172: Heroes or Villains? The Shrinking World of Shorting - With Carson Block, Founder of Muddy Waters
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Welcome to the Money Maze podcast. If this is your first time joining us, I'm the host, Simon Brewer. And in this show, we talk to proven leaders and thinkers from the worlds of business, investing and beyond. Money talks and money moves. Which direction would you choose? It's the money.

Stay up to date with every episode. Please do sign up to our newsletter via moneymayspodcast.com. Episodes are also published on our YouTube channel and we're active on all major social media platforms. Thank you for listening. Economic theory suggests that when competition decreases, remaining firms have more market power.

which can lead to increased opportunities to expand, innovate or capture a larger market share. Does that analogy apply to the world of shorting? And even if you are considered one of the best in the business, can you stay afloat with a rising tide of bullishness and asset inflation? Are

Are you heroes or villains, fraudbusters or manipulators? And when your firm's website reads, we peel back the layers often built up by seemingly respected but sycophantic law firms, auditors and venal managements, it's clear sitting on the fence isn't your priority.

So to understand more about the world of shorting, where the challenges and opportunities may lie, we're delighted to welcome back a guest who first appeared in September 2021. Founder and CEO of Muddy Waters, Carson Block, a very warm welcome back to the Money Maze podcast.

Thanks, Simon. Really happy to be back here. It's been too long. Okay. Well, I know you are flying through California and you've kindly given up some time today, which is really appreciated. And so I think that we'll jump right in to your firm, because for those who haven't listened to it, who hopefully are going to go back and listen to that original episode, can you just recap on the purpose?

Well, okay. So when we talk about our firm, and sorry to not be able to give you a direct answer, but there are really two sides to this business. And the original business is what's commonly referred to as short activism. So that is effectively publishing investigative journalistic type pieces on problematic public companies.

So that is, we publish under the brand Muddy Waters Research.

And in 2015, we also set up an asset management firm. And so the asset management firm manages various private funds, a couple of which trade alongside publications of activist reports. Got it. Now, looking at the data in the three years since we last spoke, the S&P is up 80%.

Deep intake of breath. Maybe we're pivoting, maybe not. But how has the landscape changed for your business?

Well, even before things went insane in COVID, so at the end of 2019 and beginning of 2020, we were doing a decent amount of marketing. And what I was saying at that time, I had no idea how much this was about to change or become even more so. But what I was saying at that time was that because of the monetary stimulus since the financial crisis,

investors were becoming every year more and more inert to risk. And that had the effect of raising the bar in terms of what they would care about. As an activist short seller, and again, and I do think of us in many respects as journalists, I mean, highly financially sophisticated journalists, but the

The bar for finding stories that people would care about, yeah, it was just it got higher every year because we're effectively in the bad news business. So that was the case going into 2020. And then 2020 brought COVID and unprecedented monetary stimulus and just a bizarre world

in which you had a lot of retail entrance into the market. A lot of these people had been pretty avid sports gamblers. And aside from Korean baseball, all of that was shut down. And so literally, a lot of gamblers entered the US markets and were punting stimulus checks. And that liquidity receded, but not a lot. So when you look at crypto,

I don't know a lot about crypto, but I know enough to know that these are assets without actual worths, but they have real value. And so to me, crypto is a barometer of the speculative liquidity that's in the markets. So with Bitcoin-ish, 100,000 US versus where it was at the beginning of 2020, which I can't even remember, but maybe it's like 10,000s.

That tells you that there's still so much speculative liquidity. And a lot of that speculative liquidity likes to take the other side of trades that people like myself, activist short sellers are in where we're finding the most scammy promotional flawed companies, shorting them and trying to expose them. So it's become a harder business to,

but it's still a decent business. It's just, you know, at times there's a lot of emotional angst associated with it, maybe more so now than previously, but it's still a good business. I will come back to some of those things a little later on. But again, going back to how you describe yourself in your materials, as you say, we pride ourselves on assessing a company's true worth

and being able to see through the opacity and hype that some managements create. So just remind us how you go about your work and how you go about sourcing ideas. Sure. So I'll talk about IdeaGen first.

So some portion of the names that we look at come from other investors, usually institutional investors who in their long short funds. And I think a lot of times they come across their short ideas because they were looking at something as a long dug into it, maybe had conversation with management and they see red flags. So to some extent we get pitched short ideas and,

A decent bit because that was the role that the traditional media used to fill back when you had Bethany McLean writing about companies like Enron. But activist short sellers, we get a lot of this idea flow now.

Now that's, I would say, maybe about a quarter to a third of the ideas that we really spend time on. The rest of it is internally generated and a lot of it is looking for things that seem too good to be true. We don't do much in the way of screening internally. There are, I think there are some activist short sellers who do, but a lot of what we're looking for is really qualitative ideas.

So language that seems too promotional, changes in management, boards, and actually a little plug for database provider that we use. There's a service that makes a lot of this easier.

called Canary. And interestingly, it was set up by this guy, Joe O'Donnell, who used to run the short book at Tiger Global. So Joe left Tiger Global, came out to San Fran. I think he came out to San Fran. Then he left Tiger Global and then he started Canary. So Canary is filled with all these red flags of changes in management and things like that. So every day we go through that and look at what seems interesting. I mean, that's not our...

by no means is that our only source, but that's consolidated a lot of what we were doing anyway, just made it faster for us. Is there any sense in which the availability of AI helps with pattern recognition, given that there are certain expressions and words that CEOs who are being either economic with the truth or wish to divert attention might employ?

Yeah, that's an interesting question. I went down that rabbit hole a little bit in 2017, 2018, speaking to academics as well as people who had developed software in the natural language processing NLP. And I think it's called NSP, natural semantic processing spaces.

