In bull markets, you put a premium on promises, and in bear markets, you put a discount on reality. And we're clearly in the former right now. Do we get to the latter? I don't know. There are a handful of companies that are gatekeepers and price makers in this boom. Nvidia's one of them. Not one company in the hardware space should trade at higher valuations than Nvidia. That's one of the things we hold dear.
Particularly some of the more specious data center companies that are dependent on getting Nvidia chips. No one that is dependent upon Nvidia to exist should trade at a higher valuation than Nvidia itself. And yet many, many companies do.
All right, welcome to the Risk Reversal podcast. Coming in hot here, guys.
Well, I love this room, and I love the fact that Jim Chanos is here. What do the kids say?
IRL, in real life. All right, Jim is a... Well, you're the founder and president of Chanos & Co. You've been very generous with your time over the years. We've been doing this what, how many years, guys?
I think we're into our sixth year, if I'm not mistaken.
Jim, you are a crowd favorite. We appreciate you being here.
Oh, thank you. Thank you for having me on this 100-degree day with air quality index and gridlock alert.
But it's going to break, like many things. And with that segue, is there anything breaking right now? I mean, there are a lot of strange things happening in the world, Jim. So, I know that's a 30,000-foot question. We'll get more granular, but you know, are things sort of breaking in our midst?
I mean, the S&P is basically at all-time highs, right? Within a stone's throw of all-time highs. And yet under the surface, and we may have mentioned this the last time I was on, but under the surface, there's a lot going on. A lot of things are acting poorly, and a lot of things have just gone parabolic. It's a really interesting time for stock dispersion, for long-short guys, and for us this has been a lot of alpha on the short side since I last saw you. So, I mean, things that aren't loved by the crowd have basically been shunned.
And just to take a step back for a second, because oftentimes in the press when you are referred to as a famed short seller, right? And so, I just want to take one step back and just describe a little bit when you say we're short this, we're short of that. It's not like you are a short fund, you have a model portfolio. Just explain a little bit for the audience.
We put together a model portfolio for clients. We're no longer running third-party money directly. We're just running our own money and advising institutional clients. So, but we do have a model portfolio. And that is structured with 40 ideas, but it's designed to be hedged, and we tell our clients how best to hedge it, whether through S&P or more custom hedging. And we really don't want to take a view on the market overall. We want to take a view on our 40 stocks versus the market.
And deep fundamental work is going on there. Let's just kind of go back to the market for one second because you said a stone's throw away from all-time highs in the S&P. Guy and I seem to talk about that every day. And there are parts of the market away from, let's say, you know, semis and storage and memory, that sort of thing, that have been acting very well.
Yeah, yeah, yeah, yeah, yeah.
So, when you think about just the dispersion that's going on. Today's a great example. You have the SOX down 3%. We're recording this on Wednesday afternoon. You have that DRAM ETF, I think at one point it was down 10%. Okay, so that whole kind of infrastructure is getting absolutely killed, but the hyperscalers are all up three, three and a half percent. They almost feel defensive at this point after they've all sold off, let's say, at least 15% or so. How do you square that a little bit? Because we're going to go deep on hyperscalers versus the infrastructure that goes into it and the like, but you know, this is one of the weirdest days that I've seen in tech in a very long time. And the S&P is flat on the day because of this.
Right. Yeah. And that's what I'm talking about. And so my hedges are probably broadly flat on the day. And that's fine. But the rotation that's happening under the surface is tremendous. I mean, I know others have measured it, but the willingness of these sectors to go in and out of favor and large-cap stocks that are well-followed to move 5 to 10% a day on no real news other than flows and sentiment is, I think, remarkable, but I also think it's highly speculative.
Right. Both up and down. Yeah, this has been going on now for a couple months where over the course of a week, you'll see this happen two or three times.
To the upside and the downside.
And you have a volatility index that's 17 maybe. So you have single-stock volatility, but the broader market volatility is not there. Is that just inevitable?
