Chanos & Company President Jim Chanos Talks Bull Market, Carvana and Michael Saylor
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Bloomberg Audio Studios. Podcasts, radio, news. Really appreciate your joining us today, Jim, on set here at Bloomberg World Headquarters. Kayleigh and Joe were talking, of course, about Scott Besson testifying before the House Ways and Means Committee. And, of course, this comes on the heels of

Two days of China-U.S. trade talks in which President Trump has declared a done deal. He talks about the U.S. imposing 55 percent tariffs on China and China imposing 10 percent on us. You are a longtime China bearer. You've been monitoring the economy's transition from export investment-led to one that's consumption-led. You also teach at Yale Management School of Business.

What kind of grade would you give this trade deal, this so-called trade deal? I'd give it a temporary incomplete so far because we don't have all the details yet. It doesn't seem to be a whole lot different from where we were, you know, not too long ago. So I think we need to see, as always in these things, the devil's in the details. And so we'll have to see what goes on.

But as I mentioned before we went on the air, it does appear that China ended up holding some cards after all. Yeah, you're referring, of course, to rare earths and magnets. And it turns out that China does have a lot of leverage over that in terms of whether it allows licenses for export and how quickly it allows shipments. And this is something that industry had pressed President Trump on. Is this going to be a cudgel that Beijing continues to hold over the U.S.?

I mean, obviously we're going to try to diversify and increase our sources of strategic metals and rare earths. I think the administration's been clear about that. But the fact of the matter is, Scarlett, I don't think the market ever really believed that the most onerous of tariffs was ever going to go in. I mean, even though the market was down...

20% at one point at its worst day to day, and then got a daily close 12% in April. Earnings estimates for the S&P never really dropped that much. They flattened out.

But they didn't collapse. And so the market has been kind of looking through all this for a while now. Yeah, well, one stock that did move a lot, of course, is Tesla. And as a longtime skeptic of Tesla, I'm curious to get your take on the very public breakup between Elon Musk and President Trump. Musk is now saying that he has some regrets over his comments, and he also says that they went too far. Does this drama change Tesla's narrative or prospects in any material way?

Yeah, it was all at the end of the day, big never mind, right? But look, I think that...

Depending on how this all came about, there's all kinds of stories, and who knows? Certainly everyone is going to tell their side of the story. The fact of the matter is it does look like the legislation, with a lot of benefits for EVs and solar, is going to change that dynamic dramatically. And that does have a material effect on Tesla's businesses, both in the auto credits for their customers, $7,500 each,

The so-called ZEV credits, the admissions credits that they sell for cash, that looks like it may be going away. And then a variety of possible IRA credits and certainly solar credits for their solar city subsidiary. So there is a lot for them to lose in the House legislation. It may change with the Senate and with compromise, we'll have to see.

When we get past all the personal stuff and all the craziness from last Thursday, there's some real impact in the legislation. And it doesn't appear that the White House is backing down on that. Right, right. I mean, Elon Musk and his executives over at Tesla have also been promoting videos showing a driverless Tesla on the streets of Austin. And of course, that's a hint that their robo-taxi launch will move forward, I believe, at the end of this month.

Does that remove some of the concern about the legislation that takes away some of those tax credits and tax benefits that Tesla has enjoyed? Well, I mean, I think almost everyone at this point agrees that the company is not being valued for just its auto operations. It would be trading at $30 or $40 a share, not $300 and something. So the two pillars or three pillars that it rests on are autonomous driving,

related robo taxis and then the optimist robot line and so everything has to go right for those valuations to play out. We'll see. I mean, you know, robo taxi yesterday there were images of a robo taxi in Austin but what no one talked about was the trailer car right behind it. So does that mean there's two cars for every robo taxi? And there was a driver in the second car and so

I mean, and the cost model for this. People are using absurdly low numbers for the cost per mile, not understanding the cost for redundancy and safety as well as self-insurance and a lot of other costs that aren't in people who are bullish in their models.

We'll have to see. And as for autonomy, I mean, full level four, level five autonomy, I mean, they've been promising it for 10 years now. They're still at level two, just like everybody else. I maintain by 2030 or so, every car is going to have level four or five autonomy. It's going to be a standard feature, like cruise control is now or anti-lock braking.

So I think at that point, you're then kind of relying on the robots.

Let's talk a little bit about that bullish environment you just mentioned. You've called the post-COVID market euphoria the golden age of fraud. And we've seen the S&P 500 have that gigantic drawdown in April, but it's now right back to within about 2% of its record high. On top of that, you've got a White House that has been shattering norms and continues to do so, and it plays loosey-goosey with laws and rules. How would you characterize the environment now?