At that time, the technology just wasn't even remotely close to being able to do what we do in terms of recognizing patterns that would indicate deception in speech, being overly promotional, things like that. So I don't know today what the state of it is. But to give you an idea, so in early December, I was in New York and I was

I was at a gathering of short sellers, but most of them also do things on the long side. And I heard about Google's new AI feature called Notebook. And so some of the guys who do things on the long side said, yeah, this is great. What you do is you can upload documents, videos, audio recordings, and then you can ask Google to summarize it for you. So the long-oriented investors with whom I was speaking said,

They said that they often did that to create investment memoranda that were starting points for them. And so I took a draft of a report that we had written. It was a really complex report and pretty accounting-based, and I uploaded it to that. And there's a feature in Google Notebook where you can create an audio file. It's basically a podcast with two voices having conversation, male and female, and

And I had to generate this podcast based on the draft. And it came out with this amazing 12-minute back and forth discussion following our arguments. Again, there was a lot of complex accounting here. I mean, it really got almost all of it right.

There were a few things that did not get right. And so I uploaded a seconds document that said, actually, Muddy Waters believes X, not Y. They assert, you know, A, not B. And so then I had hoped that that 12-minute recording would get even sharper. But instead, it came out as a 47-minute recording that I just said, I'm not going to listen to this. But

I mean, we've got to be really close. I mean, when I heard that first 12-minute recording or file, I was so amazed that I thought to myself, and I do think that this is the case, pretty soon we will use that to release our ideas. Pretty soon we'll start using that because one of the factors that has made our business harder as well is that in the almost 15 years I've been doing this, the human attention span has shrunk appreciably.

I mean, 15 years ago, I used to joke about how investors are really lazy and they probably would only read the first two pages of a report. I mean, I think we're lucky if we can get two paragraphs out of a typical institutional investor these days. So having an audio format where you've got the male and female voices playing off each other, lots of colloquial expressions. I mean, it's amazing. So I do think that

We are going to see some ways to use large language models in our business, but I just don't think it's going to be so much on helping us do the research. That, I think, is beyond the capabilities of LLMs. Yeah. Well, we've been using it for our multilingual channel where using software along with translators checking, we're now able to put these interviews into several languages and upload

I'm there speaking Swedish with a Swedish accent sounding like me. So it's somewhat alarming. And it's all my friends are going, oh my God, we're going to hear even more of you. Anyway, let's come back to the core of your business because the three areas that, as I understand, you focus on are business fraud, accounting fraud, and fundamental problems. Just tell me a little bit about how you prioritize because we know companies can not break the law, but they play with the spirit of the law.

Right. Yeah, that to me is the more insidious problem that the world has. It's by number, there are far more companies that are, say, intellectually fraudulent or

the spirit of the rules versus actually breaking the letter of the law, crossing the line from a legal perspective. But I think, I mean, that idea that companies are able to stretch rules to the maximum and still manipulate their financials and other information they present, I

That's really emblematic of everything that's going wrong, I think, with institutions in Western society is this idea that

hey, we have enough lawyers, we create enough plausible deniability, you need lawyers, layers, and boom, it's plausibly deniable. And you'll get various service providers to sign off or to, I actually hate using that phrase sign off, but you get various service providers to issue favorable opinions that are heavily disclaimed. But at the end of the day, if something goes wrong,

Everybody points the finger at each other. And there's seldom any action that a regulator is going to take to hold anybody accountable. I mean, if you're not an activist short seller, that is. So let's maybe take an example of one of your current names. I did look at a number on your website, which you've written about. One was FTAI Aviation. But whichever might capture some of those themes that we've talked about, it would be great to hear.

So one of the ones that I think is pretty interesting in that regard is Blackstone Mortgage Reap, BXMT. So BXMT, we first published on it in November of 23. And

This is a company, they're not, what they do is they borrow money from banks and then they lend the money to developers of property who generally just bought a property such as an office building, multifamily residential project or hotels. And basically these are three-year loans, interest only with the ability to extend for an additional two years.

And so there was a lot of activity in 2020 and 2021 when rates were super low and asset values were really high. So Blackstone grew its book significantly in those years. But again, those were three-year loans. So what Blackstone had required the borrowers to do is to effectively swap away these rates because the way that Blackstone priced these loans to the borrowers was at a floating rate. So LIBOR or SOFR plus XTX.

X100 bips spread. Well, they were able to swap away that interest rate exposure, but those swaps started rolling off in last year, 24. So our projection, and it's rare that we actually say anything that's forward-looking, but our projection was that a lot of these borrowers would be too stressed to repay the loans. And

The element here of subterfuge by the management was they released data or they released risk rankings on their loans. So one through five, five being in default, one being no concerns. But these are highly subjective. So as they were reporting leading up to when these loans were going to start, the rate caps were going to start expiring.

they were underweighting these loans. And you really can't say that that's bad faith unless you have smoking gun proof, like an email internally where somebody says, you know, this really should be a four, ha ha, let's call it a two. So assuming they don't have those conversations, or at least not an email, you can't impute bad faith because again, it's subjective. But investors, we think, were lulled into a sense of complacency

by the artificially low risk weightings or the unrealistically low risk weightings and also the fact that these rate caps were in effect covering up the deterioration in the borrower's economics because the same time that the borrowers, their interest rates or their interest expense was about to spike when those swaps expired,

Their net operating incomes were falling off a cliff also because office occupancy never returned to pre-pandemic levels, which at the time a lot of these properties traded. They were traded on the assumption that they would return. Operating costs had gone up a lot because of inflation, but also especially insurance costs because –

Actuarial cost of insurance had gone up. And then starting in 22, the insurers, they lost a lot of money since they have to match assets and liabilities. So they lost a lot of money on the asset side. So they had to make up for it by jacking up the premia. So anyway, for a whole host of reasons, there was all this deterioration that was masked. But to us, the stuff that was just...

