Wave of Speculation with Legendary Short Seller Jim Chanos
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On the Tape.

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welcome to the risk reversal podcast i'm dan nathan that's guy adam i am we have a very special guest with us today he's not only a friend of the pod he was one of the first podcast guests we have going back to 2021. he's a great friend of ours and we're welcoming back jim chanos of chanus and co thanks jim for being here thanks for having me so hold on a second whoa did i miss something no no you didn't well

Maybe the most important. What do they say when you bury the lead? Oh, legendary short seller. No, no, no. I was not going to say that. I was going to say he's a legend in our industry. Correct. I was not going to qualify it. But any single time that you were in the press, and you're often in the press, it always starts with legendary short sellers. How do you like that? Do you like that, Monica? I always say that's a really, really low bar. Oh, really? It's like being called the toughest guy in France. Well, you've gone...

Oh man, Guy Nami might start using that a little bit. You really cracked him up here. No, you've gone through your process for years with us and especially on CNBC and on Bloomberg. I mean, there is a skill to short selling. We're not gonna go into that, but you had a long strategy for your clients and you would short stuff. By the way, so Jim has been very generous, made a lot of great introductions to me over the years. And one of them, believe it or not, Guy, is a Fast Money fan. His name is Bob Melvin.

He is the manager of the San Francisco Giants. Legendary playing career, but also coaching, managing career. So yesterday I'm on Fast Money, you know, from CNBC's One Market. And behind me is the, what do they call it, the Bay Bridge. So Bob texts me. He's like, are you in town?

And I'm like, yeah. And he's obviously getting ready to manage the Giants that evening. I was in. I was out. I got to text with Bob. He watches the show. He does watch the show. Crazy. Just like we watch him playing baseball. And I met him because of the stock market. All right. Will you tell that story really briefly? I have to sanitize it a little bit. But Bob was, I think, in spring training.

And he was leaving dinner early to catch some guy that he wanted to see at, you know, four in the morning Pacific time on CNBC.

And a friend of mine who I'd known for years was at the dinner. I said, who's that? He goes, well, you wouldn't know him. And it turns out Bob wanted to see me. And next thing I know, I'm in bed trying to get some sleep before having to get up at 4 a.m. And my friend says, will you please tell Bob Melvin, the manager of the Diamondbacks, that I know you? It's just bizarre. And so Bob ended up then going to the Mets. Yeah.

and moved to New York, and we became friends. And you know that. And I'm a big fan of his. He's one of a handful of guys who've won Manager of the Year in both leagues. Just recently, too, right? In San Diego. He won again, I think, in San Diego. And yeah, so I mean, and he's a big fan of you guys, and he's a big stock market junkie. All right, Jim, what is on your mind? Right now, the S&P 500 is trading at

at 61 39 on february 19th and traded what 61 43 and change 43 actually no 61 44 47 i think if you want to get up to you know the exact level so if you took a nap in march you know you took a mat a nap in april here we are um the dollar is a bit lower uh yields are really around the same spot as they were you know people feel pretty geeked up about where the stock market is one thing i will say and our friend uh

Liz Young and Mario from SoFi, they had this stat that we read this morning. Only about 4% of the S&P 500 stocks are at new 52-week highs, despite the S&P being back. Just give us, we're not going to drill down so much on the macro, but just from a market's perspective, you've been doing this a long time. You've seen peaks, you've seen valleys, you've seen this and that. What's this market environment like to you? It's getting speculative again. It's been speculative pretty much since the elections.

There's been, since the 22 bottom, there's been a few waves of speculation, our kind of names. There was early 23, then again mid 23, and then a couple times in 24, particularly the election into the end of the year, into early January.

And then sold off pretty hard. And now it's come back again. And so the retail public and whoever else is playing is out buying stories again, buying narratives. And I think that that's a time to always be a little bit

a little bit cautious in what you're doing when people start chasing stories. It usually doesn't end well. No, I agree with that. And in terms of the narratives, I mean, some of them are legit. I mean, I think the same way in 99-2000, some narratives were legit and still here today. But some of them, of

clearly gotten themselves way ahead in terms of just valuations and other things, extremely overextended. And I look at a broader market trading maybe now north of 23 times next year's earnings, and I say, wow,

If things are slowing down, as some of the soft now hard data suggests, I mean, that's a valuation that doesn't really make any sense. Regardless of things 23 times big up earnings. Yes. Yeah. So talk to that. I mean, if that is, I mean, I know it's not a timing indicator, but it clearly means there's less of a net for the broader market. The thing that...

You know, the problem with being a gray beard like me is that until this last bull market, one of the things that was pretty consistent was the fact that earnings mean reverted. I've talked about this.

And since really 2009, that has not been the case. That earnings have paused a few times along the way, but generally margins just keep climbing in corporate America. And that's even with higher interest rates and a tax rate that's probably come down about as low as it's going to go. But margins just continue to increase. And part of that is the global hegemony we have with our MAG-7 and our tech stocks.

