Jim Chanos on Financial Fraud (Podcast)

a short seller for pretty much his entire career. On a fundamental basis, he understands why companies go out of business and what the signs are that investors should be looking for. He teaches a class at Yale on financial fraud. There really is no one better to discuss the world of short selling and fraud than Jim Chanos. So, with no further ado, my conversation with Jim Chainos, This is

Masters in Business with Barry Ridholts on Bloomberg Radio. My extra special guest this week is Jim Chanos of Kinkos Associates. He is famous for exposing a number of financial frauds, including Boldwin United Uh. He was a critic of Drexel Burnham and he of course was famously short and Ron, which eventually went bust in a firestorm of accounting, fraud and problems. Jim Chanos, Welcome back to Masters in Business.

Always good to be back, Barry UM. Next time we do this, we'll have to do it in person, but for now we'll we'll operate remotely and UH, I won't get to see you WinCE UM when we talk about certain subjects. But for people who may not be familiar with you, explain exactly what kind of coast does and how you work. Well, we're celebrating our thirty fifth anniversary UH this year. So UH what I set up the firm in to basically provide hedge services for UH high

net worth individuals. IT it then morphed into institutional investors and basically we construct short portfolios based on fundamentals for investors who want to hedge their portfolios or or go more long by being short. UM. And so the the ethos of the firm was was I like to joke that that I mean the insurance business UM. And what we're trying to do is construct better hedges than than just passively UH hedging a portfolio using futures or et fs and UH and we're still doing it thirty five

years later. Do you tailor your short selections to a specific portfolio. Oh, so you're edging across the board the sort of risk they have. Do how narrow and specific can you get? Well, so we have we have funds that are are open to to a broader group of investors who are qualified and and there we we have our core portfolio, whether it's a US only or a global portfolio of which the US is a subset. But we also run managed accounts for large investors who have

specific needs or specific restrictions. Uh, we can't do certain things. We can't do certain geographies, we have to be above certain market caps, and so on and and again it's up to the client. The idea is to is to provide the service that the client needs and wants um for for their needs. So we we try to let the client do the asset allocation um and and we will dial up or dial down the short exposure as needed in our funds. However, of course we need to

do that. Quite quite interesting. So thirty five years that's a good long run. How has the art of short selling changed over that time period. Well, it's changed in a couple of ways. I mean, the the the biggest change and most obvious change is the massive reduction and interest rates that have occurred over that period, the sort of generational or more UM and and that of course, UH reduces returns because part of the return on the short side is the rebate you get from the prime

brokers in the cash received from the short sale. UM. There's a misconception out there that short selling is costly. In fact, short selling actually produces income to the extent of the rate on short term rates. So it hasn't produced much income in the last few years, given where short rates are. But back in we were starting with a six or seven or eight sent head start every year because the short cell proceeds UH invested in cash or T bills yielded high single digits. So that's number one,

and that's that's sort of beyond our control. UM. The other more interesting development is how how we and other investors I think process information and UH and and this applies to the long side as well. But on the short side, UH you really UH had to go out and and find information. In the eighties, if you had a ten queue hot off the presses, if you will, from a filing, you might have the information ahead of

someone for two or three days. UM. Today, information, as you know, comes at you at a fire hose, and so it's not the obtaining of information, UM, it's the the analyzing and processing of the information and the sifting of information that I think gives you an edge in

fundamental investing. UM. Of course, then with the advent of much more machine learning and algorithmic traders, you have uh, basically computers looking for word changes and looking for various different patterns at a rate at which humans can't even comprehend.

So in some ways, generating alpha on the short side or the long side really involved sort of thinking beyond a you know what the immediate information is UM, or more importantly, if the information being presented to you, which is often the case in my world, is intentionally misleading. And I think that's one of the few edges that short sellers have in this environment where the computers can read things faster than you can. UM, often uh that

information is being gamed. Huh. Quite quite quite interesting. So so you mentioned UM, big machine learning, big data AI, algorithmic trading. There seems to be an infinite amount of competition on both a long only side and the active side.

What sort of competition exists on your side of the street, on the short selling side, well after thirty or five years and basically a bull market, and certainly ten years of a bull market, UH, the last ten years, as you might imagine, there aren't a lot of people doing what I do. UM. I think longer term that's probably a good thing. But the number of people who actually want to engage in fundamental short selling UH usually can fit around a dinner table and sometimes does. Well. That

sounds like an interesting meal. I'll have to work my way into an invitation the next time there's one of those. So so, given given this small amount of competition, UM, what makes each short seller unique? Are everybody looking at the same things and taking the same positions? If you're all fundamental or are some of the short sellers out there a little more technically oriented. Well, again, if we're gonna just speak about fundamental short selling, most of it

is done within the guys of long short funds. So are like or or something like that, or just a traditional you know, some of the well known names that that that we all know in the hedge fund world, you know, have teams that that look for shorts. So that's that's really our competition. Then we consider them to be very good competition. UM. And then you have people, of course that specialized. You can look at someone like Carson Block that that has focused internationally and non China. UM.

