Jim Chanos on the Nuttiness of 'Bitcoin Treasury Companies'

Summary

Odd Lots Podcast Summary: Jim Chanos on the Nuttiness of 'Bitcoin Treasury Companies'

Release Date: June 30, 2025

In this compelling episode of Bloomberg's Odd Lots, hosts Joe Weisenthal and Tracy Alloway engage in an insightful conversation with renowned short seller Jim Chanos. Recorded live at a recent New York event, the discussion delves into various pressing topics in finance, markets, and economics, offering listeners a deep dive into Chanos's critical perspectives and investment strategies.

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1. Bitcoin Treasury Companies: A Critical Examination

Timestamp: [03:01]

Jim Chanos opens the discussion by vehemently criticizing the concept of Bitcoin treasury companies. He describes them as "the stupidest thing" he's ever encountered in his career, highlighting the paradox inherent in their business model. These companies issue shares to raise capital with the intent of purchasing Bitcoin, a digital asset with a limited supply. Chanos argues that this strategy is fundamentally flawed and unsustainable.

Jim Chanos [03:01]: "The Bitcoin treasury paradox being that you are the one buying the pieces of paper that have infinite supply so that Michael Saylor and I can buy the digital asset with the limited supply. It makes no sense."

He emphasizes that the proliferation of such companies, now exceeding 200 globally, is merely a capital-raising mechanism with no proprietary value, destined to fail as more firms adopt the same ineffective strategy.

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2. MicroStrategy's Questionable Financial Practices

Timestamp: [04:30]

The conversation shifts to MicroStrategy, a prominent Bitcoin investment firm. Tracy Alloway inquires about the company's persistent business model despite the emergence of Bitcoin spot ETFs, which were expected to render such strategies obsolete.

Tracy Alloway [04:30]: "So who's actually buying MicroStrategy? Because I thought everybody on my timeline, okay, But I thought once the spot, spot ETFs, the spot Bitcoin ETFs came out, this business model would go away. And it hasn't."

Chanos explains that MicroStrategy continues to raise capital through complex financial instruments, such as convertible debt and preferred shares, to buy more Bitcoin. He criticizes their valuation approach, which includes unrealized profits from Bitcoin appreciation as part of the company's net asset value (NAV).

Jim Chanos [04:44]: "That's like saying my whole net worth is in a house that's worth $400,000, 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."

Chanos predicts that this unsustainable model will eventually collapse as more companies adopt similar practices without genuine value creation.

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3. New York City Real Estate: Overvalued and Risky

Timestamp: [07:37]

Addressing the recent decline in real estate stocks following political developments, Chanos shares his bearish outlook on New York City real estate. He expresses skepticism over the low capitalization rates (cap rates) maintained by major real estate investment trusts (REITs) like SL Green (SLG).

Jim Chanos [08:08]: "I don't get the risk reward on a 5.2% cap rate on New York City commercial real estate. Right now. I think it should be 7 or 8."

Chanos points out that these low cap rates do not adequately compensate for the risks involved, especially when compared to safer investments like Treasury yields. He critiques the REIT accounting practices that overlook significant expenses, making these investments appear more attractive than they truly are.

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4. Data Center REITs: Struggling Amidst AI Demand

Timestamp: [12:30]

The discussion transitions to data center REITs, particularly focusing on Equinix. Chanos explains that legacy data centers are failing to keep up with the advanced infrastructure demands driven by artificial intelligence (AI).

Jim Chanos [12:30]: "With Equinix, their capex is now going to bump up to between 4 and 5 billion a year. Well, the problem is their EBITDA 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 and dividends."

He warns that the increasing capital expenditures (capex) are straining these companies' finances, leading to poor business performance despite being traded as REITs. Chanos critiques the misconception that these data centers are simple real estate investments, highlighting the technical and financial complexities involved.

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5. Carvana: A Case of Mismanaged Growth and Valuation

Timestamp: [17:51]

Tracy Alloway brings up her personal negative experience with Carvana, questioning the company's business model given its operational inefficiencies and negative customer experiences.

Tracy Alloway [17:51]: "I bought a used car through Carvana and that was a mistake cuz it took us about six months to actually get the car and they lost all our paperwork and it was just an absolute nightmare."

Chanos analyzes Carvana's financials, revealing that the company's profits are heavily reliant on selling subprime loans and equity stakes rather than its core used car business, which has seen a significant revenue decline.

Jim Chanos [18:29]: "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."

He also highlights the concerning trend of insider selling, suggesting a lack of confidence from within the company regarding its future prospects.