Yeah, I don't know, but I mean, all the signs that we see, again, and they've been building for a year and a half now, of retail participation, retail speculation. And now finally, we've talked about this before, the final kind of thing that hadn't shown up for this cycle, at least since '21, supply has now started. And now we're starting to see record issuance both in IPOs and secondaries and insider selling. And so you have now a third leg to the stool of generally rich valuations, retail speculation, and now heavy issuance. Generally, that's not been a great sign for the market as a whole.
So far, it's been okay. This happened in 2021, first half of 2021, we saw these characteristics where you had all kinds of issuance, you had a lot of disparity in returns. The general market went up, I think in 2021 the peak was on December 31. But shorts began to work in mid-year after GameStop, and that's what 2026 feels like right now in our numbers and in our ideas that we share with clients. It's just again, there's been a lot of volatility, most of it to the downside.
And you know, this reminds me, Guy, you saw The Wire, right? Or are you more of a Sopranos guy back then? This was the days of the...
Love The Wire. Bunny is one of the characters.
All right. Well, listen, there was a quote from Slim Charles. He's saying to Cutty — Cutty just got out of jail — and he basically says to Slim Charles, he says, 'Man, the game has changed.' And Slim Charles says, 'No, no, the game is the same, it's just got more fierce,' right? And so, when you think about 2021 — that's pretty good, right? I didn't come up with it. But, when you think about 2021, and you just think it was like death by a thousand cuts, and that was SPACs, it was just a bunch of that was coming to the market. And we also saw a bunch of stuff that people were not particularly interested in 2019 prior to COVID that just went parabolic. You remember, like a Snap went from like five to 80, and we saw it in PayPal, and the list goes on and on. When you think about issuance, right? So, SpaceX does a $75 billion IPO, and then they follow on with $25 billion in debt almost immediately. This is a week after, you know, Google, and I know you've had a lot to say about that, raised what was that number? 80 billion, and then it was upsized to 85, right? And then we know that Meta, and the list goes on and on. So, help us think about the combination of IPOs, secondaries, and then also debt, because this is the sort of thing where a lot of these companies who are raising debt, not the hyperscalers, but some of the smaller like the neo-clouds and Oracle for instance, and I go, they're like near junk where they're raising, and to me that's something that's very different given how important they are to the narrative or the sentiment about this sort of AI infrastructure building.
Yeah, there's a lot more debt that's being used than people think. A lot of it's off-balance-sheet, as you guys know. Which makes it interesting, and the hyperscalers themselves are issuing now record amounts of equity and debt. And so it's a torrent of credit needs in this very hot sector, the AI buildout, with very uncertain returns, and we'll probably talk about that a little bit later, but that's what's so interesting in that, you know, in 2005 and 2006, it was people taking out mortgages to buy homes that were overpriced. But you know, when all was said and done, the homes actually held their value. They went down for a couple of years and people that were over-levered or didn't have the income to support the mortgage defaulted, but the home prices pretty much kind of held up. The assets held up. This is much different. We are embarking on hundreds of billions of dollars in CapEx and projects that may be completely uneconomic from day one. And I'm not talking about the models. I'm talking about the physical structures, the data centers and whatever, that you just can't get the numbers to pencil out on in any really meaningful way, and yet more and more capital is going to that asset class with lower and lower returns, and that's going to be, I think, a really interesting thing to play out.
All right, shelve that for a second because then we'll come back. The credit markets show no sign whatsoever of being concerned at all. Now maybe, and you know this better than I do, but credit doesn't care until it does, and when it does it happens fast. Rising interest rate environment is not — we are not set up for interest rates to go higher in this country, whether it's the market or the economy. So, thoughts on that.
