Jim Chanos on Who's Getting Caught Swimming Naked

Summary

Odd Lots Podcast Summary: Jim Chanos on Who's Getting Caught Swimming Naked

Released on April 12, 2025, Bloomberg's Odd Lots podcast features host Joe Weisenthal and Tracy Alloway delving into a comprehensive conversation with renowned investor and short seller Jim Chanos. The episode, titled "Jim Chanos on Who's Getting Caught Swimming Naked," explores various facets of the current financial markets, including short selling strategies, AI investments, private equity challenges, trade turmoil, Medicare Advantage fraud, and insights into Elon Musk's ventures.

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1. Market Crisis and the Art of Short Selling

Timestamp: [01:00]

The episode opens with a discussion on market crises and their revelatory power in exposing unsustainable economic practices. Hosts Weisenthal and Alloway reference Warren Buffett's adage, paraphrased by Alloway as, "What's that old Buffett quote when you don't see who's swimming naked until the tide starts to go out?" [01:27]. This metaphor underscores the importance of short sellers like Jim Chanos, who thrive when overvalued assets correct themselves.

Jim Chanos elaborates on his firm's strategy: "Our view was that the old legacy data centers that were built to basically handle the cloud, not AI, were in trouble and were a bad business to begin with and have gotten only worse." [07:08]. He emphasizes that fundamental short positions enable a more robust long portfolio, fostering outperformance when shorted assets decline.

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2. Performance of Short Selling Strategies Amid Market Shifts

Timestamp: [02:24]

Chanos provides an update on his firm's performance, highlighting significant alpha generated in recent weeks. "The stuff we're short has gone down much more than the market," he notes [03:43], pointing out that their hedged approach has proven advantageous as market conditions shift.

When asked about the declining appeal of short selling over the past decade, Chanos responds, "The short side has not been too bad. I mean, Bloomberg has an index, the most shorted basket, which you can take a look at if you're a Bloomberg subscriber." [05:43]. He acknowledges that recent market dynamics, including geopolitical tensions like Liberation Day, have rejuvenated the efficacy of short strategies.

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3. AI Investments and the Struggles of Legacy Data Centers

Timestamp: [06:03]

The conversation transitions to AI investments and their impact on legacy data centers. Chanos critiques the traditional data center business model, describing it as "one of the worst business models I've ever seen because the capex is enormous... and the returns on capital are just abysmally low." [07:08]. He contrasts this with the uncertain but potentially rewarding AI bet, suggesting that while AI remains a revolutionary technology, the returns on massive investments in this area are yet to be realized.

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4. CoreWeave and Nvidia: An Incestuous Relationship?

Timestamp: [08:26]

Tracy Alloway raises concerns about the relationship between CoreWeave and Nvidia, particularly in light of CoreWeave's underwhelming IPO performance. Chanos draws parallels to the telecom equipment scandals of the late '90s and early 2000s, cautioning against "aggressive moves with your customers and your distributors." He warns that "if you start to see this stuff on the margin, where companies are increasingly round tripping with their customers or financing their customers or buying in their inventory via distributors, you begin to wonder..." [10:37].

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5. Private Equity and Private Credit: Navigating Turbulent Waters

Timestamp: [15:07]

Chanos expresses surprise at the rapid sell-off in private equity and private credit sectors. "This is volatility laundering and the idea that these funds don't have the same risks as equity funds have is to me, preposterous," he asserts [15:52]. He highlights the challenges these funds face in bringing deals public or securing exits amidst tightening credit conditions, predicting that "the nightmare scenario for private equity and arguably private credit, will be a long period of lackluster or no equity returns with higher interest rates." [17:07].

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6. Trade Turmoil and the Impact of Tariffs

Timestamp: [22:42]

The discussion shifts to recent trade policies and their immediate effects on businesses. Chanos emphasizes the practical implications of tariffs, such as liquidity strains faced by small and medium-sized businesses. "There's real practical aspects of these tariffs that I don't think we kind of know all the implications and how it will ripple through the economy," he states [22:42]. He anticipates significant profit margin contractions as companies struggle to absorb or pass on the increased costs.

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7. Medicare Advantage Fraud and Healthcare Insurers

Timestamp: [33:48]

A substantial portion of the episode is dedicated to Medicare Advantage fraud. Chanos explains how insurers exploit upcoding to inflate reimbursements based on patients' health statuses. "Medicare Advantage has been just a windfall for the insurers. It's basically for people that are eligible for Medicare... the problem becomes it's what we call upcoding," he explains [35:26]. He criticizes the lack of robust governmental oversight, referring to the current period as "the golden age of fraud." [38:51], highlighting systemic issues where fraudulent practices are often only met with fines rather than significant punitive actions.