But it's as if capitalism has been a little bit suspended in the best way possible, right? Ever higher prices but no competition in terms of the corporate space. And if we ever mean revert, we're gonna have a big problem because margins are kind of one and a half times their mean and median over long periods of time. Mean reverting to a number below average

would basically cut earnings in half. So that's number one. Number two, we've shrugged off all of the sort of bigger macro stuff like the tariffs, and nobody cares anymore. And so, look, I mean, you're not getting paid a lot anymore to take risk. Having said that, you know, in our world,

Since the mid-90s, we've been basically long the indices and short our names. Let's stay on the narratives for a second because we're going to do a little crypto. We're going to do a little generative AI. But one of the things that seems obvious to me and why it does feel really speculative is like look at two IPOs.

And there are big IPOs that came this year. One was CoreWeave, obviously directly related to the generative AI story as a data center provider and the like. And then the other one was Circle that provides stable coins. And there seems to be a bubble in both of those. And just to give you a sense, I mean, the Circle went public at thirty one dollars, I want to say about a month ago or so. And right now it is trading at two hundred and thirteen dollars.

CoreWeave went public two months ago. It was $38, and right now it's trading at $160. So you can do the math. These are massive market caps right now. And then just another one. This is Coinbase, which has been around for a while, but it was the poster child for risk going back in 2020, 2021. This stock a week ago was trading $250. It is now trading at $375. Well, it's being dragged up by Circle.

because it's 50-50 partners in USDC with Circle. So retail is chasing this, in my opinion. Well, and it's a little bit more nuanced than that because both of those names are very small floats relative to the size of their market cap.

which was also the case, by the way, in the darlings of 2021. You know, the Coinbase is the first going, the Beyond Meets, the stocks that were the darling, Zoom, and they had low floats and they had a great story. So consequently, they had parabolic moves. The minute you start to see lockups expiring or being released, then it's a different thing. I mean, I've long said that, you

Wall Street has a printing press too, not just the Fed. And we're getting to the point now where issuance for the last month or so is starting to pick up dramatically. And I suspect if prices stay here, particularly in some of the hot areas, you're going to see just tons of secondaries, IPOs. We haven't gotten there yet. Bitcoin, treasury company shares. And so these kinds of things, sure, shooting are going to start happening because they're going to feed the

So let me ask you this. I'll push back on myself in a little way. So we talk about maybe 17 or so being the historic norm for where the multiple of the market is in terms of the S&P. In the world of passive investing, which has taken the world by storm over the last, let's call it five years, by definition, does 17 no longer relevant? And maybe, look, I don't think 23 makes sense, but maybe it's obviously...

somewhere between 17 and 23? Or is that trying too hard to sort of justify this valuation? Again, I mean, hopefully capitalism works and clears, right? So at high enough multiples, enough people will go out and start businesses, raise capital, and try to get valuations for themselves in whatever business they're doing. I do think that some of it has shifted a little bit because of the fact that if you look at globalization,

global markets, a lot of that value has come to us, right? As we've gotten better and better and more and more profitable and more and more dominant in big high margin businesses like software, AI, cloud, what have you. But again, you have to believe for multiples to stay really elevated, you have to believe that these are all sort of quasi oligopolies or monopolies. And that creates its own problems. You saw an election in New York

the other day that raises risks that nobody thinks about on one end of the bell curve.

political all right so let's talk about those monopolies for a second because we can go back and guy just mentioned going back 25 years ago a lot of comparisons are made to you know the build out of the internet and obviously famously you were looking it wasn't really adjacent but it had something to do with the the risk taking at the time and it was a really retail driven story and that was enron obviously um and at the time there was global crossing there was exodus community there was a lot of made more money in those names than we did in enron really yeah the tmt's

that. Which is pretty amazing. So right now though, what's different about the companies that are paving the way forward for this secular shift? I think we can all agree. We've had enough demonstrations so far. Generative AI is going to change a lot of things. The CapEx that has gone to get us here, it's

hundreds of billions of dollars, and it's likely going to be trillions by the end of, let's say, this decade or whatever. But these companies, their moats, their managements, I mean, they are monopolies for all intents and purposes. Isn't that different? And it makes it really hard to bet against any of those names. Look, in effect, I'm long on them. But I will raise an issue that basically is a derivative of Guy's question, which is the flip side of this.

And that is that like the late 90s into early 2000, and like my friends in China for the last decade, when you get a capital spending boom, something very interesting happens to earnings. Because my CapEx, which I defer and depreciate over seven years or five years, becomes your revenues and profits. Every dollar that Google and Meta and others are spending on chips, Nvidia's recognizing as profit. They are not expensing that immediately.

