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Hello, there are all thoughts listeners.

You are about to listen to a very special episode.

This is a conversation recorded live at our recent event in New York.

That's right, we had a live Odd Lots event on June twenty sixth.

We had tons of conversations.

We're going to be rolling them out in the days ahead, but the first one we wanted to bring you was our headliner for the night, Jim Chanos.

That's right, the famed short seller.

He was there giving us all his thoughts on the market right now, So take a listen.

All right.

First question, our bitcoin treasury company is the stupidest thing you've ever seen in your entire life.

You know, it's rarely, rarely that I have to increase my personal security after a podcast, which I had to do after your our last podcast together, when I send some intemperate things about bitcoin treasury companies.

Look, I mean, look, here's the thing.

I get people very agitated about this, and they point out on just what a genius idea this is, and I keep trying to point out to them I'm doing the same thing that guys like Michael Sailor are doing.

I'm on the same side of the trade, and I keep pointing out to my critics, you're on the opposite side of that trade, and you don't want to be on the opposite side of the trade.

And the bitcoin treasury paradox being that you are the one buying the pieces of paper that have infinite supply so that Michael Sailor and I can buy the digital asset with the limiteds And it makes kind of no sense.

So what will inevitably happen is happening in that is there's nothing proprietary here.

This is just simply raising capital to buy a financial asset, and other companies will do this.

And in fact, even since the podcast we last did, I think the number of companies that have announced this strategy is you know, scores more.

I think there's over one hundred in the US and over two hundred globally.

Now, so who's actually buying micro strategy because you know, I.

Thought everybody on my timeline.

Okay, but I thought once the spot ETFs, the spot bitcoin ETFs came out, like this business model will go away, and it hasn't.

No, because there's a wonderful sales job that's being done about the fact that this is an economic engine in and of itself, and so therefore terms like bitcoin yield are used, and they've called them financial gibberish because they are and in fact this will get armed away ultimately by companies that will do this to try to capture that spread.

In the case of micro Strategy is substantial.

It's still fifty billion dollars something like that of the difference between the value of the enterprise value of the company and the value of their bitcoin holdings.

But the thing that really kind of shot me into orbit on all this was when a sailor and others then said, well, no, you can't really value us on an NAV basis and so called m NAB multiple of NAV.

You actually have to also give us additional value for the amount of profit that we make every quarter from the appreciation in the asset.

And I just pointed out, I said, well, that's like saying, you know, my whole net worth is in a house that's worth four hundred thousand dollars that is now worth five hundred thousand dollars a year or two later, And my net worth is not five hundred thousand dollars now, it's two and a half million, because it's the value of the house plus a multiple on the increase in the profitability the asset.

When you put it that way, it sounds a little absurd.

It is absurd.

There's like two hundred of them now right, it's over two hundred globally.

Yeah, that's wait.

I have one more question.

Why did microst I have to remember to call them strategy, but I can't bring myself to do it.

Why did they switch from issuing the convertible debt to preferred shares?

Because he realized that as he began to issue more and more common it was putting pressure on the premium.

So now the latest iteration is what we're going to do this quasi equity security, quasi debt, preferred stock, and then we can torque up, we can lever up the balance sheet.

Now this is a company who's selling point a year ago was we're not going to lever because we have this wonderful equity that we can issue at a premium.

And now they're saying, well, you know, if maybe if it's trades above two x, will issue equity, but if it's between one and two x, we'll do preferred And then if it's below one times, we'll buy back common and then what is Chaino's going to do, to which I said, well, I'll be out of the trade by then.

You know, if it's at one time's anav it's not a trade.

So that's kind of the latest game plan.

But stay tuned.

It'll change.

I think the narrative keeps changing.

The other one is, of course that micro strategy will be put in the S and P five hundred and so that will be untold riches for everyone that doesn't know that's going to happen.

We got to move off this topic because I just find it so depressing, you know, like I read the news and the like, oh, like, you know, some big breakthrough with batteries and China is happening or whatever.

And then the big entrepreneurial innervation in the United States is the two hundredth company that's borrowing money right, Like, it's too bleak when you really think about it's too bleak exact to contemplate.

So on Tuesday or Wednesday morning, shares in real estate companies fell after Amdani's victory.

What's your take on New York City real estate these days?

Well, I guess I'm glad I sold my apartment last year.

