Hello there, OddLotss listeners. You are about to listen to a very special episode. This is a conversation recorded live at our recent event in New York.

That's right. We had a live OddLotss event on June 26th. We had tons of conversations. We're going to be rolling them out in the uh days ahead. But the first one we want to bring you was our headliner for the night, uh Jim Chenos.

That's right. The famed shortseller. He was there giving us all his thoughts on the market right now. So, take a listen.

All right. First question. Are Bitcoin Treasury companies the stupidest thing you've ever seen in your entire life?

You know, it's rarely rarely that I have to increase my personal security after a podcast, which I had to do after your our last podcast together when I uh sent some inmperate things about Bitcoin Treasury companies.

Look, I mean, look, here's the thing. I I get people very agitated about this and and they get they they point out on just what a genius idea this is and I keep trying to point out to them I'm doing the same thing that guys like Michael Sailor are doing. I'm on the same side of the trade.

And I keep pointing out to my critics, you're on the opposite side of that trade. And you don't want to be on the opposite side of the trade. And the Bitcoin Treasury paradox being that you are the one buying the pieces of paper that have infinite supply so that Michael Sailor and I can buy the digital asset with the limited supply. And it makes kind of no sense.

So what will inevitably happen is happening in that is there's nothing proprietary here. This is just simply raising capital to buy a financial asset and other companies will do this. And in fact even since the podcast we last did I think the the number of companies that have announced this strategy is you know scores more.

I think there's over a hundred in the US and over 200 globally now.

So who's actually buying Micro Strategy? cuz you know I thought everybody on my timeline. Okay. But I thought once the spot ETFs, the spot bitcoin ETFs came out like this business model would go away and it hasn't. No.

No. And because there's there's a wonderful sales job that's being done about the fact that this is an economic engine in and of itself. And so therefore terms like Bitcoin yield are are used and and I've called them financial gibberish because they are.

and and in fact this will get arbed away ultimately by companies that will do this uh to try to capture that spread. In the case of Micro Strategy, it's substantial.

It's still $50 billion something like that of the difference between the value of the enterprise value of the company and the value of their Bitcoin holdings. But the thing that really kind of shot me into orbit on all this was when Sailor and others then said,"Well, no, you can't really value us on an NAV basis, a so-called MNAV multiple of NAV. You actually have to also give us additional value for the amount of profit that we make every quarter from the appreciation in the asset."

I said I just pointed out I said, "Well, that's like saying, you know, my whole net worth is in a house that's worth $400,000 that that is now worth $500,000 a year or two later. And my net worth is not $500,000 now. It's $2.5 million because it's the value of the house plus a multiple on the increase in the profitability of the asset." When you put it that way, it sounds a little absurd. It is absurd.

There's like 200 of them now, right? I

It's over 200 globally. Yeah, that's that's uh Wait, I have one more question. Why did Micro I have to remember to call them strategy, but I can't bring myself to do it. Um why did they switch from issuing the convertible debt to preferred shares?

Because he realized that as he began to issue more and more common, it was putting pressure on the premium. So now the latest iteration is well we're going to do this quasi equity security quasi debt preferred stock and uh then we can torque up we can lever up the the balance sheet.

Now, this is a company whose selling point a year ago was we're not going to lever because we have this wonderful equity that we can issue at a premium. And now they're saying, well, you know, if maybe if it trades above 2x, we'll issue equity, but if it's between one and 2x, we'll do preferred.

And then if it's below one times, we'll buy back common. And then what is chainos going to do? To which I said, well, I'll be out of the trade by then. You know, if it's a one times NAV, it's not a trade.

So that's kind of the the latest game plan, but stay tuned. It'll change. I think the narrative keeps changing. The other one is of course that Micro Strategy will be put in the S&P 500 and so that will be untold riches for everyone that doesn't know that's going to happen.

Um, we got to move off this topic because I just find it so depressing. You know, like I read the news and they're like, oh, like, you know, some big breakthrough with batteries in China is happening or whatever and then the big

entrepreneurial innovation in the United States is the 200th company that's borrowing money. Like, it's too bleak when you really think about it's too bleak to contemplate.

So, on Tuesday or Wednesday morning, shares in real estate companies fell after victory. What's your take on uh New York City real estate these days?

Well, I I I guess I'm glad I sold my apartment last year. Um but but uh look, I I think a lot of people are surprised. Clearly, New York City real estate and commercial real estate will be challenged if a lot of things happen that the current front runner, you know, wants to happen.