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6. Private Equity: Diminishing Returns and Underperformance

Timestamp: [21:13]

Addressing the broader financial ecosystem, Chanos expresses cynicism towards private equity firms. He questions the long-term viability of their high returns, pointing out that many limited partners (LPs) are experiencing delayed distributions and underperforming returns compared to public markets.

Jim Chanos [21:50]: "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."

Chanos draws parallels between the current state of private equity and the challenges faced by hedge funds in the past, suggesting that private equity's "golden days" may be over as their returns have diminished and market conditions have become less favorable.

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7. AI's Impact on the Accounting Profession

Timestamp: [28:31]

The conversation touches on the potential for artificial intelligence (AI) to disrupt the accounting profession. Chanos acknowledges that while AI can efficiently process numbers and generate financial metrics, it currently falls short in interpreting the implications of these numbers.

Jim Chanos [28:31]: "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, idiosyncrastically..."

He foresees AI advancing to the point where it can better understand complex financial scenarios, but emphasizes that human expertise is still crucial for accurate financial analysis and decision-making.

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8. Short Selling Strategies and Market Timing

Timestamp: [30:14]

Tracy Alloway probes into Chanos's approach to short selling, particularly the timeframe and catalysts he relies on to profit from declining stocks.

Tracy Alloway [30:14]: "So one of the things I always wanted to ask you was how you think about, I guess, the timeframes of some of your short bets."

Chanos responds by acknowledging the difficulty in timing shorts, noting that catalysts often become apparent only in hindsight. He advises that firms should "only short the stocks that go down" and highlights the importance of monitoring indicators like insider selling and executive departures as potential signals for short positions.

Jim Chanos [30:33]: "The catalysts are really evident pretty much in hindsight, that if the catalysts were that obvious, it would be priced into the stock."

He cites Equinix's recent stock drop as an example of how anticipated poor performance can still catch investors off guard, reinforcing the challenges in accurately timing market movements.

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9. Views on Tesla and Executive Departures

Timestamp: [32:15]

The hosts briefly discuss executive changes at Tesla, with Chanos dismissing the significance of such departures.

Jim Chanos [32:26]: "Nobody cares. That's my thought. Nobody cares."

Chanos criticizes Tesla's high valuation despite declining sales and cash flow, attributing the company's inflated valuation to the speculative enthusiasm surrounding its futuristic projects rather than solid financial performance.

Jim Chanos [32:28]: "There's always one stock in every bull market that has that, at least that imprimatur of rights and dreams. Everyone can really project their hopes and dreams onto that company and then value it any way they want."

He draws parallels to historical examples like Cisco during the dot-com boom, suggesting that Tesla's current valuation is driven more by investor sentiment and speculative optimism than by fundamental financial metrics.

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10. Closing Remarks

Timestamp: [33:55]

As the episode concludes, Joe Weisenthal thanks Jim Chanos for his insightful contributions, and the hosts encourage listeners to engage with their content through various platforms. The discussion encapsulates Chanos's contrarian investment philosophy, emphasizing skepticism towards prevailing market trends and advocating for thorough financial analysis.

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Notable Quotes:

• Jim Chanos [03:01]: "The Bitcoin treasury paradox being that you are the one buying the pieces of paper that have infinite supply so that Michael Saylor and I can buy the digital asset with the limited supply. It makes no sense."

• Jim Chanos [04:44]: "That's like saying my whole net worth is in a house that's worth $400,000, 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."

• Jim Chanos [08:08]: "I don't get the risk reward on a 5.2% cap rate on New York City commercial real estate. Right now. I think it should be 7 or 8."

• Jim Chanos [12:30]: "With Equinix, their capex is now going to bump up to between 4 and 5 billion a year. Well, the problem is their EBITDA 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 and dividends."

• Jim Chanos [28:31]: "AI is still not getting that great, but it's going to, I think, ultimately... interpret it, and we're not there yet in terms of understanding what an increase in receivables are three times revenues or increase in cost of goods sold relative to inventory."

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This episode provides a sobering analysis of several high-profile areas in the current financial landscape, from the speculative nature of Bitcoin treasury companies to the overvalued state of New York City real estate and the precarious business models of data center REITs and Carvana. Jim Chanos's seasoned perspective underscores the importance of critical evaluation and cautious investment strategies in a market rife with speculative ventures and overinflated valuations.

Transcript

[Jim Chanos]

This is an iHeart podcast.

