. Most of those now 249 00:13:42,000 --> 00:13:47,160 Speaker 3: have gone to below one point zero NAV, so they've 250 00:13:47,240 --> 00:13:48,200 Speaker 3: been completely. 251 00:13:47,880 --> 00:13:48,760 Speaker 1: Blown out of the water. 252 00:13:49,600 --> 00:13:52,960 Speaker 3: And strategy is kind of the granddaddy of this and 253 00:13:53,320 --> 00:13:55,600 Speaker 3: is still holding on at one point four. But again, 254 00:13:55,640 --> 00:13:58,640 Speaker 3: we just think that investors are much better suited if 255 00:13:58,640 --> 00:14:02,839 Speaker 3: they're bitcoin believers in buying bitcoin at a dollar. 256 00:14:02,800 --> 00:14:03,720 Speaker 1: Not a dollar forty. 257 00:14:04,120 --> 00:14:06,360 Speaker 2: And you say that m NAV should be at one, 258 00:14:06,400 --> 00:14:08,480 Speaker 2: you advise clients when the m NAV was between two 259 00:14:08,520 --> 00:14:09,800 Speaker 2: point two to two point three. 260 00:14:09,840 --> 00:14:11,360 Speaker 4: Have you covered any of your shorts? 261 00:14:11,400 --> 00:14:15,160 Speaker 3: We have not covered any of our shorts. But you know, again, 262 00:14:15,640 --> 00:14:19,440 Speaker 3: we reserve the right to change our mind. But I 263 00:14:19,440 --> 00:14:22,240 Speaker 3: think as long as micro Strategy keeps selling its paper 264 00:14:22,560 --> 00:14:24,800 Speaker 3: to buy bitcoin, we're going to do the same thing 265 00:14:24,840 --> 00:14:25,600 Speaker 3: that they're doing. 266 00:14:26,000 --> 00:14:28,960 Speaker 2: You mentioned that the m NAV of the copycat strategy 267 00:14:29,000 --> 00:14:30,920 Speaker 2: companies has gone below one. 268 00:14:31,160 --> 00:14:32,920 Speaker 4: Have you did you bet against any of those? 269 00:14:33,080 --> 00:14:33,640 Speaker 1: No, we did not. 270 00:14:33,800 --> 00:14:37,600 Speaker 3: We just kept it to Strategy and it was the biggest, 271 00:14:37,600 --> 00:14:42,000 Speaker 3: it was the most liquid. The premium at two plus 272 00:14:42,400 --> 00:14:44,600 Speaker 3: was at one point I think fifty or sixty billion 273 00:14:44,640 --> 00:14:49,920 Speaker 3: dollars just the premium. It's kind of staggering how big 274 00:14:49,960 --> 00:14:54,040 Speaker 3: the arbitrage was. In my forty years of experience, when 275 00:14:54,040 --> 00:14:57,720 Speaker 3: these kinds of things set up, maybe they're five hundred 276 00:14:57,760 --> 00:15:00,600 Speaker 3: million dollar opportunity of billion dollars a couple billion, you 277 00:15:00,800 --> 00:15:03,760 Speaker 3: rarely see tens of billions of dollars of premium in 278 00:15:03,800 --> 00:15:04,720 Speaker 3: these kinds of trades. 279 00:15:05,360 --> 00:15:06,480 Speaker 1: It was highly unusual. 280 00:15:06,800 --> 00:15:08,560 Speaker 2: Let me ask the obvious question, why do you think 281 00:15:08,600 --> 00:15:10,800 Speaker 2: Strategies and Now is holding up at one point four 282 00:15:10,880 --> 00:15:13,600 Speaker 2: when everyone else has gone below one. 283 00:15:14,280 --> 00:15:15,120 Speaker 1: It's a good question. 284 00:15:16,320 --> 00:15:19,800 Speaker 3: In fact, you know people that like this concept and 285 00:15:19,920 --> 00:15:22,480 Speaker 3: I don't you know, should be buying the other companies 286 00:15:22,480 --> 00:15:26,640 Speaker 3: and buying bitcoin at a discount, but again that's not. 287 00:15:27,000 --> 00:15:28,640 Speaker 1: They can't add to their bitcoin. 288 00:15:28,720 --> 00:15:31,800 Speaker 3: So there are some diehards who still believe that micro 289 00:15:31,840 --> 00:15:35,200 Speaker 3: strategy is adding value by being able to sell securities 290 00:15:35,200 --> 00:15:38,640 Speaker 3: and buy bitcoin. The problem is he's doing that at 291 00:15:38,680 --> 00:15:42,880 Speaker 3: your expense, the new investor, and so the whole thing 292 00:15:43,040 --> 00:15:44,480 Speaker 3: just never made sense. 293 00:15:44,560 --> 00:15:46,040 Speaker 1: It still doesn't make sense, all right. 294 00:15:46,080 --> 00:15:48,080 Speaker 2: I want to talk about carbon as well, because you've 295 00:15:48,080 --> 00:15:50,080 Speaker 2: embarrashed on that for a couple of years, and in 296 00:15:50,120 --> 00:15:53,160 Speaker 2: part because of its reliance on the sale of subprime loans. 297 00:15:53,400 --> 00:15:56,880 Speaker 2: Given the problems we've seen with Prima Lend and Tree Colore, 298 00:15:57,040 --> 00:15:59,920 Speaker 2: subprime auto loans just doesn't sound like a good business 299 00:16:00,000 --> 00:16:00,680 Speaker 2: idea right now. 300 00:16:01,400 --> 00:16:06,120 Speaker 3: It is for them, so they're still booking hefty gains 301 00:16:06,160 --> 00:16:10,520 Speaker 3: on their sale loans. But look, there's just lots of 302 00:16:10,560 --> 00:16:11,680 Speaker 3: red flags at Carvana. 