Speaker 1: Hello, and welcome to another episode of the All Thoughts Podcast.
Speaker 1: I'm Tracy Alloway and I'm Joe wi isn't they so? Joe?
Speaker 1: You know, one of the most famous maxims in markets
Speaker 1: has to be that I think it's that warrant. It's
Speaker 1: Warren Buffett, isn't it the quote about when the tide
Speaker 1: goes out, you get to see who's swimming naked. It's
Speaker 1: it's a cliche. We are in a big time tide
Speaker 1: goes out the environment. I mean the number of CEOs
Speaker 1: of various companies who have written some version of like
Speaker 1: I screwed up, this was all my fault, I misjudged, etcetera.
Speaker 1: Every day it feels like there's another one. And it
Speaker 1: is true. When there is a bear market, when there's
Speaker 1: a downturn, you discover both frauds, and you discover insolvencies,
Speaker 1: and you discover unsustainable structures. It all comes out right.
Speaker 1: It is a popular saying for a reason, which is
Speaker 1: that it tends to be true. Is kind of amazing
Speaker 1: me about this particular cycle, is I guess just the
Speaker 1: speed at which all of this seems to be happening,
Speaker 1: So you know, it was only a few months ago
Speaker 1: that we had Jim Chainos, the fame short seller, on
Speaker 1: the podcast talking about how he thought that there was
Speaker 1: going to be more pain ahead for a lot of
Speaker 1: different froth spots in the market, and how interest rates
Speaker 1: going up basically meant that a bunch of frauds were
Speaker 1: going to be exposed. Yeah, and so basically the market
Speaker 1: at particularly a lot of the tech stocks and a
Speaker 1: lot of the gig economy, is sharing economy, the arc economy,
Speaker 1: all these things really have gotten hit pretty hard since
Speaker 1: we talked to Jim earlier in the summer, and it's
Speaker 1: still a mess. And so I guess part of the
Speaker 1: question is, well, what does it look like at the bottom,
Speaker 1: What have we learned, what are we seeing with the
Speaker 1: tide going out? And are we any closer to you know,
Speaker 1: something that could resemble like a bottom for this market? Right?
Speaker 1: And then also I guess my question is do fra
Speaker 1: pick up in this environment or do they get exposed
Speaker 1: and more difficult to perpetrate. So we're going to be
Speaker 1: talking about all those things with Jim Chainos. This is
Speaker 1: an episode that we recorded live at the Berkeley Forum
Speaker 1: for Corporate Governance in San Francisco. Jim is of course,
Speaker 1: the co founder of Chainos and Co. Which used to
Speaker 1: be called Kinnicos. Here's our conversation. Hi Ji, Hi guys now, Jim,
Speaker 1: the last time we spoke to you, I think was
Speaker 1: in June of this year. Fast forward a few months.
Speaker 1: You are completely correct, froth was blown off the top
Speaker 1: of the frothy stocks in the market. I don't even
Speaker 1: have a question. I think I'm just gonna ask you, like,
Speaker 1: tell us what's going to happen now. Look, we're getting
Speaker 1: a situation where the various parts of speculation are getting
Speaker 1: rung out of this market one by one. We talked
Speaker 1: a little about them back in June. I think we've
Speaker 1: waited right in the middle of kind of our second
Speaker 1: crypto crisis over these past few days. On top of it,
Speaker 1: you've got the tech complex melting down, and a lot
Speaker 1: of this is just the byproduct as we discussed of
Speaker 1: perhaps the most speculative market that I've seen in my
Speaker 1: lifetime forty years on the street, which was and one
Speaker 1: by one, whether it's crypto, whether it's n f t S,
Speaker 1: whether it's SPACs, the poster children for that speculation are
Speaker 1: basically being taken out to the woodshed. And disposed of,
Speaker 1: and the question will be does it spread to something
Speaker 1: in the markets anyway that's much broader than that, and
Speaker 1: that remains to be seen again kind of like Tracy,
Speaker 1: I don't even have a question exactly, but f t
Speaker 1: X give us, give us the Jim Chaino's take. Well,
Speaker 1: I mean, I think Joe, you basically are probably better
Speaker 1: prepared than me to talk about that, because the quintessential
Speaker 1: moment for me in the whole crypto saga was the
Speaker 1: interview that you and Matt Levin had with SPF. I
Speaker 1: think back in April, where I pointed out he kept
Speaker 1: saying the quiet parts out loud about how business models
Speaker 1: were in effect Ponzi schemes. And I think we're gonna
Speaker 1: look back at that as a watershed moment because the
Speaker 1: crises in liquidity and the revelations on the stable coins
Speaker 1: all immediately followed that interview and it was one of
Speaker 1: those moments, and kudos to you all. It was one
Speaker 1: of those moments in the markets that not only went
Speaker 1: viral on social media, but but went viral amongst professionals
Speaker 1: and others. Have you seen this interview? Did you see
Speaker 1: what was said here? And it's very rare you get
Speaker 1: that aha moment like that crystallized, But that was one
Speaker 1: of them, and the whole idea, and I've called it
Speaker 1: a predatory junkyard. As you know, the whole crypto structure,
Speaker 1: in my view, was designed to extract fees from really
Speaker 1: unsuspecting investors and investors that were kind of sold a
Speaker 1: bill of goods where the bill of goods kept changing.