They're expensing it over five, six years. And so when you get these massive CapEx booms, which you saw at the end of the internet and the TMT build-out of fiber in 98, 99, 2000, it doesn't take a lot. And that's what crashed earnings in 02, 01, 02.

because everybody forgets, earnings dropped, I believe, about 40% from the peak in early 2000 to the trough in 02, and GDP dropped by 1%. So, I mean, that's a magnifier effect, right? And what happened was everybody panicked and pulled back their spending at the same time as the dot-com bubble was bursting and said, we'll reevaluate in six months or nine months. And that just went right through the system.

And so right now we're getting just a massive, massive build out in data centers and capacity. And it's not just all NVIDIA. It's construction companies. It's Caterpillar. It's energy. Yeah. It's all kinds of things that are the beneficiaries of that $500 billion in extra CapEx every year. And for a lot of companies, that's flowing right through to revenues and profits.

And it's the whip end of the earnings thing in that if for whatever reason people begin to say, okay, we're going to now pull back a little bit or not grow it, I think you're going to see a disproportionate impact for a lot of companies in their P&L. Not on the horizon yet. We don't see it, but the risk is there because that's exactly what happened in the telecom build-out, which was related to the internet boom.

The term, yeah, and the term that I've used, Dan's used it, is the sanctity of CapEx. And again, it's different this time. People will say, you know, they're forced to spend because they have to be, if you're not in this AI game, you're completely on the other side.

But I do think there's a concern that that sanctity that everybody seems to think is basically etched in stone might not be as etched in stone as we may feel. The second derivative of that, of course, is that earnings may be overstated, right? Because although NVIDIA and Caterpillar and others are booking this, and that's real money, real cash flow, real revenues and profit, the guys buying the chips and spending the money

are writing this stuff off over five to six years for the most part, if you look at Microsoft and Amazon or whatever.

And, you know, there's a lot of evidence. If you look at rental rates on GPUs right now, they're collapsing. And so the issue is, should they be writing that off over two years or three years, not seven years or six years or five years? Or maybe six months. I mean, the world, that's how quickly things change. I mean, you know, that's a little ridiculous. I know, but not really, because that's what Jensen Wang every six months is telling you. You have to go from hopper to black.

Well, to Rubin. So if you're depreciating this over five and seven years- And some of these companies have extended their depreciation from five to six years on their chips. Right. And by the way, you mentioned CoreWeave. This is a big problem for the CoreWeave, and we have no position. But I'm just saying, if you kind of look at how fast they're spending and what they're buying, and in effect-

how fast the depreciation schedule is, you can argue about their profitability. All right. So to that point, our good friend, um, Peter book, VAR of bleakly advisors writes the book report and he frequently comes on here. He sent me this earlier today. So I don't know if you read the grants, uh, uh,

you know, newsletter, right? So this is Tiger by the tail. He's only got it in print. I don't think he puts stuff out digitally, but this is written by Evan Lorenz. This is really important. It's never been cheaper to power an artificial intelligence model, though it might just be cheaper next week. Only last week, amazon.com slash tiger.

The rental rates, it charges on NVIDIA GPUs by as much as 45% a year ago or so. NVIDIA H100 is maybe five to six per hour. Now they speculate it's around 75 cents, maybe less. So think about that. The knock-on effects throughout that entire ecosystem, but you don't hear anything.

any analysts on Wall Street talking about this because they all have 98% of them have buy ratings on Nvidia, all the hyperscalers and meta, that sort of thing. And this is the sort of thing that folks are not paying attention to. It's interesting because you have to get into the weeds on things like accounting and obsolescence.

But you can track the rental rates on this stuff, and they are collapsing. And so, again, I wouldn't be extending my depreciable life right now, that's for sure. And so it gets back to your question, Guy, about earnings and quality of earnings and how fast they could recede if there is a pause in the CapEx boom. Now, nobody thinks there's going to be a pause in the CapEx boom. That's a given, right?

We'll have to see. Before we get to some of the other individual trades, I have to ask a question about the U.S. dollar and the weakness we've seen. And it's been market weakness over the last six months. And in terms of dollar-euro, there's been no bounces. We're sitting here right now. We're trading at about a four-year low, the dollar versus the euro. Dollar-yen is its own animal. But there's clearly something going on in terms of people

I don't want to say necessarily shorting the dollar, but clearly the appetite for the dollar has not been there for quite some time now. Thoughts?