303 00:16:12,640 --> 00:16:13,720 Speaker 1: It's not new news. 304 00:16:14,400 --> 00:16:17,440 Speaker 3: But what really would worry me if I was new 305 00:16:17,440 --> 00:16:21,400 Speaker 3: to this story is the fact that a Carvana affiliate 306 00:16:21,520 --> 00:16:27,040 Speaker 3: services the loans Bridgecrest, And again, we just don't have 307 00:16:27,200 --> 00:16:31,360 Speaker 3: complete transparency as to what's going on. And given the 308 00:16:31,400 --> 00:16:36,240 Speaker 3: news in the subprime model space of default bankruptcies, rising delinquencies, 309 00:16:36,600 --> 00:16:39,040 Speaker 3: the fact that that Carvana seems to be sailing through 310 00:16:39,080 --> 00:16:42,920 Speaker 3: it without with Narus scratch stretches credulity in my. 311 00:16:42,880 --> 00:16:44,720 Speaker 2: Opinion, so your shortest still on right now. 312 00:16:44,760 --> 00:16:46,240 Speaker 1: We're still short Carvana. 313 00:16:46,040 --> 00:16:47,240 Speaker 4: And Eerie Insurance. 314 00:16:47,480 --> 00:16:50,200 Speaker 2: This is something that you've spotted accounting problems at for 315 00:16:50,240 --> 00:16:52,320 Speaker 2: a while, and now there's a legal battle that could 316 00:16:52,320 --> 00:16:56,600 Speaker 2: have ramifications for the broader insurance industry that practices overall. 317 00:16:56,680 --> 00:16:59,200 Speaker 3: This is a really odd one. We wrote about this 318 00:16:59,240 --> 00:17:04,280 Speaker 3: with another firm, my brother's firm, in February, pointing out 319 00:17:04,400 --> 00:17:08,320 Speaker 3: that this company was a real kind of unique animal 320 00:17:08,560 --> 00:17:11,800 Speaker 3: in the US publicly traded insurance space. They had set 321 00:17:11,840 --> 00:17:16,000 Speaker 3: themselves up as a servicing company and had the insurance 322 00:17:16,119 --> 00:17:18,920 Speaker 3: all of the insurance operations, which were massive, I think 323 00:17:18,920 --> 00:17:22,439 Speaker 3: the eighth largest insured the US, owned by the policyholders. 324 00:17:23,000 --> 00:17:27,120 Speaker 3: But those companies have no employees, no directors, and Eerie 325 00:17:27,359 --> 00:17:30,840 Speaker 3: itself handles all that for a flat fee of twenty 326 00:17:30,840 --> 00:17:36,000 Speaker 3: five percent of premium. Well, last week a couple of 327 00:17:36,040 --> 00:17:38,399 Speaker 3: things happened. A lawsuit was given a go ahead by 328 00:17:38,480 --> 00:17:41,840 Speaker 3: policy holders who said they're being raped by the high fees. 329 00:17:42,720 --> 00:17:46,360 Speaker 3: But just as ominously, the National Association of Insurance commissioners 330 00:17:46,600 --> 00:17:49,879 Speaker 3: have now taken notice and saying she We're going to 331 00:17:49,960 --> 00:17:52,720 Speaker 3: set up a working group to study this because the 332 00:17:52,800 --> 00:17:55,199 Speaker 3: incentives are wrong. There's an incentives for you just to 333 00:17:55,200 --> 00:17:58,920 Speaker 3: book business because your revenues come off the top line. 334 00:18:00,320 --> 00:18:04,600 Speaker 3: We point out that the company's earnings are supposedly twelve 335 00:18:04,680 --> 00:18:07,760 Speaker 3: dollars per share, but if you actually consolidated them, as 336 00:18:07,760 --> 00:18:10,399 Speaker 3: you should in our opinion, and as they've done in 337 00:18:10,440 --> 00:18:14,240 Speaker 3: the past post Enron, the earnings would be forty fifty 338 00:18:14,280 --> 00:18:15,000 Speaker 3: percent lower. 339 00:18:15,520 --> 00:18:17,480 Speaker 4: So this sounds like late cycle behavior. 340 00:18:18,160 --> 00:18:21,200 Speaker 3: It's just it's it's a kind of one off accounting 341 00:18:21,240 --> 00:18:23,600 Speaker 3: story that has been under the radar for a lot 342 00:18:23,680 --> 00:18:24,080 Speaker 3: of people. 343 00:18:24,520 --> 00:18:26,480 Speaker 1: And it's just again, this is kind of as simple. 344 00:18:26,600 --> 00:18:30,560 Speaker 3: They control these insurance companies, and the insurance companies have 345 00:18:30,840 --> 00:18:33,640 Speaker 3: very cyclical up and down earnings. They lost a lot 346 00:18:33,640 --> 00:18:37,919 Speaker 3: of money in the last quarter, for example, but Eerie 347 00:18:37,920 --> 00:18:41,000 Speaker 3: has smoothed it out by this construct, and we just 348 00:18:41,040 --> 00:18:42,879 Speaker 3: think it's it's an accounting. 349 00:18:42,520 --> 00:18:43,400 Speaker 4: Game, all right. 350 00:18:43,480 --> 00:18:45,520 Speaker 2: Jim, always a pleasure speaking with you. Thank you so 351 00:18:45,600 --> 00:18:47,160 Speaker 2: much for sharing some of your time with us. Jim 352 00:18:47,200 --> 00:18:49,800 Speaker 2: Chanos is founder of Chenos and Company.