[Mark Reap]

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[Tracy Alloway]

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

[Joe Weisenthal]

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

[Tracy Alloway]

That's right, the famed short seller. He was there giving us all his thoughts on the so take a lesson.

[Joe Weisenthal]

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

[Jim Chanos]

You know, it's rarely, rarely that I have to increase my personal security after a podcast, which I had to do after our last podcast together when I sent some intemperate things about Bitcoin treasury companies. Look, here's the thing. I get people very agitated about this and 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 Saylor 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. The Bitcoin treasury paradox being that you are the one buying the pieces of paper that have infinite supply so that Michael Saylor and I can buy the digital asset with the limited supply. It makes no sense. What will inevitably happen is happening, and 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 number of companies that have announced this strategy is scores more. I think there's over 100 in the US and over 200 globally now.

[Tracy Alloway]

So who's actually buying MicroStrategy? Because I thought everybody on my timeline, okay, But I thought once the spot, spot ETFs, the spot Bitcoin ETFs came out, this business model would go away. And it hasn't.

[Jim Chanos]

No, because 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 used. And I've called them financial gibberish, because they are. And in fact, this will get arbed away ultimately by companies that will do this to try to capture that spread. In the case of MicroStrategy, 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 shot me into orbit on all this was when Saylor and others then said, well, no, you can't really value us on, on an NAV basis, the so called M NAV 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 just pointed out. I said, well, that's like saying my whole net worth is in a house that's worth $400,000, 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.

[Joe Weisenthal]

When you put it that way, it sounds a little absurd.

[Jim Chanos]

It is absurd.

[Joe Weisenthal]

There's like 200 of them now, right?

[Jim Chanos]

It's over 200 globally.

[Joe Weisenthal]

Yeah, that's.

[Tracy Alloway]

Wait, I have one more question. Why did MicroStrategy. I have to remember to call them strategy, but I can't bring myself to do it. Why did they switch from issuing the convertible debt to preferred shares?

[Jim Chanos]

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 then we can torque up, we can lever up the balance sheet. Now this is a company whose selling point a year ago was we're not going to leverage. Cause we have this wonderful equity that we can issue at a premium. And now they're saying, well, maybe if it trades above 2x, we'll issue equity, but if it's between 1 and 2x, we'll do preferred. And then if it's below 1 times, we'll buy back Comet. And then what is Chanos going to do? To which I said, well, I'll be out of the trade by then. If it's 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 MicroStrategy 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.

[Joe Weisenthal]

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 Donnie's victory. What's your take on New York City real estate these days?

[Jim Chanos]

Well, I guess I'm glad I sold my apartment last year. But. But 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 frontrunner 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. I'm kind of stunned that some of the public traded companies like Vornado 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%.

[Tracy Alloway]

You're short SLG.

[Jim Chanos]

We've been short SLG on and off for a number of years and we are again. And I just, I don't get the risk reward on a 5.2% cap rate on New York City commercial real estate. Right now. I think it should be 7 or 8.

[Joe Weisenthal]

Because you're right. You can get 4.5% by buying a Treasury.

[Jim Chanos]

Right, exactly. So if you're buying it at 5, 2. And that's REIT accounting. REIT accounting is also pretty squirrely, by the way, for a lot of reasons. 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 5 cap.

[Tracy Alloway]

What about residential?

[Jim Chanos]

Yeah, I mean, you know, it's weird. I mean, your audience knows better than I do. I mean, it's problematic in so many ways. There's not enough supply. There's all kinds of weird regulations. Things are expensive. And you can kind of see why Mom Dummy's message resonated with a lot of people. A lot of it has to do with the cost of living here.

[Joe Weisenthal]

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

[Jim Chanos]

Well, I'm not a New Yorker anymore, but the answer is yeah, but which?

[Joe Weisenthal]

Receiving or calling?

[Jim Chanos]

Receiving. I'm not calling, but yeah, sure.

[Joe Weisenthal]

And who, who are they saying? Who? Who?

[Jim Chanos]

I'm not going to, 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.

[Tracy Alloway]

Yeah, it was a good try, Joe.

[Joe Weisenthal]

Yeah.

[Tracy Alloway]

Okay, well, since we mentioned the word bleak a couple times in these conversations now, is it Bleak. Being a short seller in the current market.

[Jim Chanos]

It'S not a lot of fun. But it. It's never really been fun. I mean, I. I started my original fund back in 85. The Dow was at 1300. It's pretty much. We started hedging back in 96. It's always a slog. 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. 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 head scratchers and are a function of general animal spirits. So there's a lot to do. And 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 head scratcher. And we don't try to predict where the market's going. But the animal spirits are definitely back.