It's unethical, but it's actually very run of the mill was the underestimation of the risk and the overestimation of the quality of the loans.

Well, it sounds a little bit like a rerun of the CDO market in 06, 07, you know, with subprimes. Yeah. I mean, it's not that bad, but yeah, exactly. So there's one where you are looking forward and you're making perfectly reasonable conjectures, which may or may not turn out. And that was what I would call more of a classic investment decision, you know, where you posited outcomes and you've weighted them and you have a thesis and time will tell whether you're right or not.

Can you give us another example of one where maybe you've arrived at it through one of your other lenses and it's brought about a conviction that you want to be shorted?

Well, I'd say in recent years, probably the craziest company that we shorted and it doesn't really have publicly traded equity, only has publicly traded debt is a Czech real estate developer called CPI. And they have over 20 billion euro bonds outstanding. And it was a really bad trade for us.

To be honest, we lost money in the trade, even though this company has all the hallmarks of some serious rot. I mean, we published on all these transactions that, you know, where the company appeared to have financed a new mega yacht for the controlling shareholder through these undisclosed related parties, was transacting with the company and pulling money out, selling assets to it that were, you know, like clearly overvalued.

in order to extract money. There were also a few transactions we highlighted that we think are obvious money laundering transactions, including with people who seem to have a real facility in money laundering. You know, it's just led to, if I can digress for a moment,

One of the things that I rant about a lot today is what I call the TSA-ification of society. That's a reference to the American Transportation, U.S. Government's Transportation Safety Administration, which has all these performative means of security checks, right? Like you accidentally wear a belt through the machine and then they have to, you know, pat you down in a very violative way. So,

I think our societies, especially in regulated industries such as finance, have really taken on this character where there's just endless forms to fill out. And to me, one of the most performative and least substantive activities that our financial system routinely performs is anti-money laundering checks. And so it used to be, I mean, in our lifetimes, we could go to a bank and open up an account without a lot of

BS. But now so many papers to fill out all because of AML. And when you look at a company like CPI, with 20 billion Euro bonds outstanding, and they're doing this stuff in broad daylight. And then there was another similar company smaller, but Vivian, whose bonds we'd shorted a year earlier. I've just seen a lot of stuff in the public markets, including in recent years,

that tell me that if you have real money that you want to do sordid things with, you can do it and it's not that hard. And yet I feel that the rest of us who are not looking to circumvent the law are burdened with a lot of unnecessary compliance paperwork and other forms of BS. And just when you do this kind of work and you see the things that I see, it makes a mockery of that.

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And as the expression goes, you know, extended bull market is complacency hiding. Are you seeing after many years of the Fed put lots of liquidity and a deterioration in standards generally, which is meaning the pond in which you are fishing is richer?

Yeah. So, yes, it is because behavior that was once fringe has been normalized several times over. But as part of that normalization, that's both on the practitioner side, the practitioners of the behavior. So just to, you know, the way that I've looked at it, probably a number of the CEOs of companies on which we write, you know, the moment that the report comes out,

They're probably looking around the room saying, what are we doing that all these other management teams aren't doing? And the answer a lot of times is not much. I mean, it just, we happen to look at your company and yeah, you probably know, probably have friends of yours who run companies who are doing things that are as aggressive. But so while you've had the normalization on the practitioner side, which gives a larger opportunity set in theory, normalization also means that on

on the consumer side, the investor side, it's normalized. So they don't really care. It's part of that how investors have been anesthetized to risk over the years by monetary policy. And COVID really doubled down on that, or the response to COVID doubled down on that. In the beginning of 2020, I mean, we were pretty early investors.

in believing that COVID was going to be a significant macro event and that markets were going to significantly correct. So, I mean, personally, I was extremely early on the toilet paper trade, like stocked up the guest house with paper towels and toilet paper. And so we ended up shorting a bunch of

stocks and also the bonds of companies that we had looked at over the years that just hadn't quite made the cut for short activism. And so initially, our shorts were doing really well. And it was kind of funny because I had this...

I had this personal sense of guilt. I was sitting there in April of 2020 thinking like, wow, I did well financially the year before and I've already made in April as much money as I made all of last year. And I'm like, man, this is bad. I started feeling awful. Actually, we ended up giving a lot of money away, my wife and I, that year in 2020. But we left those positions on just thinking that COVID is going to change the game. And boy, by the end of July,

we'd given so much of our gains back. And I no longer was feeling like this is going to be a great year financially. So that was the magnitude of the U-turn that markets did on the back of that stimulus. And I guess what really rankled me personally was there was a lot of lobbying by PE sponsors at that time to the federal government saying, look, the credit markets are frozen. You know, you need to bail them out here. And

the few remaining short sellers, people such as ourselves, we've been sitting there up to that moment saying, yeah,

This is what we were warning about all these years, too much leverage in the system, stop levering up the balance sheet to buy back shares because there are rainy days and it's raining now. But I think unfortunately over the long term, and I'm not saying that there should not have been any stimulus during COVID times because there should have been, but it was just so massive and I think misdirected in certain cases. So all these PE sponsors had their investments bailed out because of interventions in the credit market.

So what's the lesson that investors take from that? Printing press goes brr, you know, to the moon. Look at value, you know, worthless crypto. So I think we've created serious long-term dysfunction or persistent dysfunctions that result in basically what I call, I mean, we live in, you know, policy is basically what I call the powder keg economy, right? Like

And we stuff these kegs full of powder, that's leverage. They blow up every so often. And the remedy then seems to be, well, build a bigger keg and stuff it with more powder and it blows up. And so far, we're able to keep doing this without catastrophic results. But I don't think...