Now I'm going to Europe. I'm really pissed. Yeah. That's about the extent of my thoughts. I have no idea. I wouldn't even begin to tell you that I have an opinion on a currency. So I don't know. I mean, it is market weakness. It's helping earnings, by the way. Right. But it's, yeah, it's been 10%. No, okay. So, and I understand what you're saying, but let me ask you this real quick. And if you're in a view, I totally get it. But

Clearly, that's provided, to your point, a tailwind for earnings. Is there a point, though, sort of this diminished marginal returns when it gets to levels where it starts to become a headwind for the broader market? Again, it just tells you that there's some part of the

that may be excess earnings, right? That are being bolstered by an unusual move in the currency, a cut in the corporate tax rate when we had ZERP. And so those components of your earnings, I would argue you would pay less for than the core profitability of selling a widget. But again, it all is coming together positively and has been generally positive for the last 15 years. And that's why we're where we are. ♪

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iConnections is the largest membership-only platform for the alternative investment industry, bringing together thousands of fund managers and allocators on a single powerful platform. Through its platform and premier in-person events, iConnections reimagines how the industry connects, empowering allocators and managers to meet, build relationships, and do business anytime, anywhere.

To explore more about iConnections events and gain access to its members-only platform, visit iConnections.io. All right, let's talk a little bit about crypto. There's a couple things I want to talk about. One, you've been looking at strategy, okay? And then, you know, Michael Saylor has been this evangelist for, you know, companies using their corporate treasury to buy this thing. You know, Guy and I know Michael.

And the one thing I'll say to you is we've been in markets a long time. I've never seen anybody who's willing to kind of articulate his strategy, whether people want to shoot against it or not in a very transparent way. He's come on our podcast. We push back at him. He's been on CNBC a lot. You have a view on what he is doing, and we're going to talk about that for a second or in a second. But also what's going on with stable coins is really, really interesting to me. Now, I suspect talking to you, you've been agnostic

about crypto. It's, you know, it's a pocket of risk. It's gone on here one way or another. You don't have too many strong views. Your views are probably in and around the way in which, you know, traditional companies are thinking about this asset and some of the goofiness that's going on. Is that fair to say? I think it's fair to say. I mean, I think that I have views on crypto when it kind of gets out of the Bitcoin realm and into the, you know, the the

and ICOs and the Dogecoins of the world. But as it relates more to corporate finance policy, owning Bitcoin or whatever, I'm a little bit more agnostic on that aspect of it. I have no idea where Bitcoin's going to trade. So I'm not opining on the value of this stuff. I'm opining on things that are derivatives of the value of that stuff.

and so what attracted you to the strategy story because again i mean these are the sorts of things that you've sniffed out over your career on many occasions when did when did it hit you because michael saylor started talking about this i think in 2020 and he articulated it you know at a time where most people just didn't understand it you had to be like you know one of these folks who was all in so talk to us a little bit about how you came to it and and what your trade is now yeah we've been we've been tracking the the the

so-called MNAV premium in Bitcoin for a long time. I have, as you know, I have an investment conference I have every year. And one of my ideas in this past year in December was to put on the Bitcoin MSTR pairs trade. We didn't just put it on a few weeks ago, as Twitter seems to think. But

Look, I go back to the very earliest part of my firm back in 1989 when the Berlin Wall came down. There was a rush by Japanese retail investors to buy closed-end European country funds, the Spain Fund, the Germany Fund, the Italy Fund, because it was an easy way for them to buy exposure to the end of communism and the end of history, as Francis Fukuyama called it,

And they were promoted by Nomura and Daiwa and everybody else as an easy way for Japanese, Mrs. Watanabe to buy exposure to Europe. And what happened was these were big liquid closed-end funds that basically mirrored the DAX and the Spanish index and the Italian index with big liquid stocks you could buy anyway.

And they began to trade at first at 100% premium and then at 200% premium. And at that point, we were officing at George Soros' office. And I was fighting Stan Druckenmiller for the borrow. We could borrow the closed-end country funds at a 200% premium.

And then they went to about a 300% premium. And so these things can happen, right? But what of course then happened was the boards of these closed-end country funds

went and got a vote to basically open up and began to issue new shares or they formed clones, Spain Fund II, New Germany Fund, New Italy Fund II, and just began flooding the market and to Japanese investors with as much paper as they wanted. Getting back to my Wall Street has a printing press story. So let's fast forward to the end of 2024.

And Saylor, who I think is a fantastic salesman, by the way, you know, has been articulating this strategy and it's beginning to pick up with the Trump election. It's beginning to pick up traction and his stock price begins to outpace the underlying holdings in Bitcoin. It gets up to, I think, about three and a half times we calculated every day.

And it's averaged, it's gotten down to as low as one, one times, basically no premium in 2022. It's averaged about 1.8, 1.9 over, since he's been buying Bitcoin, since 2020.

And it got to 2x that. It got to 3.5. Well, before we could affect the trade, it was back down to about 2.5. And so we've been putting it on between 2.5 and 2. Average price somewhere 2.25, 2.3, somewhere in there. And the idea is simple. We're doing what Michael Saylor is doing. And that's kind of the thing that...

All the people who love to take shots on Twitter and XM me, I just keep going, I'm doing what your Lord and Savior is proselytizing about. I'm selling MSTR securities to buy the underlying. You should do the same. And people just have a hard time. They believe that immense value is being created by the issuance of securities.