I think there's a lot of restrictions that will be put in front of making some of that stuff happen. But my friends in New York City commercial real estate have said really the regulatory framework and the legislative framework in New York and New York City has done nothing but get worse over the last 15 years.

And I'm kind of stunned that that some of the publicly traded um companies like Vornnado and SL Green still have the cap rates as low as they do. I mean SLG we looked at yesterday and its cap rate is still 5.2%.

You're short SLG now.

We've been we've been short SLG on and off for for a number of years and we are again. Um and I just I don't get the riskreward on on a 5.2% cap rate on New York City commercial real estate right now. I think it should be seven or eight.

Right. You can get four and a half% by buying a treasury. Right. Exactly. Yeah.

And so if you're buying it at 52, you're And that that's read accounting. Read accounting is also pretty pretty squirly, by the way, for a lot of reasons.

you know, they don't include overhead in the cap rate. And of course, there is real depreciation in some of this stuff. There's maintenance capex in New York City. It's pretty high. And that doesn't include any capex. So, I don't get it. I don't see rents going up here.

I guess it would be the easiest way. And that'd be the only reason you'd be buying office buildings at a five cap.

What about residential?

Yeah. I mean, you know, it's weird. I mean, your audience knows better than I do. I mean, it's it's it's problematic in so many ways. U there's not enough supply. There's all kinds of weird regulations. Things are expensive.

And you can kind of see why M Dami's message resonated with a lot of people. A lot of it has to do with the cost of living here.

Have you been on the receiving end or I guess dialing of any of the calls to gather capital for a uh a challenger?

Um well, I'm I'm not a New Yorker anymore, but the answer is yeah, but receiving or calling?

Receiving.

I'm not calling. Um, but uh yeah, sure. And uh who who are they saying? Who who I'm not I'm not going to get into that. Those are private conversations. I think I think they're all pretty pretty silly at this point.

Yeah, it was a good try, Joe.

Yeah, I try.

Okay. Well, since we mentioned the word bleak a couple times um in these conversations now, is it bleak being a short seller in the current market?

Well, it's not a lot of fun. Um, but it it's never really been fun. I mean, I I started my original fund back in ' 85. The Dow was at 1300. So, it's it's pretty much and you know, we started hedging back in 96.

So, you know, it's it's it's always a slug. It's never easy. It's why a lot of people don't do it. On the other hand, the idiosyncratic opportunities, most things fail as you know and the idiosyncratic opportunities have probably never been greater given the market we have now and with things like Bitcoin treasury companies and all kinds of other things.

They just are sort of headscratchers and are a function of general animal spirits. So, there's a lot to do and I I think that's the fun part of what I do is there's a lot to do and seemingly more every year, but some of the stuff going on right now is a bit of a headscratcher and we don't try to predict where the market's going, but the animal spirits are definitely back.

You know, it's like several years ago or 2021, people could have blamed ZER. It's like, oh, it's cuz the rates are at zero and that's why everyone's going crazy.

And I do think it's really interesting how much speculative activity has persisted and the ZERP excuse does not hold water anymore. So we got to find uh we got to find something new.

Speaking of idiosyncratic opportunities, one thing you've been talking about a lot and multiple times on the show is um the data center reach and Equinex I think just had two terrible days in a row. What's going on with them?

So these are the companies that have clouds but they're not like the hyperscalers like what's their So I

I think the legacy data centers and there's only a couple companies out in the United States that that really have legacy data centers. There's Equinex, there's Digital Realy, and then there's a sort of the old Colony Capital is now called Digital Bridge, and they own these things sort of in fund format.

And when we took a look at this with our our partner back in 22, the idea was pretty simple and and we did not see the AI explosion in in mid22, but the idea was it was a pretty crummy business then working on the cloud and SAS demand.

uh but it became a really bad business with the advent of AI because it just moved the hyperscalers to invest more in state-of-the-art data centers and these are older data centers that were short and the idea being that that the new GPU centric data centers need liquid cooling they basically need all the

infrastructure ripped out and replaced and the business was not a high return on capital business before this it's getting even worse now and what Equinex

said uh yesterday at their analyst day was that revenues were not going to quite be what people thought they would be, but more ominously capex was going to keep increasing.

