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I want to welcome now our Bloomberg Radio and YouTube audiences as we bring in our big guests this hour. My co anchor for The Clothes Remain Boss It joins us now as we sit down for an exclusive conversation with Jim Chainos, President and founder of Chinos and Company. Jim, welcome back.
Oh good to be back. Thank you for having me.
You are a born skeptic. Some might even say cynek. You've built your career on questioning conventional wisdom, what people, what companies say. So when it comes to expectations for trumpnomics and the market under Donald Trump, what is the crowd perhaps getting wrong?
What are they not seeing?
Well? I think that and I've been posting that.
I think the budget cuts are going to be a lot harder than people think. I mean, we're going after kind of the low hanging fruit both practically and politically right now, like the USAID stuff. But this is is outrageous as some of the things that the Doche Committee is finding, and I agree that some of them are are pretty silly. I think that materially we're not really going to be able to do a lot until you get to kind of more serious items like medicare, medicaid, defense, the third reil.
And yeah, the.
Hot ticket third rail type stuff, and that's going to be much much tougher. And so I think we're still in the early parts of sort of political theater on Trumpanomics.
And then of course we have the whole separate issue.
Of tariffs, and that gets me to the next question. I mean, you look at Trump's policies overall, they're both populist and as you've described them, standard republican, but so far he's chosen to focus on trade war over say, cutting taxes. So what does this tell you about Trumpanomics in this second go round rather than the first attempt.
Yeah, so, I mean, he obviously came right out of the gate with the tariffs over this past weekend that have been walked back temporarily, so it appears they're serious there. We'll see the fact that Mexico and Canada kind of agreed to do things that they had.
Already agreed to do. I mean, Mexico had.
Ten to fifteen thousand troops on its border going back to twenty seventeen, and a promise they made to Trump the first go around and reiterated with Biden. So again, how much is political theater, how much is real? We'll have to see China. The China tariffs I think obviously are a lot more serious and are worth watching.
What's the economic risk?
Well, the economic risk, I mean there's a couple of problems with the message, which is, well, we charge enough tariffs, we really can eliminate things like the income tax and a lot of other sort of broad promises. And the fact of the matter is, I mean tariffs I think brought in about eighty billion dollars last year, and so you know, in order for tariffs to replace the income tax, which is about two trillion of our four trillion revenues, you gotta have a lot of tariffs.
So I don't think we're looking at that.
I think the question is is this being used as a national security cudgel as well as an economic cudgel or is it strictly economics. Because they really believe they can raise a lot of money with tariffs, the numbers just kind of don't pencil out.
I am curious.
So when we talk about the potential overhang of this, I mean, I know, in fairness to the Trump administration. It's only been a couple of weeks here, but the idea that now Mexico and Canada have won a one month reprieve, at least for investors and economic watchers, that's another month of uncertainty. Do you think we'll get more of a concrete policy, meaning an actual resolution of some form or another that will at least provide some certainty to.
The market with it the market likes it or not, that's all another conversation.
Yeah, well, I.
Think drama's part of the message remained. I mean, it wasn't the first administration. I don't see a whole lot different changing in this. I mean, the one thing you might might at least point out in the past administration for good or bad, I didn't have to, you know, check my my x feed first thing in the morning to see what was coming out of the White House overnight.
And so you know, we're back to we're back to a much more volatile set of political you know, political pronouncements and streams and walk backs, and it's a little more uncertainty.
Well, how much confidence do you have in the people around Trump? Because Trump himself, you know, he's just sort of this four text but there are some relatively competent people around him, including the Treasury Secretary, who you have some familiary with back when you were running Kinecolty Strange. He was one of your first analytics out there.
He was my first So you liked him, then, do you still like him out I.
Like Scott Passid an awful lot.
We don't show the same politics, but he's a man of real character, and I think he was probably the best man for the job given the political arena. So I'm hoping he does well. I think he you know, he will do well, hopefully, and I know he has the country's best interest at heart.
And you did see him, but you didn't actually get to talk to him about what he's doing right now.
Well, I was able to see him and congratulate him after he got the nods, so he's got his hands full.
You've described the last few years as the golden age of fraud, funny accounting, questionable behavior on the parts of investors of companies. How would you describe where we are now? Given that the lines between government and business are pretty much blurred, more intertwined than ever. You've got Elon Musk running dog, You've got the president selling his own meme coin. You've got regulators perhaps taking their hands off the wheel completely.