We've generally been generalists. We look all around the globe. UM. Typically we've always looked in the mid to large cap area. There's an awful lot of short sellers who have done very well focusing on on small caps and microcaps UM that that's never been our world. And so you know, we've generally avoided it for a lot of reasons. But

they're people that do that. And and and then you have the whole new world of activist short selling where people go out and and and and publish UM two on their website or on social media UH their research UM, you know, for for everybody to see. And and we've our view on that is is that we've, as you know, selectively disclose our ideas as we see fit. But but don't publish long reports, nor do we publish on on

the vast majority of our UH positions. We may we may be public don five to ten percent of our positions at any one time. So you raise a very interesting question here about short positions explain to the general investing audience why short sellers don't like to be public with their short positions. Well, there's a there's a lot of reasons for a lot of them having to do

with issuer retaliation. Number one. UM. One of the there's lots of asymmetry on the short side, and one of them is that corporate managements don't like to be held to account by short sellers by and large, and often we'll use shareholder funds corporate funds to harass or litigate against short sellers UM in the in the guise of of of trying to protect the company. And so that's number one, and that just raises various different agency risks

for for someone that does that. UM. And number two, I mean, like all things being equal, I think, as any businessman, you'd rather keep proprietary what you'd like to keep proprietary, and only take an issue public what luck you have to or choose to And uh, I think

that that's UM. One of the one of the one of the odd paradoxes of that is is that I've always wondered by the money management UM industry has not fought back on the on the SEC's disclosure rules for long investors UM who are not in an activist campaign or are not in a corporate control campaign UM, because there were all kinds of UH people that follow investors UH in their portfolios. And and for investors who don't turn their portfolios over a lot, they're in effect giving

away their intellectual property for free. And the industry has never really challenged that. And I I don't know why. Let's talk a little bit about the challenges of being short in a market that seems to want to do nothing but go up except for very brief periods. What have we quadrupled from the lows of oh nine to the highs? How do you maintain short positions into the teeth of that? Well, so there's a big misconception about our business in that we run most of our accounts

either actually hedged or benchmarked long. So so again it gets back to the whole idea that we're providing a hedge and not necessarily being directional for most investors. So and we started doing this in the mid nineties UH, and and the idea being that were long the market in effect and short our stocks, and so we're relatively market agnostic UM. And and just generally we're trying to create alpha from our short positions either going down UH

in in actuality or or underperforming relatively. So the idea I assume that the market will go up over time, as most investors do. The problem is the failure rate among individual corporations is quite high and and so the idea is to try to winnow those out from a broad portfolio. Quite quite interesting. So given that, what do you use as a benchmark, Well, for the most part,

for our US funds, it's the smp UM. It's it's simplest and still at the end of the day, most indices will will track it one way or the other, with variations in certain years UM. And then we use the M s c I for the global UH portfolio. Huh. That's really really interesting. So you mentioned you began with a mostly um high net worth clientele and that's morphed into an institutional client base. How have those changes come

about and how has it affected what you do? So the reason that that it's come about is that in the eighties, the hedge fund industry was still generally the purview of high net worth families and individuals, and it only really became UH it wasn't until the nineties that institutions and investment boards and corporate boards got more comfortable with using hedge funds and other alternatives as part of their portfolio UM and so we we began to see

a growth in institutional investing in the nineties, particularly towards

the end of the nineties. And then and then you had sort of the golden era of hedge funds, which was two thousand two to two thousand and six, when hedge funds sort of made their chops in the long short equity world by being short the right things in two thousand to two thousand two, being short the dot com bubble stocks and telecom and you know a lot of the things that got taken to extremes and being long value and so hedge funds made money on both

sides of their book for a number of years. And then of course the money flooded in UM and then the and then basically the UH. It all came crashing down for the hedge fund industry in long short in oh seven, O eight o nine, when UH hedge funds did not head or did not hedge as much as they should have and got caught just as much as most investors did um in the in the bare market of eight oh nine, and it's better. It's been a tough flog ever since. I very much recall something you

said in one of our prior conversations. If you go back thirty years, there were five hundred or so hedge funds and they all created alpha. Today there's eleven thousand hedge funds, and it's more or less still those five hundred hedge funds that are the alpha generators still still accurate. I mean, I think generally, I don't know about the specific numbers anymore, but I think directionally in magnitude, that's

still a pretty accurate statement. Um. You know what. The problem, of course, until I think very recently, is that you just had a lot of fairly, you know, reasonably sophisticated money trading against each other. Um And And the reason you get lots of alpha at different uh parts of the market segment is because you get unsophisticated investors who come in and start providing capital and start doing dumb