Speaker 1: You know, we remember all the use cases for crypto
Speaker 1: as they kept changing over the past handful of years.
Speaker 1: It was going to be an alternative currency, it was
Speaker 1: gonna be a store of value, it was going to
Speaker 1: be inflation hedge, and at the end of the day,
Speaker 1: it was really just a speculative asset and speculative asset
Speaker 1: class and with an immense cost structure built around it.
Speaker 1: So the idea really was for the crypto you know community,
Speaker 1: was how can we extract the most amount of fees
Speaker 1: from unsuspecting investors. And that's my view and I still
Speaker 1: hold to it. What happens now for crypto is there
Speaker 1: a recovery here or is this so bad? I mean
Speaker 1: f t X, Sam Bankman freed, and you know, I
Speaker 1: was there at that Odd Lots interview as well, and
Speaker 1: we were all sat in the room quite shocked by
Speaker 1: what SPF had just said. For those who haven't listened
Speaker 1: to it, we asked him to describe how yield farming works,
Speaker 1: and he basically says, well, you put money in a
Speaker 1: box and more money comes out of the box, and
Speaker 1: you worry about the use case later. All right, So
Speaker 1: fast forward to today, it's all falling apart. Can crypto
Speaker 1: emerge from this and potentially find, you know, a new
Speaker 1: narrative to sell a new potential use case. Yeah, I'll
Speaker 1: just add the ultimate irony in the last couple of
Speaker 1: days is the crypto community talking and sort of begging
Speaker 1: and asking where are the regulators? Is really truly the
Speaker 1: ultimate irony since the crypto ethos was about, you know,
Speaker 1: really being outside of the regulatory environment and being a
Speaker 1: separate and independent system um, and now it's begging for
Speaker 1: for the same sorts of things. And you know, as
Speaker 1: I pointed out for a few years, the real problem
Speaker 1: with anti fiat structures is exactly when you need fiat
Speaker 1: is the time when people are most afraid and when
Speaker 1: fear stalks the markets, because governments, through their various different
Speaker 1: means can not only enforce contracts and adjudicate fraud, but
Speaker 1: in effect connect as lenders of last resort and or
Speaker 1: established deposit insurance, which is exactly what everyone looks for
Speaker 1: when when people are worried about getting the money back.
Speaker 1: And it's why alternative currency schemes and by the way,
Speaker 1: crypto isn't the first. I mean, they've been all kinds
Speaker 1: of alternative currency schemes to FIAT for centuries now, and
Speaker 1: they always flourish in bull markets when people's sense of
Speaker 1: disbelief is suspended and people begin to believe things that
Speaker 1: are too good to be true. And crypto and all
Speaker 1: the other ancillary aspects of crypto, whether it's n f
Speaker 1: T s or what have you, really were the latest
Speaker 1: iteration of that. The last time we talked to you
Speaker 1: said that as well. What's an example of an alternative
Speaker 1: currency that thrived in a bull market? What's a historical
Speaker 1: parallel to so, I mean you had you had the
Speaker 1: various different banking systems that that thrived in the early
Speaker 1: nineteenth century in the US. That's certainly probably one that
Speaker 1: that economic history orients would point to. And we can
Speaker 1: go back further. I mean the various different currencies that
Speaker 1: that the father of FIAT, John Law, who I teach
Speaker 1: in my fraud course, brought forth in the early seventeen
Speaker 1: hundreds in France. But there have been a number of them.