Well, I mean, so Wall Street has been a center for this kind of activity in terms of stuff that I think crosses the line, i.e. the golden age of fraud. We now have a bipolar world because Washington, D.C. is also a center for it.

Look, I think that this bull market is going to go until it doesn't. I keep telling people we're going to need to fill every last bull and Wall Street will do it. They took a good shot at it in 2021 with the advent of SPACs and NFTs and meme coins.

And we're going to see that happen again going forward. Issuance is already starting to increase dramatically. We're seeing a big pickup in insider sales, particularly in the companies we cover. So executives are selling to retail investors, which is not a good sign. And the SEC and regulators and others have taken generally a very

to be charitable, laissez-faire approach to the markets where people can say almost anything they want. There's no downside to it. And the use of pro forma metrics, which I've been talking about for years now, just gets worse by the year. So it sounds like, and I want to connect the dots to the White House as well here, because when the president is issuing meme coins and hosting dinners for the meme coins buyers...

There's got to be a spillover effect into the business culture. Does it just give companies that are inclined already a free pass to engage in more questionable behavior? Yeah, except that meme coins aren't securities. At least that's been the ruling so far, right? And stocks and bonds are. And there are rules for saying things about stocks and bonds that don't necessarily apply to crypto.

And so I see that the administration has very wisely stayed within that boundary of embracing crypto and get-rich-quick schemes, for lack of a better term, in crypto. But it's where people cross the line and start making promises about

stocks and bonds that that I'm concerned that's my world and and see just you know lack of lack of oversight there alright let's dive a little bit deeper into your world and you no longer manage outside capital but you do manage your own funds and you advise clients chinos and companies a family office and an advisory and a new idea that you've just disclosed

A new short idea is Carvana, CVNA. The stock is up about 66% so far this year. It's made a round trip back to a four-year high. It's a used auto retailer, which is a pretty straightforward business. Why do you call it a misunderstood story then? So this is a revisit. We were short this stock successfully in 2022 and 2023.

And covered, and now it's back. I joked the other day that investors on the long side look for that 100 bagger. We do too, for companies that are already up 100x. And Carvana is basically up almost 100x from its lows in 2022 and 2023. So it's completely round-tripped back to where it was in 2021. But...

People have perceived it as a secular growth story. It's cyclical. Their revenues dropped year over year in mid-2023 from selling cars down over 30%. Units dropped. They came back. But what really has us going is a couple of things. First is the accounting.

We love bad accounting. And this is a company that is now generating, over the latest 12 months, about 70% of their operating profit is coming from gain on sale of subprime loans. So they're originating subprime loans and selling them immediately for gains.

And this is something that the chairman of the company is very familiar with, Ernie Garcia II. He started with a company called Ugly Duckling in the 90s that got into trouble for its subprime lending. It then became DriveTime, and DriveTime is the parent, the ex-parent of Carvana. So there's a history here.

That amount of income coming from sale of subprime loans is staggering. You should not be putting an enormous multiple on this, 50, 60, 70 times. On top of that, two other things that are kind of new to the story. Number one is the short interest has collapsed significantly.

It was one of the most shorted stocks in 2023. And now the short interest is back to multi-year lows as a percent of outstanding. So the bears, the other bears have given up. And number two, we've seen a dramatic increase in insider selling, something we just talked about.

in May and June in the shares of Carvana. So the last time we saw this type of selling, the stock also was getting ready to go down dramatically. Yeah, so that's another red flag. And of course, we should mention that we are out to Carvana for comment because of all of that.

I want to switch gears a little bit here because you are also blowing up on social media over the last couple of days due to your call to go long Bitcoin and short MSTR strategy. Michael Saylor, the CEO of Strategy, spoke with us yesterday on Bloomberg Crypto. Here's what he told us about your trade.

You know, I don't think he understands what our business model is. We're actually the largest issuer of Bitcoin-backed credit instruments in the world. So last week, we just raised a billion dollars by selling a preferred stock, non-cumulative, called Stride.

That means we basically borrowed money that we never have to pay back, that we pay a dividend on, but we could suspend the dividend if we needed to. So Jim has been thinking that we somehow needed to sell the equity. So at the end of the day, if he's lucky enough to short the stock below one times NAV, we're going to issue the preferreds, buy back the stock and make money for our shareholders. If the stock trades at a weak premium, we're just going to sell the preferreds

And if the stock rallies up, he's going to get liquidated and wiped out. What he still doesn't understand is we're not a holding company or a closed-end trust. We're an operating company. So when we issue – trust can't leverage the Bitcoin. They can't issue preferred shares. They can't issue permanent shares of equity at a premium. We can't.