There's too many projects that get penciled out at mid-single-digit pre-tax rates of return. Whether it's office buildings, whether it's data centers, whether it's storage centers, whatever. Everybody is doing deals at five and six and seven caps and with the 10-year at four and a half. And so, you know, you just apply a lot of leverage and maybe some crazy mezzanine financing and you tell your equity investors, 'I'm going to get you 15%,' you know, and that's how it's done. Rates going to six or seven just blows that all up. Blows up asset class after asset class. And I think that's a risk that is not being appreciated beyond just to talk about data centers or what have you. I mean, you know, SL Green here in New York City, where we're sitting, trades at a five cap, you know, for New York City office buildings. SL Green's stock's gone nowhere in 25 years. It's been a terrible investment. So, their office buildings have been a terrible investment, and we have no position in SL Green, but I'm just saying to me it's a bellwether of the willingness of people to put really, really low cap rates on assets, and that applies to equities as well, but you move interest rates up to six or seven percent and the world falls apart.
Well, it's interesting. I mean, they can put the cap rates wherever they want. The market doesn't have to participate in those numbers. They can say this is foolish, but they're going down that road. So, let me ask this question. You said at 6% things fall apart, but the market will sniff that out long before 6%.
But it will sniff that out long before.
So, where is that level? Like, where's that sort of line of demarcation?
You have a thought, though.
I mean, I think that if we saw acceleration toward 5% with feelings that it could go higher, I think spreads would begin to widen out. And that's what you need to see. You referred to it earlier. And spreads in the lowest end of junk are starting to widen out, by the way, on triple Cs. But in the triple-B, double-B area, they're not. And I think that you would need to see rates moving toward 5% with some vigor where suddenly credit investors would begin to rethink, you know, maybe I don't need to buy this office building at a four-and-a-half percent cap rate.
So, I've heard you say that what's going on right now is like a redux of what we've seen in the late '90s, right? And so...
It's much worse. Okay, I don't want to get to why that is, but like can you draw a line, and I think you did just a little bit, between the internet infrastructure build and then as we get to the financial crisis? Because, you know, one of the things that got my antennas up, like this was I want to say going back six months or something like that, where Meta announces this Louisiana data center and Blue Owl and SPV and KKR. And it was like, and I was like, I had a hard time as just a dumb equities and options guy like getting my arms around that. And then I started looking at some of the terms, you know, Meta was only going to own 20% of it and they had a three-year out. And you know, all this sort of... And I say to myself, how durable are these long-term contracts if you're like one of the biggest spenders in the area, but you don't want to actually have this debt on your balance sheet?
No one seems to suddenly want to have the hard assets. And we can get into that a little later because there's some developments this week about that.
Yeah, it's incredible. So, in the dot-com buildout, there were only two business models that failed from the get-go, right? And those were the CLECs, which were the competitive local exchange carriers, which were in effect putting a phone company in every building in Manhattan. Everyone was going to have their own phone exchange. And the Lucents and Nortels, whatever, spent lavishly to invest in them so they would buy their equipment. The other one was the fiber, which ultimately worked but took so long to pay out that the fiber companies pretty much all defaulted. Those two industries as a whole, and we went back and looked last year in our files, those two industries spent a total of a hundred billion dollars over five years, from '98 to '02. Right? So, while they were raising lots of money, it was basically 20 billion a year for both industries.
What's that in today's dollars? I mean, no, but...
Well, that's what I'm saying is it...
In comparison to what individual companies are raising in this cycle on data centers and AI buildout that may or may not be profitable. So, most of the spending that occurred in the dot-com era was by enterprises. It was by Bank of America, it was by Merrill Lynch, it was by GE and Coca-Cola to basically network their computers together. And some of it was to replace PCs because of worries about Y2K. By and large, those companies were profitable and remained profitable through the cycle. What they did was they cut back their orders. And that's what I keep pointing out to people. You know, if Coca-Cola needed 10,000 routers and it ordered from Cisco in 2000, by 2001 they cut it back to 2,000 routers, right? And order books just collapsed and earnings collapsed at the same time. But by and large the entities that were spending the money, the telcos, the enterprises, stayed profitable through that period.
In this go-around, right now the hyperscalers are the profitable companies that are doing the spending. So you have that bedrock, but almost everybody else in the ecosystem is not necessarily profitable right now and raising lots of VC money to build data centers or build out an AI model or what have you. And so the numbers today dwarf what was happening in '99 and 2000 in terms of CapEx and relative to the size of the economy.