Speaker 1: And the problem again is is they rely on a
Speaker 1: system of trust, whereby the systems that FIAT has developed
Speaker 1: in the past three hundred years have really been designed
Speaker 1: to engender trust. It's the offset, of course, to the
Speaker 1: downside of FIAT, which is debasement. And so the crypto
Speaker 1: community pointed out the risks of debasement and UH and
Speaker 1: all the other risks of sovereign governments getting involved in
Speaker 1: your currency, but they forgot the good parts and and
Speaker 1: that's I think the lesson that we have to learn.
Speaker 1: Do you worry about crypto drama, what's going on in
Speaker 1: that industry having a contagious effect on either the rest
Speaker 1: of Silicon Valley or the wider market, given that they're
Speaker 1: do seem to be these interlinkages between for instance, crypto
Speaker 1: players and venture capital firms. Yeah, I mean, to me,
Speaker 1: this looks this looks a lot more as we discuss
Speaker 1: this looks a lot more to me like the dot
Speaker 1: com era on steroids rather than sort of the prelude
Speaker 1: to the global financial crisis because of the nature of
Speaker 1: of the banking system and payments. I don't think this
Speaker 1: is a contagion effect. I do think it's it's a
Speaker 1: pretty bad mark to market effect for equity type investors,
Speaker 1: much like the dot com era. But I don't think
Speaker 1: it is contagion through the credit markets. I mean, I think,
Speaker 1: why I saw something this morning that it might even
Speaker 1: be lower now as we speak. But I think the
Speaker 1: crypto mark to market for the all the coins out
Speaker 1: there is something now below one trillion, somewhere on eight
Speaker 1: hundred billion dollars. And uh, you know, eight hundred billion
Speaker 1: dollars is a lot of money. But I'll remind you
Speaker 1: that until about a week ago, you know, Tesla's market
Speaker 1: cap was a hundred billion dollars. That's just one stock.
Speaker 1: So I think the contagion effects are probably going to
Speaker 1: be dimnimus to the to the payments and credit system.
Speaker 1: I definitely want to get to like tech stocks and
Speaker 1: Tesla and all that in one second, but one last question.
Speaker 1: You know, it's this, as you pointed out, the crash happens,
Speaker 1: people say we're are the regulators. This is again, I
Speaker 1: think a classic part of the cycle that the regulators
Speaker 1: seem to come in late. What does history say about
Speaker 1: how far they go? Would you expect to see, for example,
Speaker 1: criminal charges people in jail as a result of this
Speaker 1: dot com trading on steroids in crypto. Yeah. So one
Speaker 1: of the things, one of the things I teach is
Speaker 1: that not only are are the regulators archaeologists not detectives,
Speaker 1: but that that asset prices are both the staunch a
Speaker 1: defense attorney and the harshest prosecutor for financial fraud. That
Speaker 1: nobody's out looking to bring the bad guys in when
Speaker 1: everybody's making money. It's only when people start losing money
Speaker 1: that you begin to get a public outcry of of,
Speaker 1: you know, throw the rascals in jail. You know, if
Speaker 1: we go back again to the dot com era, people
Speaker 1: were losing money and dot com for a better part
Speaker 1: of a year. But it wasn't until the Enron and
Speaker 1: World Com scandals hit that the federal government really geared
Speaker 1: up its efforts to uh to look at corporate wrongdoing
Speaker 1: and and bring on Sarbanes Oxley. So this is gonna
Speaker 1: be the same thing. I mean, people have lost a
Speaker 1: lot of money in crypto, a lot of new investors,
Speaker 1: a lot of young investors, so you're gonna get a
Speaker 1: political outcry nowdo to to regulate this system and and
Speaker 1: bring bad guys to justice. Now. I've also pointed out
Speaker 1: that it seems to me that there might be a
Speaker 1: reason why a lot of these crypto entrepreneurs live in
Speaker 1: places like the Bahamas in Dubai and not New York City,
Speaker 1: So you know, it might be. And I think there
Speaker 1: are one or two actually that are technically fugitists from
Speaker 1: justice already. So it's gonna be interesting to see see
Speaker 1: what we see from a prosecutorial as opposed to a
Speaker 1: regulatory initiative against this, and what kind of wrongdoing that
Speaker 1: gets exposed if it turns out that there was actual
Speaker 1: misrepresentations or assets that were claimed to be there, we're
Speaker 1: not there. On the other hand, it just seems, I mean,
Speaker 1: people have been warning about this for for now a
Speaker 1: few years. It's not like the warning signs weren't there
Speaker 1: for people to notice. Yeah, there's at least one crypto
Speaker 1: entrepreneur that has effectively purchased diplomatic community as well preemptively.