things with their money. And that was certainly the case in n and two thousand, where where retail investors stopped buying mutual funds and started speculating in stocks directly taking things up, you know, to just incredible valuations. And for the most part in this last bull market, we saw it as mostly a institutional or passive driven market until really the fourth quarter of last year and the first couple of months of where I saw the retail investors

come back in a big way. Um, it's as if someone flipped the switch in October November of last year and and all of a sudden story stocks began doing what they did in early early two thousand and that for us was a was a bit of a warning sign. Yeah, the tenure bull market will will do that on the mom and pop side. But I'm curious on the institutional side. You're known as as somebody who identifies corporate fraud or mouth seasance or companies that are potentially going to go bankrupt.

What sort of a spike do you see following an event like oh, eight oh nine, or what's happened so far in well, it's interesting in in um in oh uh in nine and two thousand or oh, you know nine, the reactions were a lot different. Um, the two thousand to oh to bear market was drawn out, it was every bit as vicious as as O eight oh nine.

People kind of forget that Mastak was down from the peak in two thousand to O two and the S and P was down, so very similar kinds of draw downs that we saw in in O eight oh nine. In O a oh nine, it seemed to be mostly compressed into one year, the faithful year of oh eight UM, where it was more spread out over two years in in two thousand to two thousand and two, UM, and what we saw in in UH we saw just basically

sharp rallies in both bear markets. But uh uh in in two thousand to two two O two UM, the rallies were weaker and weaker and were sold each and every time. UM. You know, eight O nine it seemed to be the value seemed a lot sharper at the time, but shorter given the compressed nature of what we're seeing, you know, As to what just happened in March April, I have no idea yet. I don't know that anybody

else does. We'll see, I mean, uh, certainly the willingness to speculate has come back in a very quickly in the month of April from what we saw in March and UH. In that I think, as any observer of the market will tell you, UM, that is at least a little bit disconcerting, given how fast people are willing to sort of overlook what what appears to be happening to the economy, um, with the assumption that everything will be just fine, um come and certainly that might be

the case, but it might not. We just don't know. Well, well, we'll get to the markets in the economy in a little bit. I'm intrigued by the your reference of rallies during a bear market. I recall very vividly watching a stock you were short and ron fall for a year, a year solid, and it did not move in a straight line. It would drop and then rallied back almost

two thirds three quarters of what it lost. How challenging is it to sit in a position like that that you're short and it feels like you're getting even though you're on the right side of the trade, it feels like you're getting your face ripped off every day. Yeah, it's and and those rallies test your conviction. Um. And the idea is that if if the fundamentals haven't changed, they're certainly getting worse. You know, you you just have to to keep your conviction and watch your risk levels

like anything else. UM. But yes, it does seem to to uh to me and to others that that companies that are particularly controversial UM and and and and going into what might be their their terminal phase UM tend to have increased trading volatility. And UH that that is just we take as a given. So we give these things a little bit more wide parameter um when they

when they begin to to have problems. But yes, I mean I remember, I remember number of situations, uh in the last twenty years where the company ended up going bankrupt, and yet there was a series of forty and fifty rallies along the way that would have you believe that everything was was fine and they solved their problems, when in fact they never had. My my big takeaway from being short specific companies in O eight oh nine was to learn to marry a put as opposed to merely

being short naked the stock. I wish I had learned that before the crisis as opposed to after. But such as life, let's talk a little bit about where we are in the state of the economy and the state of the market. It's the end of April this market has recovered a substantial portion of the sell off that began in February. Are the markets being optimistic too optimists stick or are they seeing something that the rest of us might not be seen? Well, obviously, you know it's

too early. It's always too early to tell, UM. But what I would say is that, UM, you know, we've we've been saying, UH that I think market participants, whether you're a bull or bear, writing off UM as as you know, just just a massive, massive deceleration uh and decline in the economy. And and really the markets will look forward to to figuring out, okay, what what our business is worth based on sort of a normalized UM

rate of return. And that's where things get interesting because if you look at if you look at where the markets have come back to, UM, we were supposed to we were supposed to make about a hundred and seventy seventy five dollars on the SNP this year. That that's out the window. UM. I think the number was roughly a hundred seventy last year. UM. And and so the estimates I've now seen for one, uh, have the SMP back to the sort of a hundred seventy dollar number,

but that's starting to come down. Um, so we've basically discounted back a recovery for lack of better term, a full recovery in one. And I'm just not so sure that, at least in the case of some businesses, that that optimism might be a little bit misplaced. So so let's stay with that theme. If we're looking at originally profits on the SMP five hundred of a hundred and seventy dollars, first question is where do you really see that number