But look, I think a lot of people are surprised.

Clearly New York City real estate and commercial real estate will be challenged if a lot of things happen that the current front runner wants to happen.

I think there's a lot of restrictions that will be put in front of making some of that stuff happen.

But my friends in New York City commercial real estate have said, really, the regulatory framework, in the legislative framework in New York and New York City has done nothing but get worse over the last fifteen years.

And I'm kind of stunned that some of the publicly traded companies like Bornado and sl Green still have the cap rates as low as they do.

I mean SLG we looked at yesterday and it's cap rate is still five point two percent short.

We've been We've been short SOLG on and off for a number of years, and we are again.

And I just I don't get the risk reward on a five point two percent cap rate in New York City commercial real estate right now.

I think it should be seven or eight, is right.

You can get four and a half percent by buying your treasure, right, exactly.

Yeah, and so if you're buying it at five to two year, and that's redaccounting.

Reaccounting is also pretty pretty squarely by the way, for a lot of reasons.

You know, they don't include overhead in the cap rate, and of course there is real depreciation in some of this stuff.

There's maintenance capex in New York City, it's pretty high, and that doesn't include any capex.

So I don't get it.

I don't see rents going up here.

I guess it would be the easiest way, and that'd be the only reason you'd be buying office buildings at a five cap What about residential Yeah, I mean, you know it's weird.

I mean, your audience knows better than I do.

I mean, it's problematic in so many ways.

There's not enough supply, all kinds of weird regulations.

Things are expensive, and you can kind of see my mom Dommi's message resonated with a lot of people.

A lot of it has to do with the cost of living here.

Have you been on the receiving end, I guess dialing and you have the calls to gather capital for a challenger.

Well, I'm not in New Yorker anymore.

But the answer is yeah, but which receiving or calling?

Receiving?

I'm not calling, but yeah, sure, and.

Who are they saying who?

I'm not gonna I'm not gonna get into that.

Those are private conversations.

I think I think they're all pretty pretty silly at this point.

Yeah, it was a good try, Jock.

Yeah, Okay, Well, since we mentioned the word bleak a couple times in these conversations, now, is it bleak being a short seller in the current market.

It's not a lot of fun, but it's never really been fun.

I mean, I started my original fun back in eighty five that that was a thirteen hundred, so it's pretty much.

And you know, we started hedging back in ninety six, so you know, it's always a slog.

It's never easiest.

Why a lot of people don't do it.

On the other hand, the idiosyncratic opportunities most things fail, as you know, and the idiosyncratic opportunities have probably never been greater given the market we have now and with things like bitcoin, treasury companies and all kinds of other things.

It's just are sort of head scratchers, and our function of general animal spirits so there's a lot to do, and I think that's the fun part of what I do is there's a lot to do, and seemingly more every year.

But some of the stuff going on right now is a bit of a head scratcher, and we don't try to predict where the market's going.

But the animal spirits are definitely back.

You know, it's like several years ago, we're twenty twenty one.

People could have blamed ZERP.

It's like, oh, it's because the rates are at zero and that's why everyone's going crazy.

And I do think it's really interesting how much speculative activity has persisted and the ZERP excuse does not hold water anymore.

So we got to find we got to find something new.

Speaking of idiosyncratic opportunities, one thing you've been talking about a lot and multiple times on the show is the data center Reach and Equinix.

I think just had two terrible days in a row.

What's going on with that?

So these are the companies that have clouds, but they're not like the hyperscalers, like what's there?

So I think the legacy data centers and there's only a couple companies in the United States that really have legacy data centers, there's equin X, there's Digital Realty, and then there's a sort of the old colony capitals now called Digital Bridge and they own these things sort of in fund format.

And when we took a look at this with our partner back in twenty two, the idea was pretty simple and we did not see the AI explosion in mid twenty two, but the idea it was a pretty crummy business then working on the cloud and SaaS demand.

But it became a really bad business with the advent of AI because it just moved the hyperscalers to invest more in state of the art data centers.

And these are older data centers that were short and the idea being that the new GPU centric data centers need liquid cooling, They basically need all the infrastructure ripped out and replaced.

And the business was not a high return on capital business before this.

It's getting even worse now.

And what equinec said yesterday at their analyst day was that revenues were not going to quite be what people thought they would be, but more ominously, capex was going to keep increasing.