And that's what we've been saying that that these are not like warehouses where you just kind of collect a check. These are actually operating businesses where you have to service the the the servers. You have to make sure there's redundancy. It's just it's a business, a tech business.

and um they're traded as REITs and that was kind of the opportunity that was the the sort of dichotomy in valuation. So people added back the depreciation as they do with REITs and they valued them on a so-called FFO or AFO which is a cash flow metric but in fact unlike

warehouses shopping centers to lesser extent office buildings the capex was real depreciation was a real expense.

So to give you an example with Equinex yesterday, they said our capex is now going to bump up to between four and five billion a year. The problem is their EBIT DA this year is expected to be 4.5 billion.

So all of that's going to go to capex, meaning they're going to have to basically borrow or issue equity to pay their interest in dividends. And that's just a definition of a bad business. And it's a business that's not growing very fast.

So unlike other really true AI companies which are growing 25 30 40% a year, these guys are growing 3% 5% 6% sort of with GDP. So there's no growing their way out of this.

Um and and so they're just really bad businesses trading at at just nosebleleed valuations.

On the topic of idiosyncratic opportunities, I got to ask about Carvana cuz when my husband and I moved back to the States in 2022, we bought a used car through Carvana and that was a mistake cuz it took us about 6 months to actually get the car and they lost lost all our paperwork and it was just an absolute nightmare.

And I thought at the time, this is a company whose entire business model is basically built on regulation, right? Like that's what they're doing. And I thought, they're not going to have a future if they are this bad at it. And yet the stock is up. It's done insanely well.

Yeah. Well, it's it's it's done it's done a double round trip, right? It it it crashed 99% and now it's up 100x. So um it's pretty interesting again and and the reason it's interesting is that if you go through the numbers they are making more than 100% of their pre-tax profit from gain on sale of loans subprime loans and gain on sale of equity stakes in other companies.

And you x those two out they're losing money and they're losing money now right after the rebound after the restructuring from 2022 2023.

And this is a company that is being valued again as a secular growth stock that saw its used car revenues drop 30% between 2022 and 2023.

So it's not necessarily a secular growth company. The accounting is abysmal. And then what people are really missing is that what's happening in subprime auto uh securizations right now and you can track it on your Bloomberg terminal.

Um delinquencies are starting to skyrocket.

Yeah, we actually did an episode on this recently with Jim Egan.

Yeah. And so again, a huge amount of their profits comes from selling, you know, generating paper from customers and then selling it into the open market or to affiliates.

And this is a company that is was spun out of a company called Drive Time Finance, which is their affiliated finance company, which was originally called Ugly Duckling in the late 90s, which was run by the current CEO's father.

And that company collapsed in the first subprime blowup, which was not the GFC. It was actually in the late 90s in subprime auto credit and and consumer loans.

And um it didn't go bankrupt, but it came close. And he had to restructure it. He bought it bought it in private and then restructured it, renamed it drive time Finance. But that's the genesis of Carvana. That's its DNA. It's basically a subprime finance, you know, lead company.

if you will. And those companies should not trade at 40 and 50 times um expected earnings and they don't by and large. They're consumer finance companies. So, it's a it's a it's a odd bird. It's still heavily leveraged. The stock is up a ton.

But what really got us interested again recently was the vast amount of insider selling that has just started in May and June in the company. If you go look at the insider selling in the company, it is just now a torrent of everybody selling like pretty much every day.

And uh I we just don't think that's a good sign given what's happening in the subprime securization market.

One area of the financial ecosystem that you've been cynical about it uh cynical about for a long time is sort of private equity and a lot of the private assets.

And something that um I've been talking to some people about is or and that you hear people talk about is not so much necessarily that the values have gone down though probably many cases that they have but that it's been a long time since LPS etc have gotten distributions etc whether it's venture at the venture level the PE level how long can that go on where it's like people are not getting cash out yeah so um before it

becomes a real problem so I really kind of got much more interested in this area, serving on on a couple of big investment committees in Manhattan and one of which had a really really huge slug of our assets of this uh of this nonprofit in privates in private equity for the most part, a little bit of venture, a little bit of real estate.

And what always struck me was was that we we spent a lot of time talking about the market, talking about our managers, talking about why hedge funds were terrible. And then we'd get to the part about private and they say, "Well, the returns are lagged by a quarter, so you know, here they are and let's move on."