Speaker 1: Nothing has happened to him yet, but he has it.
Speaker 1: Let's talk about frauds more generally, and you mentioned en Ron,
Speaker 1: and you've obviously been a player throughout different boom and
Speaker 1: bust cycles. What generally happens to frauds in a down turn?
Speaker 1: I'm assuming many of them get exposed, but there must
Speaker 1: also be incentive there to maybe start new ones and
Speaker 1: try to bury some of your problems as they get worse. Well,
Speaker 1: that is a problem in that that as it becomes
Speaker 1: more and more difficult to to meet expectations, often the
Speaker 1: frauds get exponentially worse as they go on. But what
Speaker 1: I would point out is that the fraud cycle follows
Speaker 1: the financial cycle with a lag. So typically broad thrives
Speaker 1: in a in a in a bull market, and the
Speaker 1: longer the bull market and the longer the the business expansion,
Speaker 1: typically the worst the waves of fraud that are subsequently discovered.
Speaker 1: And then when when markets turned down and people become
Speaker 1: a little bit more leary, since most frauds require new
Speaker 1: capital to keep going, they tend to get exposed after
Speaker 1: the markets turned down and made off in December of
Speaker 1: oh eight's a good example. Um, And of course what
Speaker 1: we mentioned and on in world common tycho and that
Speaker 1: class in this cycle, I think it's going to be.
Speaker 1: I think crypto is probably gonna be right up there. Uh,
Speaker 1: and that has started clearly, But I think the fraud
Speaker 1: that's occurring is much more subtle, and I think it's
Speaker 1: going to be even harder to prosecute. And and that's
Speaker 1: the abuse of metrics, self described and self generated metrics
Speaker 1: that now investors have just gotten so used to, which
Speaker 1: are really, in my opinion, you know, mask over business
Speaker 1: plans that probably will never be profitable, and and the
Speaker 1: amount of adjusted adjusted profitability and adjusted EBITDA. There was
Speaker 1: one of our shorts reported last night and they said
Speaker 1: that they expected to be profitable by the end of
Speaker 1: three on an adjusted basis adjusted for other operating costs.
Speaker 1: I have no idea what that mean, but you know,
Speaker 1: analysts dutifully this morning said they expect to be profitable
Speaker 1: at the end of three UM. And so the investors
Speaker 1: have gotten so used to, particularly Silicon Valley, describing profitability
Speaker 1: as they would like it and not as it really exists,
Speaker 1: that you kind of wonder will the SEC cracked down
Speaker 1: on that, Will will Congress crack down on that and
Speaker 1: and get us back to kind of generally accepted accounting
Speaker 1: principles as opposed to accounting principles or whatever I want
Speaker 1: them to be. Well, as you say, the fraud cycle
Speaker 1: follows the financial cycle. And of course one way that
Speaker 1: Silicon Valley companies in particular, all companies, but Silicon Valley
Speaker 1: in particular, flatters their financials makes profitability look better is
Speaker 1: you know, substantial share based compensation and you know it's
Speaker 1: not really a cash expense, but of course still investors
Speaker 1: are paying it. What happens to this place, Silicon Valley?