Yeah, I'm hard pressed to think that we're going to see less of it in the near term. It sure seems like we're going to see more of it. Look, this is a cycle the likes of which I've never seen. And the willingness of people to believe things that just simply aren't true never stops to ceases to amaze me, particularly as a cycle carries on. And the willingness of management teams now to project way into the future and make all kinds of claims and promises I think is
also sort of unprecedented. It's always been there, but it's greater now.
You know.
I've always said that bull markets place a premium on promises and bear markets discount reality. And right now there's lots of companies making lots of promises.
Lots of promises, but what is the reality? And I mean, and to Scarlett's point, you have some conflicts of interest in some of the folks who are I don't know if they're in charge. I mean they would say they're not in charge, but certainly sort of leading the charge in sort of trying to sort of root out whatever they think could potentially be bogging.
Us down here.
If you're not a friend of Elon Musk or a friend of Trump, and you're running a company or an investment fund, should.
You be worried?
Yeah?
I mean, I don't know.
I don't know how personal it's all going to get to companies and individuals. But but I am concerned that we have this whole new new structure set up with people that are basically going in again. And if you read the President's executive order setting up the DOGE Committee, which was an existing committee, the US Digital Services Committee, it has no budgetary authority or even recommendations. It's it's
set up as a technology in software consulting organizations. So obviously the bally Wick has expanded to be something much greater than that.
And the question will be, you.
Know, well, at some point a federal judge somewhere say wait a minute, you know this is you're going beyond your your purview, beyond your legal.
Does it undermine faith though in the system. I mean, particularly when I see people rooting around in the treasury system. I mean, we can talk about USAID and some of these other things, but the Treasury.
I mean, we're talking about the background.
Of our.
Structure.
Yeah, I mean we'll see, and we'll see to the extent when it goes beyond just you know, aerobic studies about shrimp and USAID and gets into social security and Medicare payments and things like that.
They're really serious.
And then I think you're going to see you're going to if there's any pushback, it's going to be pretty serious.
I want to shift to our conversation now to the tariffs on China, which you said are going to be much more serious. The US began imposing an additional ten percent tariff on Chinese goods, and Beijing's response was targeted tariffs on about eighty products, which hardly seems like a proportional response.
What does this reveal?
Does this indicate that China has more to lose from a trade war with the US than the other way around.
I mean, the argument for the administration is that they do right, that China has much more to lose. They're much more export driven country. We'll we'll have to see. I mean, I think China probably feels it was proportional, and we don't know what discussions are going on behind the scenes, So I think again, wait and see, but I think that ten percent isn't going to do it, by the way, I mean, getting back to our early conversation about the amount of tariffs you need to raise
serious revenues. You know, you would have to raise them substantially on both China and EU, and we haven't seen that yet. So we'll have to see what exactly comes within thirty days sixty days.
Does it escalate or does it cool off?
And it was an early campaign promise that he's delivered on and now he's moved on to something else.
But at the same time, this comes at a precarious time for China's economy. You've been warning for a long time about China's debt bubble and his broken economic model. What does the imposition of turfs now an additional ten percent, but you know, perhaps going even higher mean for that long term.
To be fine. Yeah, it doesn't.
It doesn't help it, that's for sure, because I mean, China saw fewer reliance on net exports after twenty ten when we first put out our warning, and it's growing again. And part of that is due to the fact that the investment driven model that we've been crying wolf about forever, albeit correctly, is losing its impetus to continue to grow, and the banking system is still bloated. And we've seen now problems in the residential real estate area completely trickle
down into the actual developers. So they've got a model that really now is facing kind of a crossroads with what they're going to do, and the US putting on major tariffs to one of their few thriving parts of the engine, the export manufacturing area isn't going to help, all right.
A moment of reckoning them perhaps for China, Jim. We look at the market. It's now three months after the election. The S and P five hundred is up about four percent, just about a percent shy of as record high. Isn't it still just a big long trade right now? How significantly different is the market under Trump than it was under Biden?
Well, I mean it did pretty well.
It did pretty well under Trump Trump first go round too, So it's done pretty well under both administrations. And historically the equity markets have done better under democratic administrations than republic administrations.
Everyone kind of forgets that, but it's.
Hard pressed to see if you just look at the continuity of the last eight or nine years, or even going further back where where the elections were, because I mean, really they've the market's done pretty well under all administrations.