shaking out by the time is over? And second, what sectors are going to be, uh the biggest pain points of that decrease in profitability? So, I mean, you know, for twenty it's Anyone's guests, and I think we'll see a lot of the kitchen sinc phenomenon. That management teams will realize that wall streets giving them a past for this year, so they're gonna they're gonna load whatever costs they can in the rest of this year. UM. Where I am a little bit more skeptical is is terms

of ongoing profitability in one. I will be surprised it certainly could happen, but I will be very surprised if we're at twenty nine levels of profitability in UM, and certainly for some industries, I think it's gonna be a lot more challenged, whether you're you know, in the in the travel or leisure business, the restaurant business, UM, a variety of other things companies rely on on UM sort of robust UM UH. Supply chains are gonna have problems

and and consumer behavior may change. We don't know yet. I mean, where everyone's in lockdown UM and and what kind of permanent changes are there going to be UM, you know, in a post pandemic world. I don't know that we we we know for sure. And then on top of that, I think we'd be remiss if we didn't talk about not only the political side, but the political costs to corporate America from another round of bailouts.

And and I really think it will be hard pressed for corporate America to keep corporate tax rate going forward, for example, And that makes a huge difference that we did some numbers, and and that hundred and seventy dollar level on the SMP five drops down to a hundred and thirty five dollars UM if you change the tax right back to which is what one of the parties

is certainly advocating UM. And so you could just simply get a recision of the Trump tax cuts UM as one possible alternative that would change earnings power for the intermediate term, you know, rather permanently. Huh. Quite quite interesting. Here's the pushback adhere to that, and it goes something like this. After September eleventh, we heard that nobody was going to fly again, that travel was going to be a problem, real estate in in New York and big cities,

We're going to be affected. And we ended up not seeing that sort of response after six months or so, might we see the same sort of recovery? Absolutely, and and and we we certainly might. Um. But after I mean, I think we understood that nine eleven was was the

instance of wrong place, wrong time, right. I mean, so so there were there were countries and people who lived with terrorist attacks, such as the UK and Israel and other places for decades, right, and and we we we had a we had a basic template there that those economies generally shrugged off terrorist events that were you know, bombings and that sort of thing. Um. In the US being the US, we we we handled a little differently.

We went to war. But UM. But but I think that that there was a sense that Okay, UM, you you know you're in the wrong, wrong square, wrong building. You know that that that is a sad thing. But UM, a pandemic is something quite different because it transmits. And so I think that that's why this is, this is so different UM, and I think is going to be with people for a while and the way they changed their behaviors. Again, I certainly expect that most activity will

go back to somewhat somewhat normal. But corporate America generally is a very leveraged er D and and we've had years and years and years and years of cost cutting. We've had interest rates go down to zero percent, We've cut corporate tax rates dramatically. So you have you have operating margins and net margins that are about as good as they've ever been. Keep in mind that revenue growth has not been great in the last ten years and so UM, you had had global economy that was slowing

before coronavirus UM. And we haven't even gotten to my favorite country, China yet, and so uh, there are small changes in activity here UM could have disproportionate impacts on profitability for lots of different industries, and yet it would seem to be back to normal, you know, as we go about our day to day lives. It just might be that corporate America is not as profitable as it used to be. So you referenced China. Let's briefly look

at what's going on there. How significant is this pandemic to that giant, populous nation and what does their business community look like, what does their investment climate look like in the years once we get past this pandemic. Yeah, I think that that one of the underappreciated things that's happened during this pandemic has been a a dramatic hardening of U. S. China relations Um. That that has occurred, um for a lot of reasons, including the pandemic itself.

But um, you keep in mind last month China expelled a number of Western journalists from the country. We've had this war of world words between the Trump administration and China regarding the pandemic source. Um. But and if this had happened last year when we were having the trade talk travails, I think it would have been a far more newsworthy But it's been kind of been put on the back page. But I think that the West's view and even Europe's view of China has hardened dramatically in

the last few months. UM. I know certainly the democratic the democrats view of China has also hardened, uh in the last handful of months. So we have a situation where we're getting a little bit more adversarial politically, so for whatever that means for for ongoing trade talks. UM. But I also think that that corporate America has kind of learned its lesson with the tariffs and everything else, that there's an increasing nationalism at work here, and that

bringing your supply chain out of China may make some sense. UM. On top of all that, China is still remains to me the big credit story globally. UM. We just took an updated our look at all the Chinese large banks, for example, and they basically grew their assets last year anywhere from ten to fift sort of as they have been UM. So you know, every year, uh, China seems to grow uh it's debt at some multiple of nominal GDP. And we joked that this can't keep going on forever,

but so far it has. But now we see just monstrous amount of debt, mortgage debt, personal debt, corporate debt in the Chinese economy. And that's something that China still is going to have to grapple with going forward. Um. They haven't had to do so in a in a major way, but at some point it will, it will happen. Um. Chinese apartments are still the most important asset class in the world in my view. We were talking earlier about the challenge of being short in the face of a