Speaker 1: What happens to share based compensation in an era in
Speaker 1: which shares go down? I imagine for employees they're not
Speaker 1: as excited about getting stocked as they might have been
Speaker 1: a year ago or two years ago as part of
Speaker 1: their camp. So talk to us about like how that unfolds,
Speaker 1: and like what the down cycle of an industry that's
Speaker 1: so driven by equity issuance two employees? What happens in
Speaker 1: a down cycle? Well, it was a big issue Joe
Speaker 1: in posted dot com era, and back then it was
Speaker 1: stock option accounting that became that went under the microscope
Speaker 1: and ultimately had to be accounted for. And now, of course,
Speaker 1: in effect it's taken out through the use of pro
Speaker 1: formal adjustments. But what what people found out was that
Speaker 1: it had just a tremendous pro cyclical effect on things.
Speaker 1: That is, when your stock price was going up, you
Speaker 1: didn't have to issue as many shares for a given
Speaker 1: dollar level of compensation. And now that the stock is down,
Speaker 1: if your stock is down eight or you have to
Speaker 1: just issue massive amount of stock, So you're issuing more
Speaker 1: stock as it goes down, You're diluting people. So it
Speaker 1: becomes procyclical to the downside as well, and the numbers
Speaker 1: are now becoming meaningful. The company I mentioned just a
Speaker 1: few minutes ago that reported last night it's got run
Speaker 1: rate share based comp of almost a half a billion
Speaker 1: dollars and based on their current share count, that means
Speaker 1: that that the shares outstanding are going to be going
Speaker 1: up something like seven to ten percent a year just
Speaker 1: on the back of share based comp. The other problem
Speaker 1: is we've seen a number of companies, beginning in the
Speaker 1: second quarter UH companies like door Dash and Salesforce, dot
Speaker 1: Com and Zoom announced large share buyback programs to offset
Speaker 1: the dilution of the share base comp. So you have
Speaker 1: the you have the silliness of the share based compy
Speaker 1: excluded from the adjusted profit figures and actually being a
Speaker 1: positive for operating cash flow and the cash flow statement.
Speaker 1: But yet now the substantial share buy back cost is
Speaker 1: below the line in the cash flow statement under financing.
Speaker 1: So it's skewed incentived in so many different ways. But
Speaker 1: I don't it's getting worse. The amount of share based
Speaker 1: camp for some of these companies is actually going up
Speaker 1: faster than revenues. So they're on the treadmill, if you will,
Speaker 1: and I don't know how they're going to get off it.
Speaker 1: Why do you think investors have been willing to accept
Speaker 1: these types of pro forma adjustments in the past, because,
Speaker 1: I mean, this has been a known issue. I think
Speaker 1: we had someone from the SEC recently. I think it
Speaker 1: was an article in the Wall Street Journal. They were
Speaker 1: talking about this. We used to make fun of, you know,
Speaker 1: community adjusted ebit DAW and stuff like that. People knew
Speaker 1: that this was happening, and yet it didn't seem to
Speaker 1: have that much impact on either the company's share price
Speaker 1: or its ability to raise funding. Yeah, until it did, right,
Speaker 1: And again that that's my view on the pro cyclicality
Speaker 1: of all these kinds of developments. They make things look
Speaker 1: much better than they are on the way up, and
Speaker 1: they really hitch it pretty hard on the way down,
Speaker 1: and so it just increases the amount of votility in
Speaker 1: given corporate assets. There's one other aspect I will mention
Speaker 1: that your audience might not appreciate, and and we saw
Speaker 1: it in the dot com bust, and that is if
Speaker 1: you have a lavish equity issuance culture, and you have
Speaker 1: a compliant board that basically will agree to almost any
Speaker 1: management equity issuance plan, then when you issue stock options
Speaker 1: and various different equity instruments to your management and your employees,
Speaker 1: if the boards rubber stamp things, well, they will rubber
Speaker 1: stamp repricing those equity awards if the stock goes lower,
Speaker 1: or granting more if the stock goes lower to keep
Speaker 1: employees happy. And what that means is is that boards
Speaker 1: are acquiescing to not only call options, but they're granting
Speaker 1: put options to the employees and management. And that's a
Speaker 1: frightening alternative because number one, the black Shoals model is
Speaker 1: only picking up the cost of the call options, and
Speaker 1: b you don't really want a management team that has
Speaker 1: a bunch of puts in their stock as well as calls.