And because it's done so well, there's little institutional appetite for short selling. And just over a year ago you converted her hedge fund into a family office and an advisory Because of that, we recently saw activists short seller Nate Anderson quit as well, shutting down Hindenberg Research. Is the traditional short selling strategy just dead now?
Well?
I mean, so there's two different models there that you've referenced, the sort of traditional model that we employed for better part of forty years, which was just simply putting on short positions hedged or unhedged for our clients who were looking for that exposure. And then there's the short activist model, which people like Nate and others have perfected or really done well with. And so I think it's almost two
different questions. There is virtually very little appetite for a short oriented fund product.
Even if it's hedged.
Now.
A lot of that is the advent.
Of the so called pod shops, the multimanager shops, which have done a pretty good job of delivering returns with very little net exposure, which is what the long short industry did for years and years and years. That changed the long short industry morphed into basically mostly long on the hedge fund side. But I think that I think there's always always a market for insurance, as I've said, and remember that good fundamental short.
Positions allow you to be more long.
That's always been the point that they allow you to finance your lungs.
So for us, it was passive, right.
We we bought the indices and had our short portfolio. And by the way, I mean Bloomberg has a wonderful short index and it's in the terminal, the Goldman Sachs Most Shorted Index. It's rebalanced monthly. If you looked at that since the Game Stop episode where everybody has basically said short selling is dead, you know, there's the risks are too high, and you simply shorted that index, bought bought the S and P or a related passive index
rebalanced monthly. That return has been spectacular, and so so there's still alpha on the short side.
It's just nobody thinks it's there anymore.
That's on a more of an index level. What about on an individual.
Well, no, that index is actually individual.
Stocks, the most shorted stocks. It's a representative portfolio of very dicey companies, a lot of which we were short.
Well what's the risk out there? I mean we talk about I mean, we've sort.
Of written all these headlines about the demise, and.
I know it's not completely you know, we talk about I mean short bias funds down like seventy percent since the financial crisis. But even activist campaigns, I thought last year was like a record low despite all the headlines that we got out all of these companies like Starboard and a few others, it was a record low year for activist campaigns. Is that a reflection of market dynamics or is that more reflection of public and political dynamics.
Well, I think it's both. I mean, I remember, I mean the market.
Prices are people's you know, facts, people's opinions based on facts, and so you know, people have gotten much more bullish over general political level, level of regulation, the promises that companies made. It we talked about earlier. So I mean these are all part of a bullmarket. I mean, it's just it's just the cycle has lasted a lot longer than a lot of people were thought, including me, But
I think that that can change too. And and so the problem is is that price levels and the and where we are in that part of the cycle don't give you a good sense of timing. They do give you a good sense of how much risk you're taking should the timing change.
It feels like there's a lot of risk in this market right now. When you look at public market valuations, whether on an index level or an individual stock level, valuations are high. You look in technology, you go deeper into AI, the valuations are even higher.
Can you make a case there is a bubble out there?
And the speculation is there remain not quite as where it was in twenty twenty one, which is the most speculative market I've.
Seen, but it's getting back there.
I mean the speculation and meme coins and again or just people are floating these.
So you did not buy the Malania coin as much.
As I didn't buy the un round coin that was floated yesterday.
By the way, So yeah, so there you go.
So I think that that, yeah, these are all signs and what we haven't seen yet which we saw in twenty twenty But I suspect we will see soon. Is a lot of issuance. As I've always said that Wall Street has a printing press too, just like the fat and once that printing press goes and everybody gets filled, generally you end up with some heavier weather, as we did in twenty twenty two.
I haven't seen it yet. I suspect we will.
I want to get your thoughts on deep Seek, the revelation of deep Seek and it's technological breakthrough a cheaper, more efficient AI model. Does it help answer the question of whether we're in an AI bubble?
Well, what I pointed out when it came out, and I know nothing about LM models or any of that, which one is better is it underscores the risks of disruptive technology. And that is, when you are betting on disruptive technology, you have to always consider the risk that that technology will be disrupted itself by a better mouse trap.
The kid in the garage.
You know, we can talk about all of the possible risks, and that's something coming out of left field that I think, you know, can change the argument. So I think that's what deep Seek underscored was that wait a minute, maybe there's a way to.
Do AI with less cap x, less chips.