rising market. When we see the government reaction to a crisis, when we see the Fed adding a couple of trillion dollars to their balance sheet and Congress passing the Cares Act, which was over two trillion dollars, I guess we're gonna have to start calling that Cares Act one because it looks like there's more and more of that coming. What does that do to the market, What does that do to the economy? And how do you feel about being

short in the face of almost five trillion dollars in stimulus? Well, Well, first of all, remember we're, as I mentioned, we're also a long the S and P and the MSc. I so UM, so again we try to focus on how central bank activity impacts certain industries in our stocks. UM. But I think that that one thing I will say, you know, regarding the Cares Act and the p p P Payroll Assistance Program, is that once again the federal

government has been asked to backstop business. And I don't want to get into, um the semantics and the and the ideology of of whether or not this is capitalism or not capitalism. UM. I have my views on that, as everybody else does. But what I do think is that it means that if the U. S. Taxpayer is going to stand behind corporate America for every unanticipated risk and and I do look as coons at people say, well, nobody could have foreseen this, so therefore, you know, everybody

deserves a bailout of some certain amount. UM. My point on that is is that the real risks are always the ones you don't foresee, because if you do foresee them, you mitigate them or insure against them. UM. And so if the taxpayer is once again going to be on the hook for trillions of dollars UM to support businesses and support their employees, and I certainly think we should be supporting their employees, I'm not I'm not as convinced

on on the rest of the corporate bailouts. UM. Well, then certainly I think that the taxpayer deserves a premium going forward UM, and and that corporate tax rates should in fact go higher, because in fact that should be the in effect the insurance premium that is paid to the U. S. Taxpayer every year UM to cover these blanket risks that keep showing up every ten years and so.

And I think that's gonna be a very strong case to the American public UM that if you're going to end mind um corporate America with the U. S. Treasury and also the Federal Reserve by e the currency UM, then you should be compensated for it. And I think that that, I think is going to be a pretty strong argument. Yeah, I'm I'm fascinated how not only are there no atheists and foxholes, but there are no Austrians

or Libertarians during financial crises. It's amazing how suddenly everybody becomes pro bail out at the first sign of trouble. But you raise a really interesting question about the upcoming election. Is this gonna be essentially a referendum and how President Trump has handled the coronavirus or is this a bigger

ideological debate between labor and capital, between taxpayers and bailouts. Yeah. So, so I had this view that that, you know, labor is kind of I don't know if it's a Marxist view or or or whatever, but I do believe that that we've seen in the US these sort of long waves of capital versus labor, and labor became ascendant with the New Deal in the in the in the thirties, UM, and we took a much more, a much more status

approach towards helping workers. UM. Some countries took the status approach too far in the in the late thirties and

we end up at war. But but that all changed um with with the great inflation of the sixties and seventies and the fact that business was on its rear end and capital had been treated pretty shabbily UM, particularly from the late sixties to the late seventies, and with the election of Margaret Thatcher in seventy nine in the UK and Ronald Reagan in the U s and the eighty the pendulum began to swing back and we we

began cutting capital gains taxes, central banks aggressively. The Paul Volker fought inflation UM and and we we saw returns on corporate assets, you know, begin to appreciate dramatically. And of course we also know that median wages and labor rates pretty much hit their peak in the late seventies UM. And so I think that that there was been a long since punctuated by acceleration in the global financial crisis, that the little guy was being left behind, the worker

was being left behind. And I think in a in a in an interesting way, Donald Trump tapped into that in twenties sixteen. I just don't think, uh that he really meant it um and and I e it was just a message to get elected as opposed to following through UM with policies that we're going to really really change that um with this latest set of bailouts UM.

I think when when fear turns to anger, as it inevitably will, as we sort of look at at you know, who got bailout money, who who took money they shouldn't, we're already seeing some of that UM. I think that that that that anger is going to be stoked even more. And so the question is do we finally see policies like a rising minimum wage, higher corporate taxations, higher rates

on capital gains, end of carried interest um. That is a lot less um capital friendly and a lot more labor friendly coming out of this, And that's I think gonna be one of the most important political economy questions that investors will have to think about. Huh, that's quite interesting. I think you are dead on when you reference Trump's brilliant messaging in there. There's a footnote discussion about whether when he first began running he really wanted to win

or it was just a brilliant marketing ploy. But he has tapped into a form of nationalistic popularism that certainly resonates with thirty of of the electorate. So really, what is the election about if not the incumbent? It sounds like you think there's a longer cycle. Uh, and the pendulum is swinging from one extreme, uh, and it's beginning to reverse and head in the other direction. Am I misstating that? I think there is. I mean, if you look at certain certain US bolling things. I mean, look