That'll be a permanent state of affairs. Well, history would suggest it's not. So let's talk then about the portfolio management aspect of mistakes, which is part of the weekly monthly diet of any of us who have run money. What have you learned? How have you changed the way you act? And how do you think about reversing your position when it's just not working?

Well, I mean, a lot of lessons learned over the years, and I'd say a lot of adaptation. Let's start just with trading. So we view risk also as being a function of time. So it's not just how many dollars short you are, but it's for how many days. And so we used to try to back end weight our trading as close to release of a publication as we could, because

Because we figured, hey, why take market risk or even take idiosyncratic risk before we really need to?

But what happened was we realized in 2018 or 2019, algos begin reading our trades and I think other short activists' trades. And I also learned from speaking with somebody who's an expert in market structure at that time that the worst algo to use to trade in is a VWAP algo. So we ended up elongating the runways over which we trade into names ahead of publications. And

And we also do it almost entirely manually. You know, that's why there have been, you know, a few years back, there were these allegations that activist short sellers were mechanically crashing stock prices, you know, through HFT type trading.

And it was really laughable because when you see how manually we trade these things, Bloomberg chat box, no VWAP algos, just basically place offers in the mid, occasionally hit a bid, things like that. It's just, we have to do that to try to fool the algos. Those HFTs are actually our enemies. So that's one of the adaptations that we've made. Now,

Now, we also in, I'd say, I think it was 2016 or 2017, we began running all of our positions market neutral. So we got into factor analysis. So rather than just saying like, hey, let's go along the S&P 500 or the mid cap index against these positions.

What we do is we have a software package that we subscribe to that says, okay, well, you know, the movement, the beta movements of the stock are 35% explained by momentum, 20% explained by mid cap telecom, et cetera, et cetera. And so then we go to counterparties and we say, okay, we need a basket that kind of mirrors these factors. And so our counterparties will put together a basket where we're long somewhere between 30 and 50 names.

And we use that most of the time to hedge our positions dollar for dollar. And going back to our discussion on BXMT, I was remiss in not explaining this because when you look at where the stock price was when we announced our short versus where it is today, it's down. However, it paid a lot of dividends in the interim. I mean, it's a dividend payer. But

That's been a very good position for us because on the long side, we've made a lot more money than we lost. On the short side, it's a bit of a net loss with the dividends paid out, but it's underperformed. So we're trying to capture alpha there. And that's really important. So this idea of hedging and hedging with factor baskets, I think is essential to our business. Now, we

When you have periods in which the high beta names and a lot of the names that are in our book are high beta names, when you have periods in which you have these rips in high beta names, we generally do lose some money still. But on the whole, I think it's the right way to run this type of strategy. And when I interviewed Joel Greenblatt, he talked about how his approach had changed to shorting many more names, but...

that would have been valuation driven, whereas yours is much more thematic and targeted. Are there more shorts in the portfolio today than there would have been 10 years ago? Yeah, definitely. But part of that is because, well, that's also because we work with other activist short sellers. So the vast majority of activist short sellers do not play in the mid-cap space. Muddy Waters, we're primarily mid-cap, occasionally large cap.

But you really have to be in the mid-cap space to justify the costs of raising outside capital. So because most short activists can't really swing a big enough bat to play in that space or it takes a lot more sophistication and a bigger team because a lot of it is more this complex accounting analysis as opposed to just kind of shambolic transactions that you'd find in small cap and micro cap spaces.

Those short activists, because they don't raise outside capital, they usually have far less money than they could put into the trade. So we work with them in what we call we're balance sheet providers. So at any time we're working with give take five to seven different third party short activists. And so those trades go in our books.

So it used to be that we would have really a very small number of trades in our book each year because they were just limited to Muddy Waters reports. But I'd say in a given year, probably doing 30 – putting on 30 new positions.

in activist short selling because we're, which, you know, is several times larger than what we used to be able to do before when we were doing it just for our names. So that also changed the nature of the business and enabled us to broaden the short activist funds product offering somewhat. Now, we touched on regulation, but I read that the former SEC examiner, Robert Jackson, said that you have exposed more fraud and saved investors more money than we have.

But you've been subject to the investigation from the SEC and the DOJ. Where are these regulators getting it wrong, in your opinion?

Well, that's a big question. So I don't want to get short shrift here. I've been investigated by three different governments over the years, the French, the Germans, and then the Americans. The US government was definitely the biggest shock and it was the biggest investigation. Biggest shock because the SEC, I'd say, is the most sophisticated regulator in the world, especially when it comes to short selling.

And we also have the First Amendment in the US. So, you know, I definitely when I started doing this business, I feel that the SEC really got it.

But look, along with the deterioration of institutions in the West, one of the phenomena that is at play is the so-called revolving door between government and private sector. So at the SEC, there's not a tremendously deep institutional memory of the wins that they had on the back of short activist reports that especially we published. So a lot of the attorneys who had worked on those matters have

I've gone into private practice making seven figures a year, generally representing the guys who really have done something wrong and been replaced by a crop of...