And that's just not true. You don't create value by capital market transactions by their alone. And so at the end of the day, we figured that this was now big enough with $100 billion market cap and microstrategy when he held $50 billion of Bitcoin that other companies and other promoters were going to do the exact same thing. And that's exactly what's happening now. So the M and the...

MNAV is multiple. So it's multiple. Multiple to NAV. Right. And as you just said, at its zenith, it was probably three, three and a half. It got to three and a half right after the election. So let me ask you a question. This is not easy to answer, but you're rooting for something to happen by putting on. So what do you, how does this play itself out? I'm rooting for more and more companies to do this. Which would make the underlying MSTR

go down in a precipitous way. Well, it's going to take capital from all the retail people who love this trade. It's going to be spread out over not just MSTR. There's a...

one in Japan right now, and there's a couple in the UK, and there's more in the US. I think grants, speaking of grants, I think they put out last week that there's now 130-some companies publicly traded that have a Bitcoin treasury strategy. Let me ask you this real quick, because I can't figure out if there's any leverage involved in terms of what he's doing, but there has to be some. That's the latest story. The

He understands now if he keeps issuing common, that's not good because the MNEV compresses. So he's going to issue preferreds. Right. That's the latest. And so he's issued a number of preferreds since January and no common, I think, in the last sort of four or five weeks. The problem is the preferred market is a very, very small market, particularly for speculative preferred stocks. The preferred market is mostly for utilities and banks.

And in fact, this past week, he only did $25 million of preferred off the shelf, $25 million. Which is a pittance. Which is small. And there's no free lunch. I mean, if you're doing preferred or debt, you're just leveraging up. Right. And so at the end of the day, it's debt capital or equity capital or some hybrid in between. The issue is that you also have to believe, as the believers do,

they start with the idea that, well, Bitcoin has gone up by this amount in the last 10 years. It's therefore going to continue to go up at that rate. But it's now a $2 trillion market. It's not a $20 billion market. And that makes a big difference. All right, so my next question, because I'm sure you've thought of this as well. I think now I'm averaging up, but I think the average price for strategies in terms of their Bitcoin holdings is around $70,000. That's correct.

Bitcoin is obviously trading, let's say, north of $105,000. He's made 50%. He's going to continue. I mean, he has to continue to do what he's doing. So by definition, the average price is going to continue to go up. That's the paradox. Right. So when his MNAV was one in 2022, he was basically buying no Bitcoin at $16,000, which is when you would have wanted to buy more, right? But when his MNAV was 3.5%,

and Bitcoin was trading at $80,000, $90,000, $100,000, he was buying lots of it. And that's because, again, that's when the capital markets opened up and people were excited. So let me ask, does something potentially, have you thought it through where his average, let's just say, gets to $75,000 over the course of whatever?

and the price of Bitcoin gets to that price. - It was at 78 in April. - Yeah, it got very close. But what happens, is there something that magically happens there? - That's not possible. I'm told reliably that cannot happen. The answer is, is of course,

What he says he'll do is he will buy back, he will issue debtor preferred to buy back the comment if it goes below one NAV. So, you know, Chanos is screwed. And they're like, no, if your stock gets to one NAV, I'm out of the trade. So, but it could, I mean, the math suggests it could happen. Oh, I mean, again, the...

MicroStrategy traded in the Bitcoin bear market of 2022. MicroStrategy, MNAV traded at one. So what are some of the potential systems? And here's one of their observations on that. With everybody raising money, billions in dollars every night now, similar to SPACs in February of 2022. Who's on the hook? This is where you're going. Why is Bitcoin not going up more? Yeah. Who's selling? Yeah. Yeah. Maybe a Satoshi guy? Well, I...

That's the other part of it, right? I mean, that's the other side of this equation. Well, Satoshi wouldn't like this, to be honest, if he is a thing or what. No, but I'm just saying, think about the existence of it. It's a conundrum because everybody's talking about how all this money is coming in to the treasury companies and they are doing what they're saying they're going to do. They're announcing their Bitcoin purchases every day. They're very transparent, which I think is a good thing for whether you're a bull or a bear.

But why is Bitcoin not at 150 or 200 right now? If everybody's buying, who's selling?

Yeah, I don't have – again, it's going to be fun as just sort of a voyeur to watch how this whole thing plays out. It's a market – and the reason we're talking about it, the reason it's important – I mean, this is just one trade. We have lots of trades on it. We're going to get to some of those. We tell our clients to do lots of trades. Everyone always thinks, of course, we have one short on. We're only short Tesla. We're only short MicroStrategy. And, of course, we have 40 positions. But –

But the point, I think, the reason it's important is that it's a really good indicator, barometer, I think, of retail speculation and animal spirits. When you get these kinds of things, stocks trading at a premium, there's the much, much celebrated 3Com Palm Pilot spinoff in March of 2000, right at the top of the market, where they spun off

Palm Pilot and traded at a higher valuation than the actual parent, despite it being talked about as an insane trade on the front page of the New York Times the morning of the IPO. You know, this stuff doesn't happen at bottoms.