at the support for a national healthcare program. It's broad, it's dramatic, and it cuts across party lines. Look at the support for higher minimum wage again, it's broad, it's dramatic, it cuts across party lines. There's a number of these issues that that that cut across party lines that I think the the the heads of the parties have tried to sort of ignore, um that that because obviously there's lots of you know, lots of donor interest for it

to be ignored. But there really is a view out there. UM. And I think another set of bailouts is only going to make this this this uh sense that we've had since the global financial crisis of unfairness of how taxpayers were bailing out you know, guys who shouldn't have been bailed out. Um, we're gonna see that again in a major way. I think, after after and and and you

ignore it at your own peril. I I keep, you know, telling people, Um, this is the set of circumstances we have now for corporate returns in corporate America is about as good as it's gonna get. I mean, it's gonna be really hard. After years and years of cutting interest rates, cutting taxes, UM, cutting costs, going global, um, slashing labor rates. UM.

You know this is this is pretty good. Um And and there's lots of reasons to believe that you will revert to the mean and some of those uh, some of those items, and that could have just huge implications, as I mentioned earlier, for corporate profitability. So I recall in ten you were a pretty big donor um to the Democrats. Who did you like originally in the Democratic primary? And what do you think of the race now that it's become a head to head between Trump and Biden. Well,

I mean as as as I think you know. I mean, I'm a I'm a longtime friend and supporter of the Vice president. So um, I I actually wrote in his name in twos sixteen. Uh and so um, I want to be consistent. And was that in Was that in New York or in Florida? Because it was New York? All right, so we'll let you, We'll let it go. I was in Florida. Yeah, and I and and I did so with that in mind voter as a New

York voter. But but um, look, I think that I think for lots of reasons, um, that we don't need to get into He's he's a far better candidate, uh not least of which I think we're gonna need given

the polarity in this country. I think we're gonna need a period of healing, not only internally but externally with our allies and UH and I think Vice President Biden UM is far better um able to do that, uh and and and then turn turn this over to the next generation UH of Democratic leaders, which I think he will do. But it's gonna be Look, it's gonna be an interesting election. I think that all all accounts arts.

You know, it's it's a pretty tight race as of spring of lot can happen in the next six months, as we know that it's also going to boil down to UH to a handful of states. Although I did see one interesting thing that that made me uh, that gave me UM a little bit of pause. UM, and that is someone pointed out that, uh, there are eight states that Trump took in that are basically right now in the toss up category within margin of error. UM, there are no states that Hillary took in that are

in that same category. That makes a lot of sense. You I have to go back to part of your statement earlier, because it sounded like you were hinting that you think Biden is going to be assuming he's elected, only planning on staying one term. Did I did I pick up that you turn it over to the next generation. You you are? You are? You're putting words in my mouth. I did not say that. How well, I think that I think that his vice president selection will be made

with that obviously in mind. Um and I think that, Uh. I would be very surprised if the vice president uh chooses someone who's seventy five years old to be his running mate. Um so so not Elizabeth Warren or Bernie Sanders. I suspect it won't be. But I don't know anything. I suspect. I suspect it will be a younger woman. Uh huh so like an Amy Klobuchar or someone of that generation. Probably, As I said, I don't know anything, and so I think we'll own that within the next

month or so. But I suspect it will be a younger woman. So how concerned are you as a Democrat about Biden's reputation as a gas machine? Uh? So, the things that endear people uh to Joe Biden, I don't think have changed, and I don't think the vice president has changed. Uh. He is a plane talker. He says what's you know? In his head and in his heart and Uh. And I think that that people, actually, the people that like Joe Biden liked him for that. Um and and and you know, then again, can we just

compare him to who's in the White House now? And and so I for anyone anyone that always raises that issue, I've also seen, you know, spend time with the Vice president. Will tell you you know, I've seen the man very recently, UM by heart repeat uh legal opinion for example, um Scalia's legal opinion on handguns that was written back a number of years ago in a debate on gun control we had in my apartment. I saw the Vice President

literally recite verbatim UM, paragraphs from that opinion. And and and this is someone who who has been in office for a long long time, both in the Senate and as Obama's vice president. Um. He knows things, and he knows people who know things, and he's based basic decisions on science and and and again, I mean this is this is what I think most of us, whatever your your political leanings, kind of expect of people in the highest office in the land. And to me that that

would would be a refreshing change. But as I said, it's going to be a tight it's going to be a tight It's going to be a tight election, and uh, it's gonna come down to the wire. So I completely disagree with you, and I will save my rebuttal for the next time we have you at dinner. I have two last political questions I have to ask. One is you you mentioned the president has his own tendency towards gaffs. I've heard a lot of people say nothing sticks to