[Joe Weisenthal]

You know, it's like several years ago or 20, 21, people could have blamed ZIRP. It's like, oh, it's because 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 ZIRP excuse does not hold water anymore. So we gotta find. We gotta find something new. Speaking of idiosyncratic opportunities, one thing you've been talking about a lot and multiple times on the show is the data center REITs and Equinix, 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.

[Jim Chanos]

So I think the legacy data centers. And there's only a couple companies in the United States that really have legacy data centers. There's Equinix, there's Digital Realty, 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 Partner back in 22, the idea was pretty simple. And we did not see the AI explosion in mid-22, but the idea was it was a pretty crummy business then, working on the cloud and SaaS demand. 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. These are older data centers that were short. The idea being that the new GPU centric data centers need liquid cooling. They basically need all the infrastructure ripped out and replaced. The business was not a high return on capital business before this. It's getting even worse now. What Equinix said yesterday at their analyst day was that revenues were not going to quite be what people thought they would be be. But more ominously, Capex was going to keep increasing. And that's what we've been saying, 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 servers, you have to make sure there's redundancy. It's a business, a tech business and they're traded as REITs. And that was kind of the opportunity, that was the this 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 affo 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 Equinix, yesterday they said our capex is now going to bump up to between 4 and 5 billion a year. Well, the problem is their EBITDA 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 and dividends. And that's just the 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 your way out of this. And so they're just really bad businesses trading at just nosebleed valuations.

[Mark Reap]

This episode is brought to you by Charles Schwab. When is the right time to sell a stock? How do you protect against inflation? Are you taking the right risks with your portfolio? Financial decisions can be tricky and often your own cognitive and emotional biases can lead you astray. Financial Decoder, an original podcast from Charles Schwab can help join host Mark Reap as he offers practical solutions to help overcome the cognitive and emotional biases that may affect your investing decisions. [e-mail] financialdecoder.

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[Tracy Alloway]

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 six months to actually get the car and they 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.

[Joe Weisenthal]

It's insanely.

[Jim Chanos]

Yeah, well it's done a double round trip right? It crashed 99% and now it's up 100x so is pretty interesting again. 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 securitizations right now, and you can track it on your Bloomberg, terminal delinquencies are starting to skyrocket.

[Tracy Alloway]

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

[Jim Chanos]

Yeah. And so again, a huge amount of their profits comes from selling, generating paper from customers and then selling it into the open market or to affiliates. And this is a company that was spun out of a company called drivetime 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. 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 consumer loans. It didn't go bankrupt, but it came close. And he had to restructure it. He bought it in private and then restructured it and renamed it Drive Time Finance. But that's the genesis of Carvana. That's its DNA. It's basically a subprime finance lead company, if you will. And those companies should not trade at 40 and 50 times expected earnings. And they don't, by and large, they're consumer finance companies. So it's an 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 pretty much every day. And we just don't think that's a good sign, given what's happening in the subprime securitization market.

[Joe Weisenthal]

One area of the financial ecosystem that you've been cynical about, cynical about for a long time is private equity. And a lot of the private assets I've been talking to some people about and you hear people talk about is not so much necessarily that the values have gone down, though probably in many cases that they have, but that it's been a long time since LPs, et cetera, have gotten distributions, et cetera. 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.

[Jim Chanos]

Yeah.

[Joe Weisenthal]

So before it becomes a real problem.

[Jim Chanos]

So I really kind of got much more interested in this area, serving on a couple of big investment committees in Manhattan, and one of which had a really, really huge slug of our assets 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 that 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 here they are and let's move on. And I started looking at the numbers, and this was a fund that had all 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 estimated IRR, which is problematic for reasons a lot of your audience knows. And is it just me or are we not understanding we're leveraged 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 foundations endowments, because basically, as my friend Cliff Asta said, it was volatility 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 and P and say, ok, I'm doing better in that, and 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 over, where it was just a free lunch of mid Teen returns with no volatility.

[Tracy Alloway]

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

[Jim Chanos]

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

[Tracy Alloway]

Give us an example.

[Jim Chanos]

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.

[Joe Weisenthal]

I thought you weren't supposed to get.

[Jim Chanos]

Emotional about investing every once in a while. So yeah, it's. There's one other thing though 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 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 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 specifically AI is looking very much akin to the global Internet build out, networking build out in the late 90s. And the problem there of course 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 in profit. But for you it's capitalized expense. It's written off over time. That has a big, big boost until people pull their orders. That's what we saw in 2001, 2002. That GDP dropped about 1 to 2% in the recession of 01 02. Does anybody know what corporate profits did? 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 and 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 Nvidia's revenues are about 1/2 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 99, 2000. Does anybody know what their combined revenues as percent of GDP was in 2000?