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8. Elon Musk, Tesla, and Future Technologies

Timestamp: [28:17]

Chanos critiques Elon Musk's ventures, particularly Tesla, despite acknowledging Musk's political entanglements. "Tesla is beyond Elon Musk. Tesla is a real sort of benchmark stock for me because of the way in which Elon effortlessly sells the story of the future to investors," he remarks [28:47]. He expresses skepticism about the profitability and scalability of Tesla's ambitious projects like robo taxis and humanoid robotics, drawing parallels to car manufacturing's low margins despite high valuations.

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9. Concluding Insights and Historical Context

Timestamp: [37:12]

When asked about historical parallels to the current economic landscape, Chanos asserts, "Given what's driving markets as we sit here, I don't think we've ever seen anything like this where a global hegemon has willingly said I'm going to basically shoot myself in the foot and get rid of the exorbitant privilege that we've had as being the global hegemon with the reserve currency." [37:12]. He underscores the unprecedented nature of current market influences, driven by volatile leadership and policy shifts that defy traditional economic stability.

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10. Final Thoughts and Reflections

Timestamp: [40:02]

In wrapping up, both hosts acknowledge the grim outlook presented by Chanos. Tracy Alloway reflects on the bleakness of the discussion, while Weisenthal expresses his own frustration with the current market dynamics. The episode concludes with a mutual appreciation for Chanos's candid insights, despite the somber tone.

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Key Takeaways:

• Short Selling as a Hedge: Jim Chanos emphasizes the strategic value of short selling in hedging portfolios and capitalizing on overvalued or fraudulent assets revealed during market downturns.

• Challenges in AI and Data Centers: While AI presents significant investment opportunities, legacy data centers struggle with unsustainable business models and low returns, posing risks to investors.

• Private Equity Volatility: The private equity and credit markets face heightened risks amid economic uncertainty, with potential long-term stagnation in returns due to increased interest rates and decreased liquidity.

• Trade Policies Impact: Recent tariff implementations are expected to strain corporate profit margins, particularly for small and medium-sized businesses unable to fully pass on costs to consumers.

• Systemic Fraud in Healthcare: Medicare Advantage fraud represents a significant unchecked area within the federal budget, with insurers exploiting upcoding practices to secure inflated reimbursements.

• Skepticism Towards High-Valuation Tech Ventures: Chanos remains critical of the sustainability and profitability of high-valuation tech companies like Tesla, questioning the feasibility of their ambitious future projects.

• Unprecedented Market Influences: Current economic conditions are driven by unique and unstable factors, with global hegemonic shifts and policy changes creating an unpredictable market environment.

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For those interested in deep financial insights and market analysis, this episode of Odd Lots provides a candid and critical perspective from one of the industry's foremost short sellers, Jim Chanos.

Transcript

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[Joe Weisenthal]

Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.

[Tracy Alloway]

And I'm Tracy Alloway.

[Joe Weisenthal]

Tracy, I guess one good thing about market crisis, I don't know if it's even good because I like when lines go up no matter what. But you know, people always say, oh, this can't go on forever and they're talking about some specific trend or here's a scam or here's a bezel in the economy that will exist as long as the lines go up. Things get revealed in a downturn. Things that were unsustainable are shown to definitively unsustainable when the downturn hits. Right.

[Tracy Alloway]

What's that old Buffett quote when you don't see who's swimming naked until the tide starts to go out? And I think we are probably at that moment and I gotta say, in terms of who likes when lines go down? You know who likes when lines go down? Yeah, short sellers.

[Joe Weisenthal]

That's right. They definitely do. Especially when it's been like 15 years since the line has gone down and so many short sellers have had such a brutal time. Maybe we'll put swimming naked in the.

[Tracy Alloway]

Headline of this instead of dead bodies floating to the top.

[Joe Weisenthal]

Maybe it's a little we'll have to figure out. Anyway, let's just jump right to it. We've had him on the show in the past, someone we always enjoy talking to. He is going to tell us about what bodies are going to float to the surface. And those bodies happen to be naked, too. He's going to tell us what naked bodies are floating to the surface. Jim Chanos, founder of Chanos and Company, longtime investor, short seller. Thank you for coming back on Odd Lots.

[Jim Chanos]

No, thanks for having me. It's my pleasure.

[Joe Weisenthal]

I only recently learned that Scott Besant, I say I only recently learned as if I looked this up. I heard it from you as you were walking into the studio. He worked for you.

[Jim Chanos]

Yeah, he was my first Analyst.

[Joe Weisenthal]

Incredible.

[Jim Chanos]

I taught him everything he knew. Up to a point, I guess.

[Joe Weisenthal]

Up to a point. Okay.

[Tracy Alloway]

All right, I'm just going to ask basic questions to start, but what has the past week or so, let's see, we're recording this on April 9th at 11:28am yeah, we have to be that specific on the time now because things change so quickly. What has the past week been like for you?

[Jim Chanos]

Well, we're not in the business of running outside money anymore, so that ended a couple years ago. But we do advise clients and of course run our own money. So since 1996, we've always been hedged, but we've seen obviously substantial alpha in the last couple of weeks. That is, the stuff we're short has gone down much more than the market. We tend to be long the market passively and that usually happens right when the market shifts gears. A lot of the more questionable story, stocks, frauds, hypes, begin to underperform. And that was not the case until really about the tariff, the liberation day. And now it's really kicked in.