Speaker 1: And it's something that I don't think a lot of
Speaker 1: people pay enough attention to on the governance side that
Speaker 1: I think I think your your audience might appreciate. I
Speaker 1: have a really short question. Are you gonna make us
Speaker 1: look at the look at which companies reported earnings on
Speaker 1: November eighth and have a half a billion dollar share
Speaker 1: based compensation run Rader? You're gonna just tell us the
Speaker 1: name of the company. It's a fintech company, that it's
Speaker 1: based out where you guys are right now. And uh,
Speaker 1: and let's say let's say, uh, let's say it's involved
Speaker 1: in a sector of fintech. Uh that a lot of
Speaker 1: people have questioned by now pay later. I think that
Speaker 1: that that'll narrow down that that should narrow it down. Well, okay,
Speaker 1: this kind of leads into a process question. But in
Speaker 1: an environment like this, do you find identifying potential shorts
Speaker 1: easier than during the bull market? Identifying them wasn't the problem, Tracy.
Speaker 1: It was where they where the stocks went, that was
Speaker 1: the issue. Um. You know, some of these business models,
Speaker 1: I mean to us and others have been questionable from
Speaker 1: the get go. Um, you know, take a look at
Speaker 1: at ride hailing or or food delivery, something we're all
Speaker 1: familiar with. These companies been around for ten and fifteen years.
Speaker 1: They haven't found a way to make make profit. Door
Speaker 1: Dash to single out, one company actually has higher losses
Speaker 1: per order now then a few years ago, and so
Speaker 1: they're not scaling. And and that is for companies that
Speaker 1: are based on digitization and having a platform and using
Speaker 1: the internet, you had better scale. That's the whole concept.
Speaker 1: And you know, so many business models are showing increasing
Speaker 1: losses as they age, and I just sort of wonder,
Speaker 1: at what point do do people just say okay enough.
Speaker 1: And I've been shocked at it. It went on as
Speaker 1: long as it did for a lot of these business models,
Speaker 1: so identifying them was not the issue. Having other investors
Speaker 1: care about that is really the issue. So I've always
Speaker 1: found this point that you make to be very compelling
Speaker 1: that it's like, Okay, if these right hailing, sharing economy
Speaker 1: whatever companies couldn't make money during the boom, during the
Speaker 1: good times, then when were they ever going to make money?
Speaker 1: The counter that we've heard and we didn't interview not
Speaker 1: long after the last time we talked to you with
Speaker 1: the VC Jason Kelly canvas. He's like, yes, that's a
Speaker 1: good point. On the flip side, investors were encouraging all
Speaker 1: these companies to grow at any cost, and they were
Speaker 1: not being rewarded for profitability. They were rewarding for growth.
Speaker 1: And so it's not fair to say they can't make
Speaker 1: money because they just weren't incentivized to. There was no
Speaker 1: reason why they would have when the games were all
Speaker 1: too growth. When you look at these models, why can't
Speaker 1: in your view, they turned the dial? Because that is
Speaker 1: the big question, right, can they cut costs now? Can
Speaker 1: they sort of like finally like right size and make money.
Speaker 1: We've seen these big stock price to clients. In many
Speaker 1: cases we see management going into cost cutting, layoff profitability mode.
Speaker 1: Why don't you think that they can now turn the
Speaker 1: dials and get to positive cash flow? We'll see and
Speaker 1: and so far they haven't and and so uh, maybe
Speaker 1: they're not losing as much money, but if you look
Speaker 1: at the operating metrics, a lot of them are still
Speaker 1: inherently unprofitable at suitably high up in the income statement,
Speaker 1: whether it's operating income or gross profits. But what we're
Speaker 1: really looking for as short sellers and looking at these
Speaker 1: business models is for the companies that have stopped growing
Speaker 1: and are still losing money, Because if they've stopped growing
Speaker 1: and the losses are still considerable, then the whole idea.
Speaker 1: While we were investing for growth through investing for future capacity,
Speaker 1: investors you know, didn't care as long as our top
Speaker 1: line was growing. But if you're structurally unprofitable as you
Speaker 1: slow down or stopped growing, then you have a problem.