And that's what we've been saying that these are not like warehouses where you're just going to collect a check.

These are actually operating businesses where you have to service the servers, you have to make sure there's redundancy.

It's just it's a business, a tech business, and they're traded as reats, and that was kind of the opportunity.

That was the sort of dichotomy in valuation.

So people added back to the depreciation as they do with reats, and they value them amount a so called FFO or AFFO, which is a cash flow metric.

But in fact, unlike warehouses, shopping centers to lesser extent office buildings, the capex was real depreciation was a real expense.

So to give you an example with Equinex, yesterday they said our capex is now going to bump up to between four and five billion a year.

Well, the problem is that Ebit Davis year is expected to be four point five billion, so all of that's going to go to capex, meaning they're going to have to basically borrow or issue equity to pay their interest and dividends.

And that's just the definition of a bad business.

And it's a business that's not growing very fast.

So unlike other really true AI companies which are growing twenty five thirty forty percent a year.

These guys are growing three percent, five percent, six percent, sort of a GDP, So there's no growing your way out of this, and so they're just really bad businesses trading just nosebleed valuations.

On the topic of idiosyncratic opportunities, I got to ask about Carvana because when my husband and I moved back to the States in twenty twenty two, we bought a used car through Carvana and that was a mistake because it took us about six months to actually get the car, and they lost all our paperwork and it was just an absolute nightmare.

And I thought at the time, this is a company whose entire business model was basically built on regulation, right, Like, that's what they're doing.

And I thought, they're not going to have a future if they are this bad at it.

And yet the stock is up.

It's yeah, well it's done a double round trip, right.

It crashed ninety nine percent and now it's up one hundred x.

So it's pretty interesting again.

And the reason it's interesting is that if you go through the numbers, they are making more than one hundred percent of their pre tax profit from gain on sale of loans, subprime loans and gain on sale of equity stakes in other companies, and you x those two out, they're losing money, and they're losing money now, right after the rebound, after the restructuring from twenty twenty two to twenty twenty three.

And this is a company that is being valued again as a secular growth stock that saw its used car revenues drop thirty percent between twenty twenty two and twenty twenty three, So it's not necessarily a secular growth company.

The accounting is abysmal.

And then what people are really missing is that what's happening in subprime auto securitizations right now, and you can track it on your Bloomberg Terminal delinquencies are starting to skyrocket.

Yeah.

We actually did an episode on those recently with Jim Egan.

Yeah.

And so again, a huge amount of their profits comes from selling generating paper from customers and then selling it in the open market or to affiliates.

And this is a company that was spun out of a company called Drivetime Finance, which is their affiliated finance company, which was originally called Ugly Duckling in the late nineties, which was run by the Currencyeo's father, and that company collapsed in the first subprime blow up, which was not the GFC, was actually in the late nineties in subprime auto credit and consumer loans, and it didn't go bankrupt, but it came close and he had to retract ructure.

He bought it, bought it in private, and then restructured it and renamed it Drivetime Finance.

But that's the genesis of Carvana.

That's it's DNA.

It's basically a subprime finance you know, lead company, if you will, And those companies should not trade at forty and fifty times expected earnings, and they don't by and large, the consumer finance companies, So it's an odd bird.

It's still heavily leveraged, and the stock is up a ton.

But what really got us interested again recently was the vast amount of insider selling that has just started in May and June in the company.

If you go look at the insider selling in the company, it is just now a torrent of everybody selling like pretty much every day, and we just don't think that's a good sign.

Given what's happening in the subprime securitization market.

One area of the financial ecosystem that you've been cynical about in it goes cynical out for a long time is the private equity and a lot of the private assets.

And something that I've been talking to some people about and you hear people talk about, is not so much necessarily that the values have gone down, though probably in many cases that they have, but that it's been a long time since LPs, etc.

Have gotten distributions, et cetera.

Whether it's venture at the venture level, the pe level.

How long can that go on where it's like people are not getting.

Cash out, Yes, so before it becomes a real problem.

So I really kind of got much more interested in this area serving on a couple of big investment committees in Manhattan, and one of which had a really really huge slug of our assets of this of this nonprofit in privates, in private equity for the most part, a little bit of venture, a little bit of real estate.

And what always struck me was that we spent a lot of time talking about the market, talking about our managers, talking about why hedge funds were terrible, and then we get to the part about private and they say, well, the returns are lagged by a quarter so you know, here they are, and let's move on.