[Joe Weisenthal]

If I'm an asset allocator, is that why I allocate to someone who specializes in short selling? Not because they are going to give me positive returns month after month, month after month, but that it allows me to be more comfortably long risk assets in my other investment because I have this knowledge that I'll get outsized returns from you when they go down.

[Jim Chanos]

Yeah. In our business model over 40 years, basically it morphed into the idea that fundamental shorts allow you to be more long. And that's really, at the end of the day, your shorts are financing your long portfolio. If your shorts don't go up or go down enables you to have a long portfolio that actually will outperform.

[Tracy Alloway]

Yeah, I mean, it is true that before this month, being a short seller did not seem that fun for like the past 10 years. And we've done episodes on the hard life of being a short seller. Are the gains now enough to offset like a decade of lines going up?

[Jim Chanos]

Well, again, the lines are going up, but it was all a matter of if you're selling insurance, as I was, and advise people to do now, the idea was, is the insurance working? And the insurance was working really, even post global financial crisis for quite a while. And then starting about 2018, 2019, and right into the GameStop episode in the first quarter of 2021, it didn't work. But it has worked since GameStop. And even though the market's made new highs as recently, I think as January, the short side has not been too bad. I mean, Bloomberg has an index, the most shorted basket, which you can take a look at if you're a Bloomberg subscriber.

[Tracy Alloway]

Thank you for the plug.

[Jim Chanos]

My pleasure. And it has done relatively well relative to the market since early 2021.

[Joe Weisenthal]

So let's talk about some areas of the market. Let's just jump right into it. I think actually the last time we had you on, I'm looking at this, was FTX November.

[Jim Chanos]

No.

[Joe Weisenthal]

Well, was it?

[Tracy Alloway]

It was ftx.

[Joe Weisenthal]

That's right.

[Tracy Alloway]

It was actually before FTX imploded officially, but after we did the infamous box episode.

[Joe Weisenthal]

But you know what? The last time we talked to you was November 23, 2022. Right. As FTX was imploding. But another point in the history here that's important, November 30, 2022, was when Chad GPT came out. And then we got this incredible AI wave and people started piling everything into Nvidia and all these data center plays, etc. And in the previous odd lots, and I don't remember what that was, you've talked about data centers before in some brutal data center economics.

[Jim Chanos]

Terrible.

[Joe Weisenthal]

One of the things that we've seen in this downturn. See, I'm putting this all together. This is not totally incoherent. One of the things that we've seen in this downturn is some really like sharp reversals for the big AI plays that were big. Those were just so hot. And so I'm curious now, like, you know, you've talked about data centers, et cetera. Tell us where you're seeing some of this stuff right now.

[Jim Chanos]

So the AI bet is an uncertain bet. We don't know what the returns on this massive investment is going to be yet. And even the Mag 7 will tell you it's uncertain. We think it's going to be worth the risk, but it's an uncertain payout. And I'll leave that up to people who are much more well versed in technology than I am. Our view was that the old legacy data centers that were built to basically handle the cloud, not AI, were in trouble and were a bad business to begin with and have gotten only worse. And that was the bet. It's still the bet. I think it's a really. I've called it one of the worst business models I've ever seen because the capex is enormous. You gotta keep replacing the air conditionings and the racks and the networking equipment and to keep these centers running and the returns on capital are just abysmally low. So we kind of said, all right, AI is a thing, it's an uncertain thing. Market loved it. Now the market's questioning it. But we do know that the old data centers, the ones that have been around now, is this like an equinox? Yeah, Equinox Digital Realty, Digital Bridge. Those have really challenged business models.

[Tracy Alloway]

So one of the things that happened recently is Coreweave did its IPO and it had initially targeted 2.7 billion and it came in at 1.5 billion. And the interesting thing to me is part of that was a really big order from Nvidia. And Nvidia is very interwoven with Core Weave's model. Since we're already talking about floating bodies and people swimming naked, I'm going to try to be as distasteful as I can, but how incestuous is the relationship between CoreWeave and Nvidia?

[Jim Chanos]

So for those of us that are, that are a little bit older than you two, I mean, we remember some of the round tripping that was going on in telecom equipment back in 99 and 2000, with Nortel and Lucent providing financing for its customers and then selling things into those customers on cheap terms. And the whole thing unwound very quickly when the dot com bubble and telecom bubble imploded. I put a tweet out that got some notice where I saw Nvidia not only was doing the Core Weave kind of deals, but had just bought a distributor of theirs. And that was also a little worrisome. It's only a small part of their business. It's not material. But when you start to see this stuff on the margin, where companies are increasingly round tripping with their customers or financing their customers or buying in their inventory via distributors, you begin to wonder, you know, if it's just on the margin, that's fine. But as we all know, on the margin is everything, right? If you miss your earnings by a couple of pennies, your stock can be devastated. And if they're doing deals like this to basically make sure they make or beat numbers, then we have the old 1998, 99, 2000 dynamic at work where companies are stretching to make numbers. That has not been the case up until now, right through 2023, 2024, demand's been amazing. Yeah, blowout numbers, but it's something to keep an eye on shift.