Speaker 1: And that that's why the things like the door dash
Speaker 1: metric I mentioned to you, you know, the loss is
Speaker 1: per order become important to judge whether or not what
Speaker 1: your guests said is true or not. We've made it
Speaker 1: twenty five minutes without actually mentioning Elon Musk, although we
Speaker 1: did mention Tesla, so I don't again, this is one
Speaker 1: of those things. I don't even have a question, but
Speaker 1: Tesla Elon Musk, Twitter, Jim go. Look, you know the
Speaker 1: Twitter saga is one for the ages, and I'm an
Speaker 1: interested observer like everybody else. We're focused on on Tesla
Speaker 1: the car company, and I would just keep pointing out
Speaker 1: to people that Tesla the car company is not only
Speaker 1: the most profitable car company, which certainly we didn't never
Speaker 1: thought it would be, but is also you know, going
Speaker 1: away still with the stock down almost is still the
Speaker 1: most expensive automobile o EM in the world by a lot.
Speaker 1: And uh, I think we're looking at a company that
Speaker 1: that's training now right around thirty times gross profits thirty
Speaker 1: times gross profits is is you know, their software is
Speaker 1: a service stocks that would kill for that and basically
Speaker 1: sells luxury cars, right he sells fifty and sixty and
Speaker 1: seventy thousand dollar cars that you know have immense gross
Speaker 1: profit margins where the rest of the industry is lucky
Speaker 1: to get fifteen or we don't think that's sustainable. Um,
Speaker 1: we think that the number one the luxury car market
Speaker 1: is a much smaller than people think. And number two,
Speaker 1: even though the o E other o E m s
Speaker 1: have been slow on the uptake, they are coming and
Speaker 1: competition will increase and most cars will be e v
Speaker 1: s by the next five to ten years. And it's
Speaker 1: a tough business. It's a low return on capital business.
Speaker 1: It always has been. He caught the sweet spot to
Speaker 1: his and his shareholders benefit and to the short sellers detriment.
Speaker 1: But now he's got to maintain it. And I think
Speaker 1: that's increasingly difficult because his investors are still looking for
Speaker 1: forty growth for the next you know, decade, and that
Speaker 1: means that pretty much he's going to be the entire
Speaker 1: car industry, you know, by by the early twenty thirties.
Speaker 1: And we just don't think that's going to happen. Are
Speaker 1: you short Tesla right now? We are because I wasn't
Speaker 1: sure because I where you're so obviously the stock has
Speaker 1: come down a lot has gotten hammered over the for
Speaker 1: a while now. But you're just even at the current
Speaker 1: levels unsustainable. Yeah, And I would be remissed if I
Speaker 1: didn't point out that people have now lost more money
Speaker 1: in Tesla than they've made. It's like crypto, I believe.
Speaker 1: Think about that, Yeah, yeah, exactly. And when do you
Speaker 1: think about Twitter? Does that distract from Musk's role at Tesla? Well,
Speaker 1: remember he's also the CEO of a couple of other companies,
Speaker 1: not just Twitter and Tesla. So you know, it's I
Speaker 1: don't understand the value age, I don't understand the price
Speaker 1: he paid, um and and it's to do with what
Speaker 1: he wants. And I believe in private property and free enterprise,
Speaker 1: and you know, I'm kind of scratching my head at
Speaker 1: some of the initiatives, But um, we'll see how it
Speaker 1: plays out. I don't think it was worth four billion dollars.
Speaker 1: I think he thinks it probably wasn't worth forty four
Speaker 1: billion dollars, And it'll be interesting to see how how
Speaker 1: that plays out. But I think it's probably gonna take
Speaker 1: a disproportionate amount of his attention over the near term.
Speaker 1: So we just have about a minute and a half.
Speaker 1: So just like really simple, you know, like when you've
Speaker 1: seen the end sides of many bubbles in your career,
Speaker 1: does it look like we're close to the bottom here?