this president time and time again. As both a candidate and an elected official, he does things that would have absolutely torpedoed any other candidate. What are your thoughts on that? I have some of my own. How has he managed to become the taflon don Well Barry. I mean, you have to remember in US political history of the country, will vote for a potted plant because it's not the other guy. Um. You know, in in all of the

biggest landslide elections, the loser got around the vote. I think McGovern gott As I recall, but I mean it just it is we are to some extent, you know, it's your guy right or wrong, um in in the United States, and so that number usually coalesces around UM. And so I think that that for people that that are going to try to put trying to put rationalization as to why people support one candidate or another. Uh, you know, despite whatever they do, you can kind of

start and then figure it out. Um. And And what that means is is that this election is going to come down to independence again. And one of the things that struck me in the election, in the exit polling, was that if you looked at people that disliked both candidates, um, they tended to then vote for Donald Trump. So I just saw an article yesterday that's ad over the past two months, the number of undecided has just about doubled,

which is quite fascinating. Yeah. So I think that once once we get out of our bunkers and we there's a bit of a normalized campaign, I think you'll see the differences. I suspect you will. Um And And let's not forget I mean this. This last election also came down to about eighty thou votes in five states, and it was a much closer run thing than that I think others would have you believe. And yeah, he threaded

the needle. And and you had the comy situation a week or two before the election, and his margin of victory in those five states was actually smaller than the vote that Jill Stein got exactly. And so so again I think that that you know, we we we drew a lot of conclusions from that. But on the other hand, I suspect the Biden campaign. I kind of no, a Biden campaign understands this, understands the battleground states. Um. I think that they will not make some of the mistakes

the Clinton campaign made. And we'll see, but but it will again be be a close thing. Last political question before we move on, had the coronavirus pandemic erupted a year earlier, would Andrew Cuomo be the Democratic nominee? I'll pass. I'm a friend of the governors as well, so I'm gonna pass on that question. All right, Well you could you could pass that along to me, to him on my behalf and tell him. Um, that's what I'm thinking. All right, So let's do our favorite questions. We ask

all of our guests. You're under lockdown, you happen to be in Florida. What are you streaming these days? Tell us what you're watching on Netflix? What are you listening to in podcasts? What are you doing to keep entertained during this shelter in place. Well, I mean, first of all, I've been teaching my Yale class on financial fraud remotely this spring, so uh so one day a week I've I've had to uh, I've had to get acquainted with

with my class remotely and do my lectures. Um. In terms of entertainment, I will tell you one thing way that that we have watched recently, that apropo of our political discussion that I really really have gotten into is the new series on f X MRS America, which is the story of Phillish Schlafley and the Stop the e r A movement versus uh the National Organization women Gloria Stein and Bell Abs Betty for Dan and it's just this great nineteen seventies period piece. Um. Kate Blanchett plays

Phillish laughly and it's uh, it's well done. As someone who went through that as a kid of the seventies, I've gotten a kick I've gotten a kick out of out of that series recently. UM, And I just finished I just finished a great book. Since I'm stuck in Miami, I finished a great book, financial history book, which I would highly recommend to your listeners on the Great Florida

Land Boom. Um. That that is just a fantastic history of the first credit bubble of the Roaring twenties, which was the Florida land boom in the Miami Beach land land bubble um from n nine that preceded the Great Crash. And it's just a great history of Florida and a great history of of sort of speculation gone mad um before the hurricane hit and dashed all those hopes. And uh,

it's a terrific financial read. So so let's stay with books, because the one of the last times we had you on, you recommended a book that I ended up not only loving, but recommending to a bunch of people who so loved it. And that was a world lit only by fire. Just a fascinating just just a fascinating history. Tell us some other favorite books you like to recommend? What else are you reading? I'll give you one. I'll give you one from my bookshelf that I dust off every few years. Um,

and I picked it up again. It's on my nightstand and I'm gonna try to get through it, hopefully when my class ends in a few weeks. But every four or five years I come back to, uh, the Great Carl Sagan's book, The Demon Haunted World and and I can't. I don't know if you know it, but it's it's a terrific book by by Sagan, one of the last he wrote before he passed away, about how we think about things as a as um humanity and why we believe certain things we do in the absence of evidence.

And he goes into you know, whether it's witchcraft or belief in ghosts or or whatever it might be, UM, lief in you know, what makes it particularly topical is is the belief in incures with no evidence, as we've seen more recently with the coronavirus, and why people are willing to to bloom onto stuff. UM. And it's just a wonderful, wonderful book about kind of why we are who we are when it comes to belief in the supernatural and uh, and and in in a variety of

other sort of beliefs we have. UM. It makes me think every time I reread the book. I have that book on my shelf and I haven't read it in I don't know, twentysomething years, but I'm gonna pull that off. And I'm also gonna give you a related recommendation. I'm trying to remember his name, but the name of the

book is called Heretics of Science. The author is a journalist I think out of Australia or the UK, and he embeds himself with the wackiest of coops trying to figure out the flat earthers and the anti vaxers and just the KKK, like one group after another that is very much looked askance at by the general public. And his conclusion, more or less is all of these folks have a very fundamental error in their basic worlds model in their head. And it's like aiming for the moon.