And I started looking at the numbers and this was a this is a fund that that had all the the the premier firms, the ones you all know.

and gee stock market's doing awfully well and we're kind of doing 10% 11% in terms of realized returns and then uh estimated IRR which is problematic for reasons a lot of your audience knows and

um is it just me or are we not understanding we're leverage long equity in these entities and yet we're underperforming the indices

That was five, six years ago. And I think that that's only gotten worse since. And so I'm really beginning to wonder private equity was considered a panacea for nonprofits and and foundations, endowments, because basically, as my friend Cliff A said, it was volatility, you know, laundering, if you will, because no one ever showed you a big down quarter.

But now we're getting to the point where a lot of these funds are really mature and the actual returns themselves are not going to be mid- teens with low volatility. They're going to be high single digits, low double digits.

And we can look at the S&P and say, okay, you know, I'm I'm doing better in that and I I'm liquid and I'm not paying fees. And so I suspect that private equity and ultimately private credit are going to be where hedge funds found themselves 10 to 15 years ago having to justify their existence after having a pretty good run from the late 90s to to the GFC.

I suspect that's where we are in private equity. It'll still be a very lucrative business, but I just think its golden days are are over where it was just a free lunch of mid- teen returns with no volatility.

Does anyone ever ask you what you're bullish on? Should I ask?

I look I we're we're long equities, right? We're long stuff. A lot of people in the audience are long.

Give us an example.

Well, I mean, we're long indices, so we're long general corporate America. I just, you know, I just hate this stuff. I'm short.

I thought you weren't supposed to get emotional about investing every once in a while.

So yeah, it's uh and there's one other thing though I I do want to mention and that is I was talking to someone earlier today and I think one of the things that's underappreciated by investors right now and and one of the things that's been most interesting to me is how corporate profit margins have have held up which used to be very mean reverting as you know and um the more

work we've done on this the more we're kind of convinced that the capital spending boom we're seeing due to tech and and specifically AI is is looking very much akin to the global internet buildout, networking buildout in the late 90s.

And the problem there of course is is that if you buy my chips from Nvidia or you were buying my networking equipment at Cisco and Lucent, that's revenue for me and profit, but for you it's capitalized expense, right?

It's written off over time and that has a big big boost until people pull their orders and that's what we saw in 2001 2002 that GDP dropped about 1 to 2% in the recession of 0102.

Does anybody know what corporate profits did in that and that was an investment driven recession. Consumers didn't feel it at all. earnings were down about 45% I think from peak to trough in the S&P they were down about the same a little bit more in the global financial crisis but of course GDP collapsed.

So here's a little interesting thought experiment right now um Nvidia's uh revenues are about 1 half of 1% of US GDP about $140 billion and our GDP is about 29 trillion okay.

anyone Tell me what Cisco and Lucent, the two companies that you needed when building out your internet network in 99200. Did anybody know what their combined revenues as a percent of GDP was in 2000?

No using your phones and Chad GP. It was a half a percent. It was uh it was roughly $50 billion total on GDP of 10 trillion.

So those revenues stopped growing at at at some point shortly thereafter and actually shrunk a little bit. So the investment boom we're seeing right now we've seen before and it's not just chips, right? It's Caterpillar. It's people building the data centers. It's it's people building new utilities.

I mean it's there is a ecosystem around the AI uh boom that is considerable as there was for TMT back in 99 and 2000 but it is a riskier revenue stream because if people pull back they can pull back capex very easily.

projects can get put on hold for six months or nine months and and that immediately shows up in disappointing revenues and earnings forecast if it happens. We're not there yet, but that's one of the risks out there that I think a lot of people are underestimating.

So, one of the reasons that um we like talking to you and a consistent thing that I've noticed in the almost 10 years of doing this podcast, it's always uh you learn a lot talking to people who are really steeped in accounting and that people who uh are knowledgeable about accounting just I don't know they seem to be have more interesting things to say than a lot of other people.

Will AI be able to do accounting some of these sort of understandings of you know whatever capitalized expenses and different like is this coming for the accounting profession about coming for the accounting profession that's a good question.

I think that AI that that we've seen and used is getting better and better pulling numbers together and making sense of them it's not quite there yet when I've done it I find lots and lots of errors not so much in the numbers themselves but the implications of the numbers the AI is still not getting that great but it's going to I think ultimately.

and the question will be for sort of tonight's conversation and keeping in the theme is where we made a lot of money on the short side idiosyncratically after dotcom from sort of 03 to09 were in analog businesses that saw their business digitize.