[Joe Weisenthal]

So. So in other words, like, the insinuation here is not that there's something like per se bad, but history says that when you see stuff like this to keep the rallying point.

[Jim Chanos]

Aggressive, aggressive, aggressive moves with your customers and your distributors.

[Joe Weisenthal]

Because that's what everyone's been wondering. Right. And I guess like all of this stuff with the trade turmoil has like, like we actually. It's kind of amazing because I think we've gone two weeks without talking about AI, which may be something. Maybe it's something that we could be a little bit thankful for in some sense. But were the trade trade war to go away tomorrow.

[Jim Chanos]

Yeah.

[Joe Weisenthal]

And we will return to what we were talking about in January.

[Jim Chanos]

I saw your post earlier today about if tariffs went away like this, all the other stuff that is suddenly.

[Joe Weisenthal]

This would be the concern.

[Jim Chanos]

Yeah. I look on the margin. Again on the margin. I think these numbers are not material. They deal with core weeds, the distributor, they're bought. But it's something to keep an eye on.

[Joe Weisenthal]

Tracy, I just want to do. By the way, some of these names are just for listeners. Digital Realty is below where it was like at its 2020 peak after having plunged from about 195 to 133. Core Weave is actually just slightly above its IPO price of 40. That was a closed day. It's at.

[Tracy Alloway]

Hanging in there.

[Joe Weisenthal]

It's at 4135 right now.

[Tracy Alloway]

So anyway, so one of the things that happened in the early 2000s with the telecoms and Internet bubble is I think people, a lot of people expected some of these companies to fail, but I guess the bet was maybe a handful of them would be huge winners from the development of the Internet. And it's true. You know, we had like Google come out of this. If you invested in Google, Amazon, you made a lot of money. Is there any possibility of that happening? When it comes to AI, do you see a winner?

[Jim Chanos]

Oh, I mean, I think there's going to be a lot of winners. If it's as revolutionary as a technology as it appears to be, we'll see all kinds of new business models and probably a company that we might know like Nvidia or whatever succeeding or maybe a couple companies we don't know yet that will take advantage of it. The flip side to be the glass half empty guy is that what everyone also forgets about the Internet was that it destroyed as many businesses as it brought forward. Any business that was in the analog business that went digital. So you actually had a physical product that went digital, was absolutely devastated, like Kodak or Blockbuster Video or the Yellow Pages, what have you. And I suspect that AI will be very similar. We'll see.

[Joe Weisenthal]

So you're Not a hater.

[Jim Chanos]

No, no. I mean I'm open minded about it. I think it really is an amazing technology and I think it just. You're going to have to see both sides of the coin for capitalism with it. It'll probably, it'll probably devastate a number of business models as well.

[Tracy Alloway]

What's the path to monetization for these AI companies? Because you already pointed out the cost of capital is really high.

[Jim Chanos]

Yeah, I don't know. And that's. We still haven't seen the aha moment as we did with the Internet with online retailing and communities like America Online where suddenly your aunt was on it and then getting emails and paying money for it and getting emails and you have mail. Yeah.

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[Joe Weisenthal]

You have been fond over the years to talk about this sort of myth that private equity is something more than just adding leverage to companies and that there's this perceived stability. Yeah, it's very nice. You don't have to look at your marks every day. That it really is just leverage. And I'm looking at a share price. The shares of like Apollo for example, I guess maybe the private credit. That was at 18930 on December 9th. That's at 109. Blackstone shares look pretty similar. We're talking like 40% declines. That was at 200. It's at 118 right now. That's below where it was in late 2021. Private assets are like the story that Tracy and I keep coming back to. What is your takeaway from this like really intense selling of these names?

[Jim Chanos]

Yeah, I mean I'm a little surprised at how intense the selling has been so quickly. But look, I mean I agree with Cliff Asness who's done a great job talking about this. This is volatility laundering and the idea that these funds don't have the same risks as equity funds have is to me, preposterous. You're buying businesses on leverage and we're now seeing that as it's becoming increasingly hard for these deals, for them to bring these deals public or get exits. And again, on the margin, you're seeing a little bit of odd behavior in some of the private equity funds in trying to entice their investors to stick around. We'll have to see. I mean, up until now, for the last 15 years, getting back to the beginning of our conversation, sell offs have been relatively short and sharp. So if you held off on marking your portfolio down, you generally were rewarded by not having to take the mark. Right. The markets kept going and the nightmare scenario for private equity and arguably private credit, will be a long period of lackluster or no equity returns with higher interest rates.

[Joe Weisenthal]

Can you actually just. When you said, oh, at the margins, we're starting to see some janky behavior with regards to their partner LPs, what's going on?