[Joe Weisenthal]

No, using your phones, it was a half a percent.

[Jim Chanos]

It was roughly $50 billion total on GDP of 10 trillion. Those revenues stopped growing at some point shortly thereafter actually shrunk a little bit. The investment boom we're seeing right now, we've seen before. It's not just chips, 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 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 that immediately shows up in disappointing revenues and earnings forecasts 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.

[Joe Weisenthal]

So one of the reasons that 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 you learn a lot talking to people who are really steeped in accounting and that people who 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 like, Is this coming for the accounting profession?

[Jim Chanos]

Well, about coming for the accounting profession, That's a good question. I think the AI that we've seen and used is getting better and better at 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. 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.com, some sort of 03 to 09 were in analog businesses that saw their business digitize. So if you were selling an analog product that became digital, you were in a lot of trouble. Think like Kodak 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. We're trying to keep an eye on that. But I do think 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, thank you. Databases, but interpreting it, and we're not there yet in terms of understanding what an increase in receivables are three times revenues or increase in cost of goods sold relative to inventory. But it'll get there. It'll get there within the next couple of years.

[Tracy Alloway]

So one of the things I always wanted to ask you was how you think about, I guess, the timeframes of some of your short bets. Because it seems to me like 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.

[Joe Weisenthal]

Declining car sales at Tesla.

[Tracy Alloway]

That's right. And yet, you know, 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.

[Jim Chanos]

Yeah. After 40 years, I've kind of figured out that the catalysts are really evident pretty much in hindsight, that 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 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. 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 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 idiosyncratic attributes of our shorts. Even then, stuff you would think would bring a lower valuation out of common sense doesn't happen in bullion bull markets and in fact can be a negative factor. The worse the company, the more it goes up. So you have to be willing to understand that concept as well. But again, it's funny Equinix coming out of the blue, just to use the example we've had tonight, and stock down 20% in two days. Everything it said at Analyst Day was known to anybody who's paying attention, but yet they came out and said it and everybody went, oh, wow, ouch.

[Joe Weisenthal]

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'd been there for a long time. Do you have a Nobody cares.

[Jim Chanos]

Nobody cares.

[Joe Weisenthal]

Do you have a Tesla thought of the day?

[Jim Chanos]

Nobody cares. That's my thought. Nobody cares. Yeah, you could, you know, you could see Elon, you know, robbing a Brinks truck with a mask on or whatever. I hope 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 it. I, I've given up trying to figure out what people think about executive departures at that company. I mean, their car sales are plummeting, their cash flow is plummeting. All the metrics that you would look as security analysts. But it's a unique animal where people say, oh, well, of course, yes, but Rosie the robot's going to serve me my breakfast and it's going to have Tesla trademark on it. So it's worth a trillion dollars. There's always one stock in every bull market that has that, at least that imprimatur of right of, I call it hopes and dreams. Everyone can really project their hopes and dreams onto that company and then value it any way they want. And Cisco was that company, by the way, in 99. And it's undoubtedly Tesla because companies are actually executing in some of these fantastic areas of the future, like Nvidia and others trade at a discount to Tesla, and they're actually doing things. He's just talking about doing things. But it doesn't matter. At least not yet. To get to your timing question, Jim.

[Joe Weisenthal]

Chanos, thank you so much. Always a thrill to chat with you.

[Jim Chanos]

Thanks, guys. Thank you.

[Tracy Alloway]

This has been another episode of the Odd Lots podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.

[Joe Weisenthal]

And I'm Joe Weisenthal. You can follow me at the Stalwart. Follow our guest, Jim Chanos. He's Eel Jim Chanos. Follow our producers, Carmen Rodriguez, Armenarman, dashiell, Bennett at Dashbot and Cale Brooks at Kalebrooks. For more Oddlauds content, go to bloomberg.comoddlods where we have our daily newsletter and all of our episodes. And you can chat about these topics 24. 7 in our Discord, Discord GG oddlots.

[Tracy Alloway]

And if you enjoy Odd Lots, if you like it when we talk to veteran investors like Jim Chanos, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber you can listen to all of our episodes absolutely ad free. All you need to do is find the Bloomberg Channel on Apple Podcasts and follow the instructions there. Thanks for listening.

[Bloomberg]

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