It happens when the animal spirits are running. - Again, I think it's interesting back in 2017, we'll move on from crypto, it was an ICO mania and then it was an NFT Web3 mania going back to 2020, 2021. And what's interesting about both of them, they're all gone. Those things don't exist. - I'll go one step further. I would say the previous retail

peak of speculation in NFTs and garbage coins and Bitcoin was when my friend Elon Musk went on Saturday Night Live in May of 2021. It was also the peak of the meme stocks were peaking in May, June of 2021. Bitcoin hit 70, I think 71 or 72,000 in that peak and then sold off to 16,000. Well,

From that peak to today, it's up 50%. I believe the S&P is up 60 or 70 from where it was in the summer of 2021. So again, when you chase this stuff, you're chasing a risk asset, and it hasn't done as well as the sort of standard for risk assets, the S&P 500. Stablecoins. Let's be really quick on this. Okay, so traditional financial services companies that have

you know, really been slow or for a whole host of reasons, kind of defending their moats and that sort of thing, have just, you know, rebuffed this idea of stable coins. Now they're all tripping over each other to do deals with some of the providers. And it seems like there's going to be lots of stable coins. And, you know, here in a well-banked country, you start saying yourself, if it's just about, it's not about speed, it's about fees, right? But these things exist now.

to give interest, to pay interest to those willing to kind of use dollars or whatever it is that you're going to put up as collateral. But again, going back to the last crypto craze, these were very unregulated. Maybe it's a good thing. They're going to be regulated now, but tether was like this, this amazingly brilliant blow up. Do you know what I mean? And it broke the buck and that sort of thing. There's going to be grift and there's going to be, uh,

you know, just kind of some unholy actors here. Do you agree with that? And where's the risk? Because if you're MasterCard and you're defending your moat and you're jumping into it, there's risk here. I would say that I'm going to defer talking about stable coins because it's above my pay grade. But what I will say is that you put your finger on something I think that's even more important, which is the fee generation. Crypto has had and has now a giant ecosystem.

a giant ecosystem and that fees related to trading of crypto are crucially important to keep everybody making money in this boom. And we pointed out back in 2021 when Coinbase fees were higher than they are today, just how much fee extraction they were taking on the entire industry.

It's still a lot. So, for example, if you look at Coinbase's latest quarter, they will tell you that their clients and its large representative body of all AUM, their clients traded the entire amount of AUM every six to seven weeks, twice a quarter. So that's eight times a year that Coinbase clients, by the way, many of whom are institutions,

I think the bulk of them, by the way, volume is easily institutionalized. Yeah, yeah. But having said all that, if you look at the revenues, including institutional revenues, it's 3% per round trip. That's what Coinbase is earning.

because of spreads, right? And so 3% times 8, last I checked, is almost 24% of just trading your crypto before your P&L. That's a big drag. And that's on top of all the other fees that get charged. And so the crypto ecosystem is large and growing for...

paradoxically, what should be frictionless, low cost digital transactions, right? They're anything but that. Let's do Equinix. This is a name you've been talking about. You've been talking about it before. We've had this AI boom just for the listener who's not familiar with the company. Just give us the quick 411. What attracted you to it now? Obviously,

These data center REITs, if you will, have been closely aligned with the generative AI story, but they haven't kept pace. This one in particular. And now in the last couple of days, they had an analyst meeting, they guided down a whole host of stuff. They said they're going to spend a lot more to kind of catch up with demand. Give us the 411 on this because the stock is literally down 20% in two days. It is. So this was an idea that a friend of the firm brought to us in early 2022, Circle Road LP, and

And we looked at the idea and agreed that this was a really intriguing thing. We put together a special purpose vehicle in summer, June of 2022.

And in any case, there are three basic publicly traded legacy data center companies. Equinix is one. Digital Realty is another, DLR. And then there's sort of a publicly traded private equity fund of funds called Digital Bridge. It's the old colony capital that transformed itself into a digital company.

legacy data center company. And those are the three guys who actually have the properties, not the bricks and mortar guys, the bricks and shovels. Shovels and picks. Picks, yeah. Like Vertiv or the others. These are the guys that actually have the old data centers. And it's a very important point

We were not bearish on the build out of AI-centric data centers, which is what's happening now by the hyperscalers themselves. What we were bearish on, because we saw that the business was moving away from that, is the old data centers, which are basically to service the cloud and older applications and need to be completely retrofitted if they're going to be AI compliant with liquid cooling and other things.