Jim, your response? Yes, I always love it when management say, well, he just doesn't understand our business. Michael Saylor is a wonderful salesman, but that's what he is. He's a salesman. And what he's selling investors is the concept that you give me your money and I'm just going to go buy Bitcoin. And hopefully the value of my stock trades at a premium to the value of that Bitcoin. And so as long as I can keep doing that, I generate value.

And this is, of course, I called it financial gibberish because on top of that, he also said in your interview, he said the company should not just be valued on the basis of the Bitcoin holdings, but on a multiple of the profits that accrue from when I do this financial alchemy.

And I pointed out on social media, I said, well, that's akin to saying, well, my house that rose in value from $450,000 to $500,000 last year is not worth $500,000. It's worth $1.5 million because it's worth the $500,000 plus a 20 multiple on the $50,000 increase. And of course, that's absurd. But that's the claim he's making.

On top of that, he's basically now saying that, well, I'll sell preferred, not common, to dilute the shareholders and compress the premium.

And let me just interject really importantly here. I'm actually doing what he is advocating, right? I am selling MicroStrategy securities to buy Bitcoin. Let's be clear, it's a hedge trade. I don't know where Bitcoin is going to go. And it doesn't matter to you, actually. Well, it doesn't matter. The premium compressing matters to me. And so...

It's important to understand that in 2024 and 2025, mostly at the end of 2024 and 2025, MicroStrategy has sold $35 billion roughly of securities, $33 billion in common and convertible into common, and $2 billion in preferred most recently. The market for the preferred stock that he's selling is tiny relative to common.

Let's be clear about that. And in his own words that you just played back, he makes a case that you have to be crazy to buy these preferreds, right? He's going to pay you a dividend, maybe.

It's not redeemable. It's perpetual. And if I don't pay the dividends, they're not cumulative. I don't have to pay the back dividends. So who in their right mind institutionally would buy these preferreds? That's my question. Do you think there's always going to be buyers for these preferreds, especially if Bitcoin starts to trend lower or go materially lower? And again, he said, well, if the stock trade's below a 1%.

multiple to MNAV, we call it. Chain, I'll just fly back by comment. I can assure you if it trades below one, I will have covered by short. Is there a catalyst, though, or a certain set of conditions that would drive the premium down to collapse? The catalyst is Michael Saylor. It's exactly he's been selling equity to himself compress the NAV. And I would point out, I posted something just yesterday as well, that for all of this...

The premium to NAV that MicroStrategy has averaged has been right around the levels we are today, about 1.8. We put this trade on and advise clients somewhere between 2.2 and 2.3. But it's traded at one and it's traded as high as three and a half. Where do you think it should be? It should be at one. I mean, I just think...

Because for all the advantages he claims, you have what we call agency risk in finance. You have the fact that he could do something to the detriment of shareholders. And of course, we're not calculating any deferred taxes in our NAV.

which theoretically there would be if he sold Bitcoin. So the other argument that people make is that the average MicroStrategy shareholder is not a tourist. These are diehards who eat downside volatility for breakfast. That's what they say on social media. How long are you prepared to wait for this trade to play out? You have to stop listening to all social media, Scarlett, because if you do a simple calculation of share turnover, how often does MicroStrategy turn its share turnover

share base over it. The last we looked, it was something like four weeks. So the average micro-strategy share trades every four weeks. That's not a long-term investor. This is one of the most actively traded speculation vehicles in the market. So there are other companies that are following micro-strategy's approach, right? The Bitcoin treasury strategy overall. GameStop, DJT, the president's media company.

Does that mean that there are comparable big short opportunities for those specific names as well? Well, you're pointing to another catalyst. So the catalyst is this is a me too trade, right? Other companies can do it. There's nothing proprietary about Michael Saylor's business model, right? He's simply buying Bitcoin, which is a highly liquid asset that trades everywhere.

So, yes, other companies have now looked at this and said, we can do this too, and we can issue equity to become a Bitcoin treasury company. And the more and more supply we're going to see, the less and less premium anybody's going to have. Jim, I'm going to wrap this up and ask you one final question to kind of put everything in perspective. Are the economy and stock market as strong as they seem to appear? You've got a resilient consumer, you've got tame inflation, you've got stellar profits, and you've got stocks near record highs. Yes.

Yeah, I mean, everything looks good. I think that valuations are back up to their high levels. And what we're keeping our eye on, again, is issuance. We're looking at supply. I always keep joking that Wall Street has a printing press, too, and the printing press is starting to gear up. It's whirring away. All right, Jim Chanos, always a pleasure. Thank you so much. President and founder of Chanos & Company.

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