[Jim Chanos]

Yeah, there was a story, I think on Bloomberg just yesterday or the day before where one of the funds was asking investors if they wanted to sell their LP investment in one of the funds or transfer it. They had to get permission from the gp. In order to get permission, they had to agree to put money into the next fund. That story caught my eye. And so when you start to see that, and now we're starting to see time series of fund performance that is starting to become more lackluster. Right. Rolling 10 year returns and private equity are beginning to converge with that of the regular equity market.

[Tracy Alloway]

To your point about the length of the sell off, I mean, we've established that one of the competitive advantages of doing private credit versus public is you're not forced to take the mark to market losses so soon you can hold on for longer. Theoretically. We're seeing a lot of people right now talk about emergency moves from the Fed, maybe a cut sooner than the market had expected a week or two ago. Do interest rates matter for private credit at the moment? How much of a buffer would lower rates actually provide here?

[Jim Chanos]

Well, I think spreads matter more and we've seen a widening out of credit spreads. So I think that one of the reasons people think the Fed is going to ease is because of that. Right. Weakness, not because of low inflation. And so you're seeing a relatively very quick increase in credit spreads over the past two weeks. I mean, it's really moved. So I don't think that's the panacea that people are expecting, at least not yet. Even with the Fed Ease, because junk credit is. Rates are going up.

[Joe Weisenthal]

Right. They could. The Fed could do something just about like the sheer mechanical breakdown if it's happening.

[Tracy Alloway]

The plumbing.

[Joe Weisenthal]

The plumbing. People love to talk about the plumbing of the treasury market.

[Jim Chanos]

The basis trade. I read something, I read something today about the basis.

[Tracy Alloway]

Thank you. Thank you for reading.

[Joe Weisenthal]

Listen. Pause right there, listeners. Jim Chanos is a reader of the Odd Lots newsletter, which means you should be too. What is it? What is a GP of a private fund do when the IPO window is slammed shut, when there really is not a lot of M and A. So basically very few opportunities for liquidity or distribution or anything like that? What kind of moves do they make you better?

[Jim Chanos]

Better practice your writing of, of, of a heartfelt apology letter to your LPs because the IRRs you've been telling them that the fund has been getting prior to its wind up are going to turn out to be way overstated to the actual returns. So look, it's problematic. I mean investors are going to get back stakes in private companies that they might not want.

[Joe Weisenthal]

Oh, so distributions in kind.

[Jim Chanos]

Yeah, exactly. And so if you can't cash out. And so yeah, I think it's going to be problematic for a number of funds. I mean, I'm sure there'll be plenty that'll do fine. But the days of saying, well, I'm going to earn, you know, 14, 15% with very little volatility, so this is a free lunch, I think are over.

[Tracy Alloway]

The other narrative that pops up from time to time is this idea of dry powder that there are a bunch of funds out there who have been holding cash for a long time just waiting to snap up distressed assets once everything finally crashes. Is that real?

[Jim Chanos]

I don't know. I mean, you have to get into the, the sort of weeds of every specific fund. But I mean, if they've been holding cash for years and years and years, they certainly weren't earning that 14 and 15% investors were hoping for. So I don't know how the accounting works on that, but I'm sure, look, there is some unused capacity in the private equity world. But on the other hand, that doesn't get you your returns. Buying companies and, and adding value to them is where the returns are. So if there were funds and firms holding dry powder and asset prices get marked down a lot, that should be a good thing for them.

[Joe Weisenthal]

It just seems, I mean the issue to me, and I've sort of talked about this in various ways, is that for the last 15 years you're a dummy. If you had dry powder. Right. The market has told you over and over again. Right.

[Jim Chanos]

Yeah.

[Joe Weisenthal]

So this is why I'm always, I'm kind of skeptical that there could even possibly be much. And it's interesting, you know, look like we're like two weeks into or no, it's been a week since Liberation Day. But you got a few weeks before that. Obviously the weakness started picking up and now we're seeing, you know, we've seen this sort of dislocation in treasuries. It seems like if you have 15 years of people telling you you're a moron for holding, for being under levered, then a downturn in just sort of normal investments can metastasize into financial problems very quickly.

[Jim Chanos]

Well, it also depends, Tracy, how you define dry powder. A lot of firms define dry powder as the ability to capital call on their limited side. It's not actually cash sitting in a bank account.

[Tracy Alloway]

Yeah.

[Jim Chanos]

And I think that will become much more problematic in a downturn.

[Joe Weisenthal]

Not going to pick up the phone.

[Jim Chanos]

Look. Yeah.

[Tracy Alloway]

So you're primarily a markets guy, but you are no stranger to macro. Talk to us a little bit about, I guess, the relationship between what we're seeing in markets and the real economy right now.

