2020-07-27 — ft.com
Chanos describes the current environment as "a really fertile field for people to play fast and loose with the truth, and for corporate wrongdoers to get away with it for a long time". He reels off why: a 10-year bull market driven by central bank intervention; a level of retail participation in the markets reminiscent of the end of the dotcom boom; Trumpian "post-truth in politics, where my facts are your fake news"; and Silicon Valley's "fake it until you make it" culture, which is compounded by Fomo -- the fear of missing out. All of this is exacerbated by lax oversight. Financial regulators and law enforcement, he says, "are the financial archaeologists -- they will tell you after the company has collapsed what the problem was."
All in all, it's "a heady witch's brew for trouble".
My guest has one of the best track records in the hedge fund industry. The Kynikos Capital Partners fund, a long/short equity strategy, has gained 22 per cent a year on average over the past 35 years -- double that of the S&P 500 index. In the same period, against the backdrop of rising equity markets, its US short-only Ursus strategy -- named after the Latin for "bear" -- has lost 2 per cent a year.
The past decade has been a difficult one for short-sellers in general, as trillions of dollars of central bank stimulus have lifted prices of assets indiscriminately across the board. How do you trade that? "Very carefully and painfully," he says.
Prolonged periods of quantitative easing -- most recently to ease the economic pain of the coronavirus crisis -- is "adding to inequality" by benefiting the people who own financial assets, says Chanos. He believes that the Federal Reserve ought to cut credit card rates for consumers, which are still 15-18 per cent in the US, and sees a potential political backlash against the central banks for their part in how "the rich have gotten much richer and the vast majority of people have not".
I return to the subject of Tesla, whose shares have surged around six-fold in the five years since Chanos began shorting the company. What is going on here? "I think Elon Musk has personified the hopes and dreams of this bull market," he says, setting out his bear case against Tesla, which he sees as unprofitable, highly leveraged and facing increasing competition. Tesla "burnishes its results through aggressive accounting", in his view. He also describes it as "a culture of deception" because it is selling self-driving to consumers, which as yet "doesn't exist".
What, I ask, is Chanos's main motivation: to be rich or to be right?
"I want to do this until they pull me out of the seat," he replies. When Wirecard filed for insolvency, there was "an electricity" that ran through Kynikos. "That keeps you going." And so, he says, does his belief that "this market is setting up to be one of the great short opportunities of all time".
"Trouble's coming, I don't know when, but it's coming."
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