So if you were selling an analog product that that became digital you were in a lot of trouble. think like Kodak, okay, or Blockbuster, Yellow Pages, those kinds of businesses, right? That suddenly just didn't have to exist.

And there's going to be a raft of them post AI and people are already kind of starting to think that through. But there will be industries that are collecting what I call agency rents that will suddenly not be able to collect those agency rents.

And um we're trying to keep an eye on that. But I do think that that the issue isn't so much the quantitative numbers that AI will be able to generate and give you ratios and things like that, although Bloomberg does a pretty good job of that already, right? I mean, databases.

Um, but interpreting it and we're not there yet in terms of understanding what an increase in receivables are. It's three times revenues or in increase in cost of goods sold relative to inventory. But it'll get there. it'll get there within the next couple years.

So, one of the things I always wanted to ask you was how you think about, I guess, the time frames of some of your short bets because it seems to me like, you know, we can sit here and talk about how crazy cap rates are for office buildings in New York and subprime loans and Carvana and how stupid Bitcoin treasury companies are.

Declining car sales at Tesla.

That's right.

And yet, you know, it the key to all of this, to making the money on it, is actually calling what the catalyst is going to be and when the stock eventually falls.

Yeah. I I've after 40 years, I've kind of figured out that the catalysts are really evident pretty much in hindsight.

Um that that if if the catalysts were that obvious, it would be priced into the stock. And so, you can look for signposts along the world, but but they're just that.

Now, there's some that are better than others. you know, a massive increase in insider selling and executives leaving has always been a good one for the most part. It's it's probabilistic, but I think that timing is, you know, I always like say, you know, only short the stocks that go down. If they don't go down, don't short them.

Um, and and it's hard. And it's why being hedged pretty much systematically to us made a lot of sense for the last 30 years. um and say, "Okay, we're going to take the market out of what we're doing and we're going to just try to isolate the the idiosyncratic attributes of our shorts."

And even then, I mean, stuff you would think would bring a lower valuation out of common sense, you know, doesn't happen in in a bullion bull markets and in fact can be a negative factor. You know, the worse the company, the the more it goes up.

So, you have to be willing to understand that concept as well. But again, it's it's it's funny, you know, Equinex coming out of the blue, just to use the example we've had tonight and stock down 20% in two days. I mean, everything it said at analyst day was known to anybody was paying attention, but yet they came out and said it and everybody went, "Oh, wow. Ouch."

Speaking of executive departures, I think there was another one today at Tesla, someone who was like, I think pretty close to Elon or someone who had been there for a long time. Do you have a um

Nobody cares. Nobody cares.

Do Do you have a Tesla thought of the day?

Nobody cares. That's my thought. Nobody cares. Yeah. You You could, you know, you could see Elon, you know, robbing a Brinks truck with a mask on, whatever.

Oh, that's Elon. You know, I'm sure they're going to have a new business of robbing Brinks trucks and, you know, we'll put a we'll put a trillion valuation on. I I've given up trying to figure out what people think about about executive departures at that company.

I mean their car sales are plummeting, their cash flow is plummeting, you know, all the metrics that you would look as security analysts, but it's a unique animal where people will say, "Oh, well, of course, yes, but you know, Rosie the robot's going to serve me my breakfast and it's going to have Tesla trademark on it, so you know, it's worth a trillion dollars."

So there's always one stock in every bull market that has that at least that impremature of right of of a I call it a hopes and dreams. Everyone can can really project their hopes and dreams onto that company and then value it any way they want.

And Cisco was that that company by the way in 99. And it's it's undoubtedly Tesla. Yeah. because companies that are actually executing in some of these, you know, fantastic areas of the future like Nvidia and others trade at a discount to Tesla and they're actually doing things.

You know, he's just talking about doing things, but it it doesn't matter, at least not yet.

To get to your timing question, Jim Chanos, thank you so much. Always a thrill to chat with you.

Thanks, guys. Thank you.

This has been another episode of the OddLotss podcast. I'm Tracy Aloway. You can follow me at Tracy Aloway. And I'm Jill Weisenthal. You can follow me at the stalwart.

Follow our guest Jim Chenos. He's at real Jimchenos. Follow our producers Carmen Rodriguez at Carmen Arman Dashel Bennett at Dashbot and Kaleb Brooks at Kalebrooks.

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