I guess, more naive attorneys. And I'd say there's also a problem we have societally, especially in the US, which is the overproduction of attorneys. And so I think that when you look at all of the paperwork, you know, going back to that theme, the TSA-ification of society, a lot of it has to do with the overproduction of attorneys. But the problem

The problem is when you look at a regulatory agency like the SEC, it's run by attorneys. In the enforcement division, it's principally staffed by attorneys. And then there are also the accountants whom the attorneys can countenance. And that's a problem because modern markets now –

I mean, a much more sophisticated understanding of technology. And so one of the things that the SEC, you know, they go around bragging about how, oh, you know, we built AI to detect manipulation. No, it doesn't work. I mean,

I mean, especially when we look at a lot of these Chinese stocks that are back in the US exchanges, these things are obviously so manipulated algorithmically. There's a lot of in small cap and micro cap land, a lot of algorithmic manipulation that the SEC just has no ability to detect, it seems. And I think the reason for that is, again, it's an agency run by attorneys and principally staffed in enforcement by attorneys. They are anachronistic.

But one of the problems with attorneys is that they tend to think that they're the smartest people in the world, and they seldom admit when there's something they don't understand. So I just think you have the SEC. I just think it has no understanding of modern markets. And I look at this. The SEC has civilly charged another activist short seller, Andrew Left, and the DOJ has brought criminal charges against him.

And, I mean, Andrew said, hey, you know, I'm long XYZ. I think it's going up. I mean, NVIDIA in 2018, Andrew said, you know, AI is going to be huge in 2018, NVIDIA. And this is one of the names for which he's being prosecuted because he was long the stock, said he was long. Then shortly after, he traded out of part of his position. And the SEC comes at this, it seems like, from this, and the DOJ too, from this very

like first year of college textbook approach. Well, if you thought that this was worth more, then you would not have traded out of it. And it's like, hey, do you understand risk management? Do you understand opportunity cost of deployment of capital? And I just think that they're so divorced from being able to understand how markets work now that really, if you wanted a good regulator, you'd have to just get rid of the SEC and entirely reconstitute this.

Got it. Now, the other big change in the last decade has been the growth of passive. Isn't it? A day goes by when there isn't something else being written about it, which, dare I say, peak passive because I'd only proved to be wrong.

wrong again, you know, about something that has been so extraordinarily strong. And yet, for a short seller, that presents one layer of problems. But how do you think this plays out? Because I remember when Japan was 48% of the world's market cap, and you know, and then we had it going all the way to 10. What do you think happens?

So I think that the extent to which passive has distorted markets, I don't think is widely appreciated. I think it's had a much more profound effect on markets than most investors understand, especially when you look at the S&P 500. Because for years...

There's been a lot of dispersion between the largest names in the S&P and everything else in the S&P. And that's because the larger a company's market cap gets, the larger it's waiting within the index. So when you have these index fund buyers, they have to put more money into the name tomorrow than they did today because they bought it up today. But the way that it really warps marketplaces

and especially with the larger companies in a given index. I mean, at a point in time, it could be an ESG index or a solar index. The way that it really warps markets is that it effectively shrinks the float of the stock. So, so long as passive does not have outflows, it's not going to sell at any price. So, it's removing active ownership

owners of the shares who make these value decisions every day. Okay, this price is too high. I'm going to sell it. So it's removing them. So until the day comes when passive has outflows, it's never going to sell the stock and it's going to show up tomorrow and generally buy more of that stock.

So that's the reason why you get this dispersion effect within the indices and the winners win. But obviously, everything is benchmarked to that in the investing world. And the other thing is that it's a smaller effect. But

When an investor reallocates from active to passive management, and your typical active manager, long only, so not levered, is running 90, 95 cents in the market for every dollar. So they have 5 to 10 cents of dry powder. Well, when that dollar gets reallocated from active to passive,

That 90, 95 cents gets sold and it turns into basically a dollar of buying. So that's one of the other reasons you've seen this tremendous uplift over the years as passive has become bigger. Now, this is all wonderful and we should just go along the largest names in the index or the indices until…

something happens and there are net outflows from passive. And the really big buyers, the really big passive buyers are what they call target date funds. So the retirement funds in the US, these are generally 401k funds. So if you have a situation where there are significant layoffs and fewer people are making contributions to their 401ks than are withdrawing from them, especially people then have to start withdrawing early to make ends meet in the interim, then

all of a sudden has to net sell, but there's just not a lot of active money left to

to catch those falling knives. So it's a great party on the way up, notwithstanding, you know, the blips of the yesterday of deep seek, you know, like tagging NVIDIA and some of the other tech names, notwithstanding that it's a great party on the way up. But when this does unwind, I mean, it's going to, so the way my friends is somebody I highly recommend you guys have on at some point, his name is Mike Green. He's done a lot of work on passive and

The way Mike Green puts it, and it might come across as a little too pithy, but it's probably correct, that we'll have a 1929 magnitude crash at 2020 speed or 2020 whatever the year is speed. So...

It's great on the way up, but it's really built a lot of fragility into the system. And, you know, so another example of the powder keg blowing up on us. And will the next powder keg be able to bail out this one? And look, there might be some powder kegs that explode in between now and then as well. Who knows? So before we continue this conversation, we're going to take a short break to have a note from our sponsors.

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So, when allocators think about where you might fit on the short side, we're going to just talk a little bit about the long side of your business. Do they see you as tail risk protection? How do they think about where you might fit in a larger allocation?

Well, that's another reason why our business is kind of a shitty business relative to other asset management businesses is that we do not fit neatly into any box. Now, one of the ways, this is somewhat more subtle, but one of the ways in which activist short selling has developed over the years or changed somewhat is I used to think that we were wholly idiosyncratic. So we

when we ran our market neutral positions, I expected there to be no correlation at all to the broader market. And again, we were just talking about the S&P and the S&P, as I said, is warped. So maybe you need to take all that with a grain of salt. But there is, I'd say, a more cyclical element to this business than there was before. And that's really driven by the capital market cycle in terms of new offerings. So in

In early 2021, that's when you had GameStop and the original meme stocks. And all these people, you know, like every interview I did in February of 21, because that's really all I was doing because I was questioning whether there was a future. Everybody's asking me, does short selling make sense? Are you going to go out of business? The irony is that 2021 ended up being a great year on the short side, just as 2001 was a great year on the short side.