And we looked at this business and even at its boom a few years before 2022, its peak of the cloud business, it was just a really low, low, low margin business. And it was a really capital intensive business. That's the other thing that blew us away. But because the two big guys trade as REITs, in effect, Equinix and DLR,

they convinced investors to add back the depreciation, even though the CapEx was enormous. And what sunk Equinix last night and today

was the fact not only did they sort of say well revenue it's going to be a little bit disappointing to expectations oh and by the way we're going to increase the capex going forward which has been our story that this these are just capital munching reits they don't most reits throw off lots of cash these companies these companies finance their dividends and interest and so they went up

within 23 and 24 when Nvidia came up because everybody said, "Oh, these are AI plays." And we kept saying, "No, wait a minute. No, they are AI victims. They are going to be left behind in the AI." This is all legacy business, but nobody's putting new capacity in old legacy data center construction or architecture.

And so the three stocks, Equinix, even after the decline, I think is still up about single digits from 2022. DLR is about up 25, 30% since the mid-2022. And by the way, that's when the market was near its lows. And then Digital Bridge has been cut in half. So these have been pretty good shorts since.

notwithstanding the AI sort of pull. And the symbol is EQIX. I mean, this was almost a $1,000 stock not that long ago, trading $750 now. It might just getting started on the downside, though. I mean, we don't think the equity has a lot of value in any three of these companies because they're all leveraged. And so if you look at what EQIX said last night,

Their estimated EBITDA this year is $4.5 billion. They said they're now going to increase their capital spending per year to between $4 and $5 billion. So-

At the midpoint, EBITDA minus CapEx is zero. And there's no hyper growth here. So, you know, you've got a huge amount of interest in dividends they have to pay that they're not earning. And so we can question what are you paying for? Yeah. Yeah. Really quickly, I know we want to get away from this, but I think this what you brought up is a really good point. The idea of retrofitting these old data centers is really expensive. Right. And you might miss the boat because all

all of the major hyperscalers are building their own, okay? And obviously, Nvidia just mentioned that they're throwing their hat into the ring, so they're gonna be competing with their biggest customers. CoreWeave, 70% of their business comes from Microsoft. They needed excess capacity as they're building out their old things. Now, if you think about Azure, you think about AWS, and you think about Google Cloud, to your point, they were made to host SaaS workloads.

Right. So this is one of the reasons why they're spending hundreds of billions of dollars to build out the data centers, to buy the chips that go into them, the servers and that sort of thing. So the idea that once all this spend is done, they might have spent overspent to retrofit, overspent to get excess capacity from a core weave and the like here. And Corwee is going to be

the first casualty of this because if the hyperscalers have excess capacity on their own data centers, they're going to pull it away, especially if the third party guys. Right. So I just I just think that's like a really interesting distinction. And I think we could keep watching the legacy guys are growing at like three, four or five, 6%. I mean, they're growing with nominal GDP. Yeah. And so they're the ones that are

Really, you're going to scratch our heads and say, what were people thinking here? This is a pretty easy case of technological obsolescence. Okay, so that growth, you know, off a low base, it was much higher. Now it's much lower. At some point, there's going to be this digestion phase that we're talking about. What do you think will be the best shorts in the space, like away from some of the stuff you're focused on right now? Well, I mean, clearly...

we're going to keep our eye on companies like core we the the guys who are selling excess capacity to the guys who can do it themselves right who who need capacity right now but don't necessarily need it and they're very capital intensive and they're taking a lot of debt and we have that accounting issue but how fast are you depreciating your equipment what do you do in a name let me let me just give you one example though however to get back to equinix and what i'm talking the insanity about what i'm talking about so they say with a straight face

that they have a $30 billion capital base. That's their assets in effect in place. They say that their recurring CapEx is only 250 million a year.

on 30 billion of capital employed. That's 120 year life, guys. And so we could take the land out of there and the buildings out of there and it's still probably close to 100 year life on the networking equipment, the HVAC, all the other guts of a data center.

We all just know that that is absurd. And so these FFO numbers and AFFO numbers that the legacy data centers quote because they're REITs are complete financial gibberish. They're meaningless.

And so I think that that's the other thing that attracted us to that is the valuation construct that they're valued on is as if it was an office building or a warehouse. And these are, in effect, service businesses. They're not simple collect your rent every month.

Quick pivot before we get out of here. At its zenith, Tesla was close to a $500 stock. I think it got up to $488. Recently and recently within the last few months, traded down to $220. We've moved up to $360 a couple times. We're sitting here. It's a trillion-dollar market cap company on the screws.

The fundamentals for their car business are declining in a word, in my opinion. But I think that's fair. People will say, you know what, guy? It's a lost leader. You're missing the big picture. This should be valued on something else. So just sort of walk me through your views on the company. You know it better than I do at this point. Look, the car business is declining and is getting to the point now, without the ZEV credits, it's unprofitable again. And competition is only heating up.