[Jim Chanos]

Yeah, I mean the transmission mechanism via tariffs will happen pretty quickly, I think. I mean you saw Walmart warn today, Delta has pulled their guidance. Both of those were just today. I mean it's kind of stunning how if you think about the nuts and bolts of these tariffs and how they work despite what our president says, the importing entity pays the tariff. Right, Right. It's not a tax on China. And so you're a small medium businessman. You just got $100,000 worth of product that landed at Long beach port from China and your broker is saying, yeah, just come down with a Cashier's check for $100,000 for the government and we'll release your product. A lot of businesses don't have that. And so I mean there's real practical aspects of these tariffs that I don't think we kind of know all the implications and how it will ripple through the economy. And I suspect you'll start by May getting some pretty decent real time feedback from businesses saying we're cutting our profit guidance because if they can't pass it on completely and study after study shows they can't usually then profit margins, which by the way, let us not forget are at all time highs are going to hit an air pocket.

[Tracy Alloway]

We have Seen some companies pulling their forward guidance already, right Jim?

[Joe Weisenthal]

Yeah, Delta, Delta this morning. Walmart, Walmart. When that chart came out, when Donald Trump pulled out the chart on Liberation Day and the market immediately tanked. The view from a lot of people is like if people actually understood the size of what these numbers are, the market would be down a lot more. Do you sense, and again, anything could happen by the time this, but on April 9, that there is still an element of disbelief that this could actually be where our terrorist is going to be?

[Jim Chanos]

Oh, I think there definitely is a level of disbelief. I mean the stock market's still at 20 times latest 12 month earnings and I mean they're coming down, but people still think earnings are going to be up 10% this year. And I don't know what planet they're on. And so I think that that's number one. And the size of the tariffs was stunning. I remember it was watching the press conference after the market closed and I don't have the best eyesight in the world. I had to get close to the TV to make sure I was reading the numbers. Was that 50 or 5%? I like what?

[Tracy Alloway]

Yeah, yeah, I mean that says a lot. Like the idea that it could be 50 or 5% at all is pretty nuts. The point you were making about profit margins I think is really important. And a lot of the macro impact of the tariffs depends on how corporations actually react to the tariffs. Do they choose to absorb the additional costs themselves or do they pass it on to customers? What's your sense of flexibility there? And then more generally, where do you see inflation going from here? Because obviously there is tension between prices going up in the immediate term because of the tariffs and demand being destroyed and us getting deflation.

[Jim Chanos]

I think Walmart's warning this morning was, was maybe instructional in that they went out of their way to say that they were pulling their profit guidance, I believe, but, but told people that their revenue growth guidance was still intact for this year, which seems to me to imply that they're not going to pass on these tariffs since they get so much of their stuff from China. Right. They're gonna eat it. They're gonna eat it. And because otherwise they would say, well, we're gonna hike prices 15, 20% and our revenue is gonna be up 15 to 20%. They didn't say that, they said 3 to 4%. But margins, you know, we don't know on margins yet.

[Joe Weisenthal]

Yeah, I think this is really important because I think if you were to go back six months ago before the election so much of the tariff conversation is this very simple minded. What does it mean for inflation in the Fed and not this sort of deeper question of like are you kneecapping corporate profitability in America? I think what does that mean for all these different.

[Jim Chanos]

I think that's the bigger. I think that's the bigger risk, not inflation.

[Tracy Alloway]

If you remember the past few years, the reason we had record corporate profits was because companies were able to pass on inflation to customers. The whole price overvalue volume idea that we've been talking about.

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[Joe Weisenthal]

Guy, Elon Musk, who for many years you were famously short term my bff. Your bff? Elon Musk. We did an episode recently with Nick Denton, founder of Gawker Media, and he said, he said, he said the fall of Elon Musk is a story that any journalist should come out of retirement for. It may be the biggest story of our lives. He's been pronounced, you know, done dead many times and Tesla is always. Is this different this time in your view?

[Jim Chanos]

Look, I mean, he's tied himself to the administration in a way that is frankly kind of, to me amazing and shocking at the same time. So he is tied now politically in a way that he never was. That's number one. But to me, Tesla is beyond Elon Musk. Tesla is a real sort of benchmark stock for me because of the way in which Elon effortlessly sells the story of the future to investors. And I've always said, I've always said that in bull markets, people put a premium on Promises. And in bear markets, they put a discount on reality. And this is a stock that still, there's a handful of others that still trade at 40, 50 times revenues, where people still believe, they still believe in the promise of robotics and AI and robo taxis. And he's captured the imagination of a whole set of investors, particularly retail investors, who just are rabid with the idea that this is the company of the future. And so that's number one. Number two, I mean, ultimately he's going to have to deliver on these promises. And because you know what, the car business he's got right now ain't all that. Margins are imploding. Profits are down now for three or four years in a row. He's going to have, I think, down sales this year in terms of units. So I remember when the estimates were we were all going to be driving Teslas in 2030. Right. That's not happening. And so it'll be curious to see when the robo taxis are rolled out this summer in Austin. How exciting is that? And then, of course, the big one is we're all going to have Rosie the Robot from the Jetsons in our house doing our tasks from Tesla. And again, being the skeptic, I think I don't see the robotics, the humanoid robotics market being a whole lot different from the car market. Right. It's utility. People will have one, it'll be 30 to $50,000. There'll be 15 companies making them, and margins will be. It'll be a manufacturing margin business. Cars have tons of software in them, tons of chips in them. They're amazing utility for the consumer, but they're cars, they have a low margin and a lot of people make them. And I think it's going to be the same with robotics.

