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