You know, today, Xiaomi in China introduced their SUV at a price below the Model Y in China. And so the car business is what it's always been, a really capital-intensive, rough business, right? You get a lead for a little while. And so, of course,

the bulls have transitioned as they want to do with with Elon's companies to the next shiny objects the next two shiny objects are basically autonomous driving software whether in robo taxis or in everybody's car and then Optimus robots and so we're now with the Austin rollout we're kind of at the point where literally where the rubber hits the road on robo taxis because we're going to see what the software is doing

Meanwhile, you know, very quietly, VW just announced in conjunction with Mobileye that they're going to be selling VW vans with level four software next year and testing it in the U.S. and L.A. in 26. And so we just keep saying by the time Tesla figures this out and does it without LiDAR, which everybody else uses, by the time they get this all sorted out,

autonomous software will be standard equipment in every car in the world, basically, just like cruise control and anti-lock braking and all the rest of that stuff. You mean they're not going to sell it for $10,000 per car? And they're not really selling it for $10,000 a whole lot now. I think their market share of their own drivers is single digits. It's less than 5%. Single digits, yeah. And so it's going to be standard equipment that BMW is going to have, Mercedes is going to have, Toyota is going to have, Xiaomi is going to have, BYD is going to have. Everybody is going to have it.

So then we're going to transform ourselves into robots and asteroid mining or whatever will be the next shiny thing. But the problem is that these businesses are increasingly further and further out. I looked the other day, and the 2029 consensus earnings estimate for Tesla on Bloomberg is where the 2020 –

five estimate this year was two years ago. So so let me just put that in perspective. So the the end plus four estimate today is at or below where the end plus two estimate was two years ago in early 2023 when the stock was 100 bucks. Yeah. So it just tells you that even with all the future stuff that people are excited about, the street has brought down estimates in the out years dramatically. And so

The question is, what are you paying for? If Volkswagen is going to have a level four system, you know, Volkswagen trades half of revenues. And so, and I'm pretty convinced that by the time we get to robots,

you know, it's going to be the same thing in 2035, right? Every Korean company, Chinese company, Japanese consumer liquor, everybody's going to have one. So visionary, but by the time they get there, commoditized. Yeah, look at Mars. I mean, you know, Mars, Starship hasn't gotten into Earth orbit yet. It's blown up four times this year. Really quickly, though, on that, your point is a great one. 2022, Tesla earned $4.07. This year expected to do $0.

and then in 2027, 373. I mean, just think about that. Just on the full self-driving and the autonomy, they're very different things. They don't even have, they have supervised full self-driving right now. I was in San Francisco yesterday. You see Waymo's and Zooks. Zooks is a guy, you know Zooks.

- I love Amazon. - Amazon. - Love Zoox. They're all over the place. - Yeah. - Okay. And you say to yourself, okay, do these models scale? Does Waymo scale? Does Zoox scale? Does Waven, you know, like there's a scenario where it's just not a profitable business for 10 years and people forget that they had to subsidize

all these deliveries, right? Uber was losing money on every ride for years and Lyft, that sort of thing. So the idea, the guy used the term loss leader. If you have a declining EV business that's literally as bad as it's ever been, how do you finance this? If the credits are going away, if the credits were

Consumers are going away. And the cost models per mile are laughably low. If you look at where the big bulls in Tesla have, you know, they say, oh, their costs are going to be $0.30 a mile, $0.20 a mile, $0.40 a mile. Commercial insurance, whether you self-insure or not, you still...

have damage, right? Commercial insurance alone is 30 to 40 cents a mile. And then you get to maintenance, cleaning. Yeah. I mean, and then the redundancy, having the remote people to make sure nothing bad happens. So the costs are going to be well above a dollar a mile, just as supply is coming on, on demand.

All right, but do you think, and I promise we'll get out of here, do you think there's going to be a moment like we had, I want to say 2022 into 2023, where everybody just gave up on the story? You know, the stock was trading, where was it, like $150 or something? It went down 80%. Yeah, late 23. Not quite, it went down 70%. It went from 400 to 100. 400 something to 100. From its highs in 21 to its lows in 23. And so do you think there's a moment like that?

I think this is a highly volatile stock. It's also totally driven on the margin by retail. So it's like our Bitcoin store, our Bitcoin treasury stock. This is if you look at the share turnover, it's multiples of other companies of similar size like Nvidia and Apple.

And so this is a trading sardine. And yeah, when people get concerned and lose money, it will trade at a lot lower valuation. But when they're excited about the future, it trades at a higher value. Well, to get people excited about the future, he's going to have to buy XAI and that's going to happen. Well, there are some other problems like that. All right. Mr. Chanos, Jim Chanos, great friend of ours, great friend of the pod. We really appreciate you coming back here. We hope to do it again very soon. My pleasure. Thanks for having me.