[Tracy Alloway]

I always wonder how much rope the tech believers are giving companies to fulfill their promises. And I remember I asked Cathie Wood about this, like, what is her time frame for actually making a profit? Because there's a premium on good stories. You can keep telling a good story for a pretty long time and a certain set of investors will believe it. What's the catalyst for that actually starting to change?

[Jim Chanos]

Well, again, I mean, I think that, number one, interest rates have a big determinant on those kinds of stories because if we believe at least some of the rudiments of finance, you're willing to pay more for profits and cash flow 10 years in the future than when rates are higher. That's number one. And for all these companies like this, 95% of the value is in the terminal value. That's number one. Number two, it's. Look, it's castles in the sky. I mean, in bull markets, people believe these stories, and it's as old as human nature. And when things get tight, I mean, we kind of Forget. Tesla was $100 a couple years ago, down from 500, and it dropped 80% in 2022. So it varies.

[Joe Weisenthal]

2022 feels like a long time ago. All right, I want to talk about Elon, but from a different angle for a second. When Doge was announced, yeah. People didn't really know what it was. And then, like, it sort of start over. Once it started going, it looked like, oh, these cuts, like, have these moves do not seem to have any rhyme or reason other than kneecapping the federal government. And a lot of guys are like, look, I'm all in favor of cutting waste, but I'm not so sure about this. Anyway, I was probably one of those guys, so I'll cop to it. But we did an episode a while back with this professor at Boston University on Medicare fraud, and I thought to myself, okay, if there's one area that maybe some of these cracked data scientists could go into and find some evidence and really, like, make some efficiencies and so forth, this would be Medicare. However, this week, I saw a headline that says, health insurers cheer increase of Medicare Advantage payments. I don't know what Medicare Advantage is yet. I know I'm supposed to look this up. Health insurers, insurers that offer Medicare Advantage plans to seniors cheered a Trump administration decision announced Monday to increase federal reimbursement rates by $25 billion next year. What's Medicare? This is in the Albany. What is Medicare Advantage? Why are they cheering this?

[Jim Chanos]

You're asking the old guy, right?

[Joe Weisenthal]

No, I think it's because you know about these companies very well. And what does it say that the reimbursement rates came in so much higher than expected?

[Tracy Alloway]

Joe, if you watch cable news, you would know all about Medicare Advantage.

[Jim Chanos]

Yes. Yes, you would. So I tweeted out when Doge started out, I said, if they don't go after Medicare Advantage right away, then, you know, they're not that serious. Okay. And so that kind of tells you where I'm coming out on this. Medicare Advantage has been just a windfall for the insurers. It's basically for people that are eligible for Medicare. It's supplemental, and it's also. It can be all inclusive, meaning that you have a carrier treat you for not only that, which Medicare Covers, but additional things. The problem becomes it's what we call upcoding. And that's where the fraud has occurred, because the government will give Medicare Advantage carriers a tiered set of payments depending on how sick their patient is coming into the program. So, you know, I could be relatively healthy. I don't know how they're gonna code me when they go to the government for their reimbursement to say Mr. Chanos is very sick and blah, blah, blah, blah. So we get, you know, X thousand dollars from him per year as opposed to Y thousand dollars for him per year. And that's a big problem. There were some public companies that were purely in Medicare Advantage that we were short, and a lot of them were bought up by companies like CVS and others. And we just couldn't believe it because if you did any kind of due diligence on these companies, you realized that they were upcoding.

[Joe Weisenthal]

But I guess implicitly, if you're shorting them, that's a bet that someone takes this issue seriously in the public sector. And it looks like at least here's the guy who came in to cut spending and he now we're paying.

[Jim Chanos]

Yeah, I mean, they're going after the small stuff. They're going after. I'm a baron Doge. I mean, they're going after the political stuff. They're going after this ridiculous thing from two weeks ago about the number of Social Security numbers going to, you know, illegals and things like that. I mean, this is all political theater. And the real cuts are in areas that they haven't touched. And so we'll have to see. But it didn't get past me that Musk basically now is all but saying he's going to be gone from Doge in May four months and Vivek never got going. And so I think that they're finding out that what they thought was fraud in ways, it's turning out to be authorized programs that you might not agree with politically, but were authorized. Right. And need legislative prescriptions. So I think they're not even going to come close to their target of a $trillion and $2 trillion. I think that's just pipe dreams.

[Tracy Alloway]

I completely forgot about Vivek. But you're right, he did.