Why? Well, because the market, I mean, when you have a lot of frothiness and you have a lot of liquidity, the one thing that Wall Street is going to do is produce more financial product. So eventually you get a supply-demand imbalance where the supply of crappy companies exceeds the demand for them. And that's what happened in 2021. So in 2022, with the increase in rates and a correction in tech and, you know, like even higher quality tech,

You did see a slowdown in the IPO and secondary issuances. So I was saying up until yesterday, which is when the whole deep seek thing really tagged

various equities. I was saying that I think 2025 is going to be a similar type of year on the short side because I feel like there would be a lot of issuances this year. Now, that's in flux at the moment. But yeah, I mean, basically, so there is more of that element now where we will do best, I think, in following a lot of issuances where you've just soaked up the demand for speculative companies. That's when I think – so there is now, I'd say –

somewhat of a negative correlation to the market than what we do, but certainly more profound than it was in the past. And back to that question I had at the outset, which is when many of your competitors, Hindenburg, you know, has gone now, the disappearance of people who do the same thing view, is it actually disadvantageous because there are a few of you maybe to go after the stuff that you really have found issue with, or do you just say, well, that's just the market? Well, you have to say something to yourself, right? Yeah.

Well, it's certainly a sign that things have gotten harder. I mean, it's not just Hindenburg. If you look at the macro data, there are fewer short activist campaigns than there used to be. Yeah, it's a business that if you do it at a high level, it pays reasonably well, very well by the average person's standards, but certainly not as well as being successful in asset management.

just kind of long, short equities or some other strategy. I mean, it's not a scalable strategy. So I kind of understand that in asset management, you will get to a net worth, I think that's roughly around a 10th of what you manage in AUM, right? So when you have a strategy that can scale to a few billion dollars, if you get to a few billion dollars, you're going to be a cent a millionaire. This strategy, I don't think you scale...

beyond a few hundred million dollars. So that puts us, you know, those of us who can do it, that puts us in great financial standing relative to most of the rest of the world. But when we look around and we see people we think are just in easier jobs, frankly, I mean, one of the things on the short side, whether you do it in activist short selling or the more traditional short

short selling, you're sprinting on a treadmill, right? The idea is you want your idea to work out quickly and you want to be on to the next one as soon as possible. I mean, the long side just, you know, we've done some things on the long side, especially in resources. And man, it's a beautiful thing, right? You go along this for several years, it compounds, you don't have taxable gains in the interim. And if you had a whole portfolio of those and you could, you know, lever them, I mean, it's a wonderful thing. You're

You're not sprinting on a treadmill when you're doing your job well on the long side. It's the opposite. And I think you could be sitting by the pool to be totally blunt about it. So that makes this hard. So I think for a lot of people who tried to do this, it puts a lot of miles on you. And I think, you know, I've been doing this 15 years. I think one of the secrets of my longevity is that I built infrastructure around me. It's a team approach. Almost everybody I work with

on the research side has been with me at least 10 years. So I've been able to devolve responsibility to them over the years and that's helped me maintain a better personal balance and also to pursue things in which I'm able to grow professionally and personally, like doing some things on the long side in resources or also doing some things in Vietnam. So I'm just going to come to that, but that emotional wear and tear of being in

In the world of shorts, I've shorted stuff along the way and I've had to retreat several times wounded. You have to do it day in, day out. Do you think there's actually an element in your makeup that if not a warrior of morality, you are on a mission as well because you think deeply that what you're doing is a good for society?

Yeah. So look, I think the first layer is I've always preferred to be right than to be popular. So growing up, that often made me the opposite of popular because I've called people out for saying and doing stupid things.

when, you know, try to metaphorically pull their pants down in public when I thought they were wrong. And, you know, most of the world goes along and gets along, right? So that's, you know, I think for those of us who end up as short sellers, I think constitutionally, most of us don't believe in go along and get along. As for the moral crusade, doing something good for society, yeah, like, look, I'm going to be really blunt because my views on that have evolved. And, you

I remember there was a profile in 2021 that was done on me or 2020, and they actually interviewed Andrew Left. And I'm friends with Andrew. And Andrew and I always had a different view. For Andrew, Citron Research, he's like, look, man, you're not going to save the world.

This way, you want to save the world, that's great, but don't do it in capital markets. And, you know, my retort was, Andrew, you know, the capital markets are really the lifeblood of a lot of bad things that happen in society. This is kind of an old rant of mine, but whenever it turns out that a company was harming society or consumers, getting them addicted to prescription fentanyl, things like that,

It gets sort of broad brush says, oh, due to corporate greed. But nobody really goes and looks at, well, what was going on in the market? How many shares did the president of the company sell and the founding shareholder? How many shares did they sell and who enabled them along the way? Like all the sell side analysts that were saying, oh, no, no, that's probably all noise. Just ignore it. Bye, bye, bye.

So from my chair, I felt that we did play an important role in trying to control some of the excesses of society. Well, after going through that investigation in the U.S., and as I said earlier, that was never supposed to happen in the U.S. The Germans, you basically expect that from. I think the French are better than they were, but at the time, it wasn't really that big a surprise.

But having gone through that in the US, I came out and I said, you know what? Andrew's right. It's a business. Stop treating it like a crusade. And then, you know, and the other thing was, it's just kind of, I look around and I do question, does it matter? I mean, even when we get a clear win on something, even when there's a prosecution and it's been clear that it's a fraud.