Speaker 1: And also what do you what would be the signs
Speaker 1: that we are close to something that you would call
Speaker 1: a bottom. Again, market timing is not my forte but um,
Speaker 1: if it was a bottom, it would be the most
Speaker 1: expensive bottom probably in modern financial history. I mean, most
Speaker 1: bear market bottoms have basically bottomed out somewhere between nine
Speaker 1: and fifteen times the previous peaks of earnings. And because
Speaker 1: normally the earnings are depressed at the bottom of a
Speaker 1: bear market. But but if we think that roughly, you know,
Speaker 1: earn things are peaking right now, and they may or
Speaker 1: may not be, but my guess is they're pretty close
Speaker 1: nine to fifteen times would be eighteen hundred two three
Speaker 1: thousand thirty one on the SMP. We're a long way
Speaker 1: away from that, so, you know, I saw it for
Speaker 1: the first time. Facts that was saying that SNP earning
Speaker 1: estimates are coming down for the fourth quarter, are gonna
Speaker 1: be down you over year, So we might be at
Speaker 1: peak earnings right now of two hundred and five or
Speaker 1: two d ten dollars. You know, we were where were
Speaker 1: we the other day? So we were at nineteen and
Speaker 1: a half times that number. That's a pretty rich number
Speaker 1: to be a stock market bottom. All right, Well, Jim Chanos,
Speaker 1: it was lovely seeing you again. We look forward to
Speaker 1: maybe catching up with you in like another four months
Speaker 1: and we'll just ask you we'll just say you were
Speaker 1: right again. Thanks guys, I appreciate that. Well, that was
Speaker 1: our conversation with Jim Chainos at the Berkeley Forum on
Speaker 1: Corporate Governance. Tracy, it's always a pleasure to talk to Jim,
Speaker 1: of course, you know, I thought it was actually interesting.
Speaker 1: Obviously we're in this sort of like fraud exposure cycle,
Speaker 1: but the other sort of pro cyclical element besides discovering
Speaker 1: all this bad activity, it's just what we see about
Speaker 1: financing and what he talked about with share based compensation
Speaker 1: and this sort of compensation structure coming home to roost, right,
Speaker 1: and also the idea that those sorts of share based
Speaker 1: compensation schemes can be an amplifying force for stock prices
Speaker 1: on the way up but also on the way down, right,
Speaker 1: Because you know, when when it comes to uh, you know,
Speaker 1: Silicon Valley, you know, and we think about leverage, we
Speaker 1: we sometimes don't think of tech companies in that because
Speaker 1: they don't have any debt per se. But when you
Speaker 1: think about like how crucial share based compensation was, and
Speaker 1: if you think about it in terms of almost rowing
Speaker 1: from your own investors in order to pay employees and
Speaker 1: so forth so that they'll keep working at the salaries
Speaker 1: it expects, it really is like a form of financial leverage.
Speaker 1: It's just not a credit leverage. Share based capital is
Speaker 1: the lower tier two capital of Silicon valid I like this.
Speaker 1: That's good. That's good. That's yeah. Shall we leave it there.
Speaker 1: Let's leave it there. Okay. This has been another episode
Speaker 1: of the Odd Thoughts podcast. I'm Tracy Alloway. You can
Speaker 1: follow me on Twitter at Tracy Alloway, and I'm Joe
Speaker 1: Wi isn't, though. You can follow me on Twitter at
Speaker 1: the Stalwart, follow our guest Jim Chanos He's at Wall
Speaker 1: Street Cynic, follow our producers Carmen Rodriguez at Carmen Armand
Speaker 1: and Dashel Bennett at Dashbot, and check out all of
Speaker 1: our podcasts under the handle at Podcasts and I wanted
Speaker 1: to let you know about a special event that we're
Speaker 1: holding for listeners. My co host Tracy Alloway and I
Speaker 1: will be speaking with past guest Josh Younger, as well
Speaker 1: as Columbia law professor levmanand in a special live episode
Speaker 1: of The Odd Lots podcast on November nine. We're gonna
Speaker 1: be holding it at Bloomberg h Q, and you're welcome
Speaker 1: to come mingo join. We're gonna have cocktails, canapas and
Speaker 1: other stuff on that day along with the live recording.
Speaker 1: So if you're interested in attending a live episode of
Speaker 1: the Odd Lows podcast as well as meeting me and Tracy,
Speaker 1: as well as meeting our guests, and as well as
Speaker 1: meeting other Odd Lots listeners, go find the rs VP.
Speaker 1: Both Tracy and I have tweeted about it. It's also
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Speaker 1: join us in New York City at bloomberg Age Q
Speaker 1: on November twenty nine,