[Joe Weisenthal]

Well, he didn't even make it to. No, he didn't make it to inauguration.

[Jim Chanos]

Yeah, he didn't. He didn't even get. Get to day one. Yeah.

[Tracy Alloway]

Jim, hopefully you won't mind me asking this question, but I think it's fair to say you are a financial markets Veteran. You've seen.

[Jim Chanos]

Yeah, I'm old.

[Tracy Alloway]

You've seen a lot of stuff happen over the years. Are there any historical parallels or analogies to our current moment in time?

[Jim Chanos]

No. I mean given what's driving markets as we sit here, I don't think we've ever seen anything like this where, where a global hegemon has willingly said I'm going to basically shoot myself in the foot and get rid of the exorbitant privilege that we've had as being the global hegemon with the reserve currency. They're trying to dismantle that as we speak. And I think that just has all kinds of impacts that none of us have lived through. So we'll have to see unless it gets reversed. And so I don't know what the, what the analog for this is. We're just going to have to like everybody else, take it day by day. But the idea that markets are now going to react to tweets and as someone I follow said, this is still a vibes market, not a math market and that as it relates to the equities and I think that's well said. I think that this stuff just goes back and forth and I think that's kind of no way to run an economy and no way to run markets.

[Joe Weisenthal]

That was a great place to leave, but I'm going to go end on a more boring question on the Medicare Advantage stuff. All these people can come in here and talk to us about upcoding and fraud. Where did your view when you've looked into this and why these companies end up getting bought out and the shorts don't work? Where is the force coming from that prevents whether it's the HHS or whatever from actually taking this?

[Jim Chanos]

Yeah, there's actually Inspector, there's actually arms of the government.

[Joe Weisenthal]

This isn't like none of this stuff is new. So why in your view does it not get addressed?

[Jim Chanos]

I don't know. I've called this the golden age of fraud. And it just seems that we have a willingness in the corporate sector and elsewhere and in the nexus of government corporate of just not holding people to account for this stuff in the white collar crime area. And I think Medicare is just a wonderful example of that in our budget, the federal budget. And so the fact that they haven't even gone after this or addressed this yet for Doge is really telling to me because it's there, it's low hanging fruit. And if you look at the, if you look at the 10Ks of these companies that we were short I mean, there's, there's criminal investigation after state level investigation listed in their legal proceedings. And yet most of them, when they get caught, they pay a fine and, and nobody goes to jail.

[Joe Weisenthal]

And the cost of doing business, it's so disgusting. Even if they reverse this trade strategy, there's so much rot.

[Jim Chanos]

Yeah.

[Joe Weisenthal]

I'm so angry right now. Jim Chanos, thank you so much. This was a very satisfying episode. I found this very fun. Thank you for coming in.

[Tracy Alloway]

Therapeutic, therapeutic.

[Joe Weisenthal]

Thank you. I'm so disgusting.

[Jim Chanos]

My pleasure, guys.

[Joe Weisenthal]

So disgusted. Thank you for coming on Oplux.

[Jim Chanos]

My pleasure.

[Joe Weisenthal]

Tracy. I love talking to Jim.

[Tracy Alloway]

Yes. Although that was bleak.

[Joe Weisenthal]

And I have to say, you know what? You know, yeah, it was bleak and I've. But Jim knows ball and I enjoy talking to a ball knower like Jim.

[Tracy Alloway]

I have to say, for our listeners, I rarely see Joe in a bad mood and he is actually in a bad mood this morning. Usually Joe has to put up with me being cranky and I'm.

[Joe Weisenthal]

Did we switch this week?

[Tracy Alloway]

Yeah, I think we switch. No, but I mean, it's bad. I feel bad too. And it is just crazy to think that one man could end it all with just a simple announcement or even like some words of comfort and indication.

[Joe Weisenthal]

Trump said be cool.

[Tracy Alloway]

Be cool.

[Joe Weisenthal]

And unfortunately, when I hear the words term be cool, I just think of the opening scene in Pulp Fiction. Everybody be cool. I'm not going to say the rest. Yeah, he said be cool. It didn't work.

[Tracy Alloway]

Yeah. And if only he did something or said something, at the very least we could all go back to worrying to your point about AI and. Yeah, stuff like that.

[Joe Weisenthal]

Yeah.

[Tracy Alloway]

Shall we leave it there?

[Joe Weisenthal]

Let's leave it there.

[Tracy Alloway]

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

[Joe Weisenthal]

And I'm Jill Wiesenthal. You can follow me hestalwart. Follow our guest, Jim Chanos. He's RealJim Chanos. Follow our producers, Carmen Rodriguez, Armenarmon Dashiell Bennett at dashbot and Cale Brooks, Al Brooks. For more Odd Lots content, go to bloomberg.com oddlots 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.

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KPMG makes the difference by creating value like developing strategic insights that help drive M and a success or embedding AI solutions into your business to sustain competitive advantage. KPMG make the difference. Learn more at www.kpmg.us insights when you're.

[Jim Chanos]

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