People don't care. You know, like you look at my Twitter feed and every day, you know, I've got people responding to old tweets, calling me a manipulator and, you know, like all sorts of nasty names and, you know, get to these, you know, vitriolic DMs.

It should change things, but at the end of the day, it really doesn't, at least not in the age in which we live. So I feel like I can look at myself in the morning and say, vast majority of people go to work every day and they don't make the world a better or worse place. Vast majority of lawyers go to work every day and they make the world a worse place.

Look, I think I go to work and, you know, I make the world slightly better place, or at least I'm not making it worse. But yeah, I think society's ability to internalize and properly act on the exposures that short activists provide, I think that's greatly lacking. But, you know, again, see the part of the conversation earlier where I referenced the decay of institutions in the West.

Well, I know, I think it was on a different conversation I'd heard you were involved where Casino, the French company, where you were either short or had written about, sent a spy to try and, you know, trap you. But that's a story for another day. On the long side, I know you're positive on Vietnam and Rob Mead, who is a friend of Will Campion's, funnily enough, I think is, you know, helping, you know, run that. And you also, I believe, have, if not one or two gold stocks, a particular angle on the resources. Just give a sense of those two opportunities and how you're expressing them.

Sure. So Vietnam came about in April of 2020 when it just dawned on me that coming out of COVID, it was going to be the largest geopolitical realignment we've seen since World War II. And it's going to be about the various countries of the world's relationships with China. And the net effect would be that a lot of FDI that would have gone to China is going to go elsewhere.

and became readily apparent to us that Vietnam is going to be the single largest beneficiary relative to the size of its economy and its markets. And we do think that public markets, when done right in Vietnam, are going to be a great way to capture that growth. Now, some people will push back and say, well, you know, you look at these EMFM indices, you know, including China,

They go nowhere over the long term, right. Those indices are trying to solve for scale, basically. So they take a bunch of banks and property companies because they're the most liquid names in the market. But if you go outside of the indices, I think you can profit significantly. So that's what we're doing. We opened an office in Vietnam that Rob Med heads. We opened

We opened that a little over three years ago. And so we have a fund that's focused on making long investments in Vietnam. And then resources, we're focusing on mining. We brought somebody in with whom we'd worked on a

on a few names over the years. He'd previously been another manager based in Toronto. His name is Darren McLean. And he first brought us a short on something called Asanko Gold. That was a great short, then a long on GT Gold. And then also we were in a company called Filo that was taken out by the Lundin family, which were the controlling shareholders. And now we are publicly disclosed as long in Mayfair Gold, and I'm on the board of Mayfair Gold. So we

We ended up going long side activist on both GT Gold and Mayfair Gold. But what we like about resources, especially in the junior miner space, is that you can get venture size returns, but you have a lot more information upon which to base your decisions. The other thing is, the other factor that enables that is there's so much room for edge there. So when you look at, this is true in both the operator side as well as the capital allocator side,

You've just had a dearth of talent going into it for a couple of decades. I mean, how many smart kids do you know graduated from uni after 2000 and said, oh, you know what? I want to go into mining like hardly anybody has. So there's just a real dearth of talent. And it's funny when you go to this Denver Gold Convention, which we've gone past several years.

It's just, it's so grim. Like everybody's old, you know, there's no youth there. There's no energy, there's no enthusiasm. And it says to us, like, this is a great time to get involved in resources, especially as we need to electrify our economies. I mean, it's not so much on the gold side, but on base metals, we're going to have to pull a lot of that stuff out of the ground. Right.

One of the other things that I think is also important to understand the way that – because I'm sure you could talk to a lot of individual investors who've lost money in junior miners before, especially gold miners –

One of the mistakes that we think a lot of people make commonly in the space is that they want to buy exquisite rock, you know, like, oh, you know, this many grams per ton. And the problem is generally you shouldn't buy the exquisite rock because it's usually in jurisdictions where the project will never happen. You buy good rock in jurisdictions where the project can't

can happen. Like, you know, again, to plug it, I'm on the board, but Mayfair Gold, it's really nice rock, but it's not exquisite. But you've got a major highway that runs through the property, which we can move for not that much money when we develop the mine. Like this is a great jurisdiction in which to have a mining project. So that's one of the mistakes people make is they throw money at stuff that sounds great, but without really considering the jurisdictional elements. So the

At the end of the day, there's a lot of potential edge in the resource space, or at least in the mining space. So we like that for that reason. Yeah. Well, I can at least second it where you've had a lot of gold mining companies, which I've followed over the years, have been bad allocators of capital, but there is as wide a disconnect between the gold price and these gold mining companies as one has seen. And I mean, I've been adding to my own allocations and think they look very interesting. I do want to expand on that point. That's

That's a great point about how a lot of the miners have been bad allocators of capital because a lot of them come at it from this engineering mindset as opposed to a commercial mindset where they're like, oh, you know, we're going to build this huge mine and we'll build the refining capacity and blah, blah, blah. And, you know, 10 years later, they're patting themselves on the back saying like, oh, wow, we got it done and look at what we're producing. It's like, yeah, but your share price is the same as it was 10 years ago. Why? Why?

because you decided you had to develop the biggest possible project you could. So you had to dilute the stock massively along the way. And so that's part of that lack of talent that's going into the space where it would make a lot more sense in many of those instances to say,

Let's start small where we can cash flow and let's increment this up so that we don't have to issue all this paper along the way. And ideally, you can issue some debt that's supported by the cash flows of building your minds incrementally. So I think that's another reason why people have just gotten so badly burned in

in junior mining is you just had really bad management decisions. Yeah. We have the CEO of Wheaton Precious Metals now. It's probably two years ago. And he talked about the evolution of more discipline than one that he's been used to seeing, which will be encouraging for returns.