And I started looking at the numbers, and this is a fund that had all the premier firms, the ones you all know, and gee, stock market's doing awfully well, and we're kind of doing ten percent eleven percent in terms of real life perturns and then estimated IR which is problematic for reasons a lot of your audience knows.

And is it just me or are we not understanding we're leveraged long equity in these entities and yet we're underperforming the indices.

That was five six years ago, and I think that that's only gotten worse since.

And so I'm really beginning to wonder.

Private equity was considered a panacea for or nonprofits and foundations endowments because basically, as my friend Cliff Astd has said, it was volatility, you know, laundering if you will, because no one ever showed you a big down quarter.

But now we're getting to a point where a lot of these funds are really mature and the actual returns themselves are not going to be mid teens with low volatility.

They're going to be high single digits, low double digits.

And we can look at the SMP and say, Okay, you know I'm doing better in that, and I'm liquid and I'm not paying fees, and so I suspect that private equity and ultimately private credit are going to be where hedge funds found themselves ten to fifteen years ago, having to justify their existence after having a pretty good run from the late nineties to the GFC.

I suspect that's where we are in private equity.

It'll still be a very lucrative business.

But I just think it's golden days are over where it was just a free lunch of mid teen returns with no volatility.

Does anyone ever ask you what you're bullish on?

Should I ask?

Look, we're long equities, right, we're long stuff.

A lot of people in the audience are long Give us some example.

Well, I mean we're long indity, so we're long general corporate America.

I just, you know, I just hate the stuff.

I'm short.

I think you're supposed to get emotional every once.

In a while.

So's There's one other things though, I do want to mention, and that is I was talking to someone earlier today, and I think one of the things underappreciated by investors, right, now in One of the things that's been the most interesting to me is how corporate profit margins have held up, which used to be very mean reverting as you know.

And the more work we've done on this, the more we're kind of convinced that the capital spending boom we're seeing due to tech and specifically AI is is looking very much akin to the global internet build out networking build out in the late nineties.

And the problem there, of course, is is that if you buy my chips from Nvidio or you were buying my networking equipment at Cisco and Lucent, that's revenue for me and profit, but for you, it's a capitalized expense, right, it's written off over time, and that has a big, big boost until people pull their orders.

And that's what we saw up in two thousand and one, two thousand and two that GDP dropped about one to two percent in the recession of one to oh two.

Does anybody know what corporate profits did that?

And that was an investment driven recession.

Consumers didn't feel it at all.

Earnings were down about forty five percent I think from pete to trough.

In the s and P they were down about the same little bit more in the global financial crisis, but of course GDP collapsed.

So here's a little interesting thought experiment right now in videos revenues are about one half of one percent of US GDP about one hundred and forty billion dollars, and our GDP is about twenty nine trillion.

Okay, anyone tell me what Cisco and Lucent the two companies that you needed when building out your internet network in ninety nine two thousand, So, I mean, know what their combined revenues of percent of GDP was in two thousand.

No, using your phones, it was a half a percent.

It was it was roughly fifty billion dollars total on GDP of ten trillion.

So those revenues stopped growing at some point shortly thereafter and actually shrunk a little bit.

So the investment boom we're seeing right now we've seen before.

And it's not just chips, right, it's Caterpillar.

It's people building the data centers, it's people building new utilities.

I mean, there is an ecosystem around the AI boom that is considerable, as there was for TMT back in ninety nine and two thousand, But it is a risk year revenue stream because if people pull back, they can pull back CAPEX very easily.

Projects can get put on hold for six months or nine months, and that immediately shows up in disappointing revenues and earnings forecast if it happens.

We're not there yet, but that's one of the risks out there that I think a lot of people are under estimating.

So one of the reasons that we like talking to you, and a consistent thing that I've noticed in the almost ten years of doing this podcast, it's always you learn a lot talking to people who are really steeped in accounting, and that people who are knowledgeable about accounting just I don't know, they seem to be have more interesting things to say than a lot of other people.

AI be able to do accounting, some of these sort of understandings of you know, whatever capitalized expenses, and like, is this coming for the accounting well profession?

About coming for the accounting profession.

That's a good question.

I think the AI that we've seen and used is getting better and better at pulling numbers together and making sense of them.

It's not quite there yet.