You know, cheaper, and nobody had kind of really considered that until Deep Seek. Now I don't know that deep seac it dethrones the other models. It's beyond my pay grade, but it does underscore the risks of paying multiples of revenue that are historically considered you.
Know, egregious.
And now we have companies routinely trading at twenty thirty forty times revenues. Yeah, so that gives you an idea of the risk those in those businesses.
I look at Palinger and how well it's done, and it's talk about untamed organic growth. So at least when it comes to big tech and AI, this threat of disruptive technology, do you see any evidence that institutional investors maybe have an appetite to start hedging or looking to protect against them those positions.
Well, they should by seeing it yet, but they should. And as I said, and the other thing I'll just mention about disruptive technology is in the up phase of it, as we saw in the late nineties when the Internet,
which was certainly a disruptive technology. Everything is a positive The Internet will affect all things positively, and in fact, what we found and what I and my clients made a lot of money on from two thousand and twenty ten was how many businesses got unfortunately disrupted by the Internet, how many businesses went away. And I suspect that's going to be the same thing in AI that not a
lot of people are talking about yet. I mean, AI is a very revolutionary technology and will be benefiting lots of things and hopefully humanity, but by definition it will put a lot of business models out of business.
Yeah, and it's already We're always starting to hear talk about that. I was interested in how so many people were dismissive of deep Seek and its founders. I know there are a lot of questions about exactly what they did and how they paid for but we saw that same dismissiveness back during the computer era when that was coming up, and of course during the dot com bubble what led up to the dot com bubble. A lot of the giants today, I mean people scoffed that Jeff
Bezos and Amazon. People scoffed at what Apple and Steve Jobs were doing.
Right, And again those companies had had.
Big valuations in the up part of the cycle.
But what everybody forgets about Amazon, for example, is the two ninety plus percent declines that had you two, three and seven eight along the way, and for me to tell investors, well, that's fine, but by the way, when you're down ninety five percent, tell me if you're still holding and adding to the position number one.
Number two.
We then forget about the America onlines, the yahoos, the ask jeeves, the businesses that I.
Remember them, I still mock them to this day.
But do we also forget about I mean then wrong, the world comms and all that, because how am I supposed to believe that at all of these companies that are trying to sell their AI product and giving numbers as to what they're selling are on the output out, particularly because we don't have a.
Jim Chanos out there rattling the cages.
Maybe I'm still.
Trying occasionally, Yeah, but look, you underscore an important part that fundamental short sellers play, whether fund managers are activists, and that is there's still the only ones incentivized real time other than journalists to point this stuff out.
As we wrap up our conversation here, if investors are indeed less sensitive to valuations, and that certainly seems to be the case over the last couple of years, and passive funds are driving a lot of the price action the inflos there, what is the impact on the health of markets overall? And I mean, I guess you could expand that to capitalism.
Yeah, So I've had this discussion with my friend Mike Green, who's been talking about this now for for years, about passivity and the impact on markets, and will it just simply lead to more disruptive events, meaning everyone going one side of the boat but then going to the other side of the boat, so flows become much much more important.
I mean, I certainly have hope that's not the case, inextremists, it's certainly happening now, because the fact of the matter is is that if we can't differentiate valuations, if it's all just a matter of flows, then an important part of capitalism and signaling mechanism and capitalism is broke.
Right.
You don't want to be sending a lot of money to the enrons and world commes and pharrnosis of the world, you know, you want to.
Be sending it to the amazons.
And so we hope that the market starts differentiating these beyond your simple flows and narratives and positioning and all the things that everybody watches now like a hawk day to day and hour to hour, because if not, we got a bigger problem with capitalism.
Final question to you, what's the single biggest risk you see in next six to twelve months.
Something that I don't see probably, I mean definition, it's the stuffy exactly. I mean, look, I think the political theater is going to get ratcheted up. It seems that way that we're heading to kind of an issue where Congress is going to have to say, well, I'm just going to abrogate my entire responsibility to the executive branch.
So I suspect, I suspect.
Day to day it'll be politics, but the real risks will be something like deep seek that comes out of left field, that changes people's thinking, and you know, by definition, we don't know what that is, all right.
Causing a complete rethink, a complete reset, perhaps some investor expectations. Jim, thank you so much for joining us today. A real pleasure speaking with you. Jim Chanos is president and founder of Chaos and Company, and I want to thank my colleague remained Bossic as well,