Moses put the commandments in stone, right? Like a chisel probably, right?
Yeah, 10. Well, with a lot of words. How etched in stone — like I talk about the sanctity of CapEx. People seem to think it's sort of etched in stone, it's going to happen regardless of the environment we find ourselves in. Do you believe that to be the case?
No, and history says that's not the case.
So why are people so willing now to say...
Because marginal returns on that CapEx are so high right now.
Yeah, that's the reason. It's simple. Right now if you dig a hole in the ground and you get a client, you can claim I'm going to be able to rent out capacity for X and that's a 20% return on my capital, 25% return on my capital. The bad news is I'm only going to pay you that for a year or two and then we'll see how things go, but the asset that you're building is a 20-year asset. So people are making decisions on long-term projects based on spot prices. And that's a terrifying thing. We saw it in the shale business. We've seen it in lots of businesses. You know, so railroads in the 19th century, rail freight rates were enormous and there was tremendous incentive to build double and triple capacity, you know, from New York to Chicago or Chicago to St. Louis. And then, of course, when demand fell back a little, freight rates collapsed and railroads went bankrupt. And so matching duration is a really important thing. It even happened in the global financial crisis on the other side of the balance sheet where people were financing the long-term unsaleable part of their derivatives book in the repo market, right? And suddenly they realized there was a mismatch and people who'd lent them money in the repo market wanted their money back and the asset was still unsaleable. So, that's one of the biggest sort of financial crimes I'm seeing right now in terms of finance 101 is that people are committing long-term capital projects based on near-term spot pricing. And you know, given where AI models are, how they leapfrog each other, what demand may or may not be in two years, that's a big bet.
The best example of that is actually DRAM, right? And so this is obviously Micron. And they've owned this market and so now all of a sudden, you know, they figured out that you need high-bandwidth memory to attach to your high-end GPUs, right? To train the models, all that stuff, right? So when you think about Micron, it's a great example where after their last earnings report, I remember like some of the big reporters and whoever, you know, big bulls were saying these are LTAs. They were talking about the order book. They were talking about RPOs and LTAs, and you know, Guy used the word sanctity. I mean, like we've seen this before. Micron's a company that had negative gross margins three years ago, right? And so, you know, how much of this future expectation for revenues based on an 80% gross margin are you willing to assign to a company that has gone from, let's say, what was it, like 100 bucks like 18 months ago and it topped out at 1250 just recently and now it's trading at 950? I mean, that just seems egregious to me. And the other point that, you know, I'd love to get your take on here is that here's a company when Nvidia over the last three years has basically been doubling their revenues, right? And if everyone knew that Blackwell and Vera Rubin and all this stuff was going to need increasingly expensive memory to do all this, why is it that Micron was not bringing on capacity? You know what I mean? Like, what did they see or not see? What sort of visibility they had? And so, I guess, you know, at this point, why would you believe that those LTAs, you know what I mean, that huge order book that they are literally being awarded market cap right now for, right, that they are going to materialize over the next few years?
I mean, history says you should be very cautious about that view. I would turn the argument around from the other side of the telescope and say, 'Okay, there are a handful of companies that are gatekeepers and price makers in this boom. Nvidia's one of them. Not one company in the hardware space should trade at higher valuations than Nvidia. That's one of the things we hold dear.'
Most of them are. And particularly some of the more specious data center companies, whatever, no one that depends on getting Nvidia chips. No one that is dependent upon Nvidia to exist should trade at a higher valuation than Nvidia itself. And yet many, many companies do. And so again, it's even within the AI space, there's just insane dispersion between the way people are buying stocks and valuing them and not stepping back and saying, 'All right, let me try to look at this ecosystem. What's sustainable? What's not? What's ephemeral? What's not? What's based on spot pricing, not long-term contract pricing? And should I be, you know, putting up the 45th data center in Abilene, Texas?'
All right. So, with that premise that none of those companies should be trading at a premium to Nvidia, which that's fair.