When I've done it, I find lost and lots of errors.

Not so much in the numbers themselves, but the implications of the numbers that AI is still not getting that great, but it's going to, I think ultimately, And the question will be for sort of tonight's conversation, and keeping in the theme is where we made a lot of money on the short side, idiosyncratically after dot Com from sort of three to nine were in analog businesses that saw their business digitize.

So if you were selling an analog product that became digital, you were in a lot of trouble.

Think like Kodak, buster of Yellow Pages, those kinds of businesses, right it suddenly just didn't have to exist, and there's going to be a raft of them post AI, and people are already kind of starting to think that through.

But there will be industries that are collecting what I call agency rents that will suddenly not be able to collect those agency rents, and we're trying to keep an eye on that.

But I do think that the issue isn't so much the quantitative numbers that AI will be able to generate and give you ratios and things like that, although Bloomberg does a pretty good job of that already, right, I mean a databases, but interpreting it and We're not there yet in terms of understanding what an increase in receivables are three times revenues or increase in cost of good soul relative to inventory.

But it'll get there.

It'll get there within the next couple of years.

So one of the things I always wanted to ask you is how you think about, I guess the timeframes of some of your short bets, because it's it seems to me like, you know, we can sit here and talk about how crazy cap rates are for office buildings in New York and subprime loans and Carvana and how stupid bitcoin treasury.

Companies are climbing car sales at Tesla.

That's right, and yet you know, the key to all of this, to making the money on it, is actually calling what the catalyst is going to be and when the stock eventually falls.

Yeah, after forty years, I've kind of figured out that the catalysts are really evident pretty much in hindsight, that if the catalysts were that obvious, it would be priced into the stock.

And so you can look for signposts a long the world, but they're just that.

Now there's some that are better than others.

You know, a massive increase in insider selling and executives leaving has always been a good one.

For the most part.

It's probabilistic.

But I think that timing is you know, always like say, you know, only short the stocks that go down.

If they don't go down, don't short them.

And it's hard, and it's why being hedged pretty much systematically to us made a lot of sense for the last thirty years and say, okay, we're going to take the market out of what we're doing and we're going to just try to isolate the datias andcratic attributes of our shorts.

And even then, I mean, stuff you would think would bring a lower valuation out of common sense, you know, doesn't happen in a brilliant bull markets and in fact can be a negative factor.

You know, the worse the company, the more it goes up.

So you have to be willing to understand that concept as well.

But again it's it's it's funny.

You know, Equine's coming out of the blue.

Just to use the example, we've had tonight and stocked on twenty percent in two days.

I mean, everything it's said an analyst day was known to anybody who was paying attention.

But yet they came out and said it and everybody went, oh wow.

Ouch.

Speaking of executive departures, I think there was another one today at Tesla, someone who is like, I think, pretty close to Elon or somebody been there for a Brillian time.

Do you have a Nobody cares?

Nobody cares?

Do you have a Tesla thought of the name?

Nobody cares, that's my thought.

Nobody cares.

Yeah, you could.

You know, you could see Elon, you know, robbing a Brinks truck with a mask or whatever's Elon.

You know, I'm sure they're going to have a new business of robbing Brinks trucks and you know, we'll put a we'll put a trillion valuation on it.

I've given up trying to figure out what people think about about executive departures at that company.

I mean, their car sales are plummeting, their cash flows plummeting, you know, all the metrics that you would look as security analysts.

But it's a unique animal where people say, oh, well, of course, yes, but you know, Rosie the robot is going to serve me my breakfast and it's going to have Tesla trademark on it, so you know it's worth a trillion dollars, So there's always one stock and every bull market that has that at least that imprimiture of right of I call it hopes and dreams.

Everyone can can really project their hopes and dreams onto that company and then value it any way they want.

And Cisco was that company, by the way in ninety nine.

And it's undoubtedly Tesla because companies are actually executing in some of these fantastic areas of the future, like Nvidia and others traded a discount to Tesla and they're actually doing things.

You know, he's just talking about doing things, but it doesn't matter at least not yet.

To get to your timing.

Question, Jim Chandos, thank you so much.

Always a thrill to Cheveril.

Thanks guys Khan.

This has been another episode of the All Thoughts podcast.

I'm Tracy Alloway.

You can follow me at Tracy and.

I'm Jill Wisenthal.

You can follow me at the Stalwart.

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