If you're off by a couple of inches, you missed by millions of miles, and extrapolating a little bit of flat Earth and to the rest of the world, you end up with fairly normal. Otherwise people who believe absolutely insane things. You, of all people, would like it because you're in the business of figuring out what's true, what's false, and why people sometimes believe things that just a kind of wacky. I will I will order it today. Thank

you for that recommendation, right. It reminds me of that great study and I think there was a book out of the University of Chicago in the late fifties UM where the researchers embedded themselves into a group that believed the aliens were gonna come down and end the world. And as it became with it with a series of dates for the end of the world. And as the dates came and went without the end of the world UM,

the movement lost more and more members. But there was an interesting observation that those that remained in the movement hardened their views as opposed to uh loosened their views on on this this series of predictions that the alien would would come down and whisked them away and and and end the world for everybody else, and and UH that that as people as people were shown evidence of

course that this was was not true. UM that affected a number of believers, but the believers that remained actually hardened their view against the set of facts and boomerang. Yeah, the boomerang effect. And when we talk about it doesn't matter which political party or which belief system, that core has some cognitive dissonance and doesn't want to admit error, and they just doubled down no matter how much evidence you throw at them. If anything, it just makes them

believe it all the more. Yeah, yeah, and and and and and that has that has implications for not only markets, but politics and lots of other things. All Right, So let's get to our final two questions before we have to let you go. What sort of advice would you give to a recent college grad or or one of your Yale students who was interested in a career in either finance or the fine art of fraud detection and

short selling? Don't? Um what? What? Look? I what? I When I got into Wall Street in nineteen eighty two, nobody no, in nineteen eighty excuse me, um, nobody wanted to be there. The guy who hired me in Chicago was amused that I was looking for a job in in the investment world. Um, with the Dow at seven

fifty and having gone nowhere since nineteen sixty six. And I made more money, uh, in the previous summer working in a steel mill for two and a half months that I made my first full year on Wall Street. That's how That's how out of favor Wall Street was in nineteen eighty And we talked about the pendulum was about to swing. But I didn't know it. Um. We're at the other end of that extreme right now, UM, where whereby finance has paid immensely well. For the last

forty years. We've seen a financialization of the economy. UM. We've seen lower tax rates, We've seen all those things. And I've got to think that that UM. Being a money manager, whether you're a long only guy, a short seller, a hedge fund manager, a private equity guy, I think it's just gonna be a lot tougher going forward than than the last forty years has been UM. And I'm just not so sure the rates of return are going

to be there. UM. Having said all that, UM, if it's something you're still you know, convinced you want to do, UM, I think you have to adjust your expectations UM as to uh how remunerative it's going to be going forward. And our final question, what do you know about the world of investing, hedge funds, short selling today that you wish you knew when you began back in that's that's

literally forty years ago. Yeah, I I, Well, what I really wish is I would have just bought some uh uh some some zero coupon treasuries and you know, I just went to the beach. But UH, since I was that that prescient, UM, I think that that one of the things I certainly UM wish I wish I had known, UM was to to be far more open in what

I looked at as in investing opportunities. I was a pretty US centric guy, UM until two thousand and five, UM, which is pretty late, uh, twenty years into our fund, and we did our first global global fund in in you know five, and Uh, I wish I had really spent more time looking at things like Japan in the late eighties, UH, in other places Latin America in the nineties. UM. But it's to keep your business open, then, don't don't pigeonhole yourself too much. UM. There's there's a reason you

should be good at something specific. But once you once you attain that UM, that knowledge or that experience, UM, be willing to be willing to look at lots of different opportunities. UM in that in that world. We have been speaking with Jim Chanos. He is the founder and president of Kinnicos Associates. If you enjoy this conversation, well look up an inch or down an inch on Apple iTunes. You can see any of the three d and thirty or so such prior conversations we've had over the past

nearly six years. We love your comments, feedback and suggestions right to us at m IB podcast at Bloomberg dot net. Give us a review on Apple iTunes. You can check out my weekly column on Bloomberg dot com Slash Opinion. Follow me on Twitter at rit Halts. Sign up for our daily reading list at rid Halts dot com. I would be remiss if I did not thank our crack staff that helps put together these conversations each week. Charlie Volmer is my audio engineer slash producer. Michael Boyle is

my booker slash producer. Michael Batnick is my head of research. A Tika Valbrann is our project director. I'm Barry Ritolts Hugh been listening to Masters in Business on Bloomberg Radio.