Because I'm going to ask you a few closing questions. When we talked about Tesla three years ago, you'd come to this realization that Musk did enough to persuade, even if the valuation didn't make much sense, but simply the amount of capital that could be issued ensured continuity. Two big egos in the White House? How long does this marriage made in heaven last?

It's amazing how similar the two of them are in personality. What's interesting is when Elon started his crusade against short sellers in the middle of the last decade, that was about the same time that Trump began his campaign for president. They each recognized the populism of the moment. I think we know about Trump's enemies he identified, the grievances, but

But Elon went at it and said, hey – I mean he created this boogeyman of short sellers and said you want to change the world and make it better. The amazing thing with Elon is how far on the political left –

or, you know, he was identified with being on the political left because every now and then he would stoke those anti-short seller sentiments by saying, oh, you know, they're, or insinuating they're backed by Saudi and big oil, you know, and now he's all the way on the political right. But yeah, it was, you know, Elon used populism, market populism to jack that stock price up. Then it got added to the S&P 500 index. We were talking earlier about how

how passive warps the market. And so basically, then it was one of the bigger market caps in the index, and it's part of the MAG7. So it's had that virtuous cycle from a stock price perspective, where the higher it goes, the more that's bought of the stock, and the smaller the real float actually is. How long can Trump and Elon coexist in the same room? Are their egos coexist in the same room? Not very long, but for now, Elon is like shadow president of the United States. So

easier shorts in the world than Tesla, once again. So three final questions. First, we've got lots of young listeners from around the world. What's your advice to young people thinking about a career in finance? Jeez. I mean, I used to have advice, but right now I just have questions. I've got two young kids. One of them is getting very low double digits age. And I do ask myself, will finance offer job opportunities for them? I think what I

What I keep ranting about with my kids, because I think it's impossible to predict what the opportunity set is going to look like even several years from now, I think math and science, math and science, math and science.

And I was great at neither of those. Me too. So I'm going to be a hypocrite, but I think that that's what you really – and I would always advise kids especially – I mean this is consistent with what I've long said is have more than one set of tools in your toolbox.

I mean, for me, I came up in finance, then I became a lawyer, then I became a real world entrepreneur. And I could not have succeeded nearly this degree without those additional tools. So don't expect to approach your career as just a finance guy because, you know, after the GFC hit, there are a lot of people like that who ended up driving taxi cabs. Yeah, a lot.

Well, I was lousy at maths, but I married a mathematician. So there are various ways to solve that problem. Two final question is, give us a fun fact about yourself that might surprise people.

Okay. So a couple of years ago, I lost over 50 pounds. I've kept it off and I have not done Ozempic or Wagavy or anything like that. Well, I first got sick. And so within two weeks, I lost some weight, a very unhealthy weight. But then I decided, I said, look, you know how to do it. You know what you should be eating, what you shouldn't be eating. And I just willed myself down. And

I don't want to come across as preachy, but one of the things that really depresses me about this world is that so many people, you know, when they hit middle age, they just think it's like, oh, it's not possible. Like, oh, I need the drugs. No, it is possible. Like I have definition in my abs. I never had that in my teens or 20s because I actually know more about how to exercise now than I did then. So that's a fun fact that maybe comes off as, like I said, a preachy fact. I'm not trying to be preachy.

I do have a deficit in terms of it's very difficult for me to candy coat things and say them in gentle ways. But absolutely understand that you can get yourself in great shape. Like my resting pulse rate is in the 40s now. And I did that, you know, I'm 48 years old. So it can be done and I did it. No drugs other than marijuana, which makes it harder. Marijuana and alcohol. Okay. You got to reduce those in order to...

lose the weight though. Well, just to conflict you, I know you're sitting in Sonoma in California. And I said to you before we started the call, one of my most exciting jobs was working at Stag's Leap over the Napa Valley. If you were going to give one bottle of wine to somebody you really liked as a special present, Californian bottle of wine, which one and what would it be? Well, this is also driven by the fact that they are amazing people as well. But Verite,

It's a producer. It's technically Sonoma County, but it's right on the border of Sonoma and Napa. And, you know, it's amazing how many of these boutique wine labels are actually owned by a few major producers. So this is owned by the Jackson family, as in Kendall Jackson. So Kendall Jackson is the cash cow, and they buy a lot of these smaller wineries. They also own Cardinal, which is a Napa producer, very typical big, bold red that I like.

Kaman, K-A-M-E-N, is Border of Napa and Sonoma. It's owned by Robert Kaman, who wrote scripts for all of these action movies like The Karate Kid and the Taken movies. And his real passion has always been making wine. So he basically, I think he had kind of a cynical view to writing scripts. He just kind of pounds them out, these almost brainless action movies that are great to watch when you're on the elliptical and you're bored.

I mean, you need to keep your heart rate up. And then he uses that money to invest in his winery. So I would say Verite. I like Cardinal. I mean, there's so many great wines out there, but also Cayman. God, I need to make a visit to your part of the world. And so great to reacquaint myself and, in fact, learn some more. We're going to stop there. Carson, you've been terrific. It's so nice to welcome you back and to get a very different conversation about a

It may not be a dying art. Maybe we're on the cusp of the phoenix rising from the ashes in the world of shorting. But for particular lessons or things that I've taken away, you are unusual. You prefer to be right over popular. Number two, that you like the opportunities available in Vietnam if they're not in the mega caps. Resources, there are opportunities particularly lower down the market cap.

universe where maybe the geologists aren't running the programs in the same way that they were. And finally, young people, maths and science, because you can learn from Carson and myself about where we went wrong. So with that, Carson, thank you so much for being here. It's been absolutely great. And we look forward to seeing you in person. Thanks, Simon. Enjoyed it.

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