On this episode of the Danny Moses Show, how the ongoing war in Iran is exacerbating many of the problems the economy was already dealing with and the new challenges the economy faces as a result of the conflict. These are real issues that affect your daily life. And my guest this week is Jim Chanos, the famous short seller known for uncovering some of the largest corporate frauds in financial history. We will hear what he's focused on right now, plus my Kowi picks of the week.
Over 30 years of beating Wall Street, predicting the famous Big Short, now he's here for you. This is the Danny Moses Show.
Since the launch of the Danny Moses Show back in January, I've spoken about several topics that I believe are both important to understand and will be front and center in the economy both now and in the future. I've addressed the growing federal debt, the rise in energy costs related to AI data center development, the fragility of the K-shaped economy, and how reliant the markets are on a select group of stocks and consumers, as well as the role that private credit has played in the system. And on last week's episode, as the war was just beginning, I spoke about how a sustained rise in the price of oil could be enough to tip the scales and negatively impact both the markets and the economy. And this was before the February payroll report that was much worse than expected.
Even before the war broke out in the Middle East, we had already been dealing with several issues: concerns about job losses related to AI adoption, inflation readings that were higher than expected, defaults in various pockets within credit prompting some investors to ask for their money back within the private credit sector, and how so many consumers were struggling to make ends meet. Well, if the war in Iran and the subsequent move in oil prices is showing us one thing, it is how fragile everything actually is. While oil is well off its highs, damage has been done and continues to be done as gasoline prices, including diesel, have risen substantially. This week, the national average rose to $3.59 for a gallon of regular, up 65 cents in a month. Diesel is up more than a dollar to $4.86.
According to AAA, even with the release of global oil reserves over twice the size of the release in 2022 related to the Russia-Ukraine war, oil prices have held firm. It's hard to see prices returning to levels we saw before the war began. And we are beginning to see supply chain issues emerge outside the energy sector as well. We are also seeing yields on longer-term Treasuries actually moving higher as inflation begins to be priced into the system even though U.S. Treasuries are viewed as a safe haven asset. The Federal Reserve meets next week and while the market expects them to leave rates unchanged, we might begin to hear the word stagflation, which is a period of higher inflation coupled with a decrease in economic activity. The last time we saw stagflation was in the 1970s, brought on by higher oil prices and the cost to fund the Vietnam War.
Lastly, people often ask what could be the cause for recession here in the U.S. In addition to rising oil prices, I believe it's actually a sell-off in the stock market that could begin to unwind the wealth effect that has led to consumers spending more. If the higher-end consumer pulls back on spending even a touch, I think it will be felt across the entire economy. Just look at this ETF, which represents the major airlines. This is a sector that had benefited from lower and stable oil prices and has been largely supported by the higher-end consumer filling seats in the front of the plane.
Let me also add that while I'm well aware we are in the midterm election year and that the White House will pull out all the stops to try and help the consumer and the economy, but there's only so much they can do and I think some of that kind of relief is already being priced into the markets. We'll continue to watch out for the issues that impact you and keep following Scripps News for the latest reporting on the situation in the Middle East. When we come back, I sit down with legendary investor and short seller Jim Chanos.
Jim, it's incredible timing to have you on the show this week and whether you know it or not, you were always a mentor to me and it's an honor to have you on the show.
Well, thank you for having me. It's great to be on the show.
So, in addition to playing yourself in the Wall Street movie sequel, Money Never Sleeps, and in a few episodes of Billions on Showtime, your day job is searching out and finding opportunities on the short side where most investors aren't looking. Talk about Chanos & Co. if you would just a little bit.
Well, Chanos & Co. has been around now for 40 years, a little bit over 40 years, since 1985. And we've been running portfolios and giving advice to institutional clients, high net worth individuals, family offices on how to hedge portfolios, and we do that through the use of short sales in companies that we think are dramatically overvalued relative to the market. And we're market agnostic, which is something a lot of people don't realize. We're pretty much always hedged, long the market, short our stocks, and we're just looking for things that have been overhyped, fraudulent accounting, or selling a dollar bill for $2. So that's, I'd like to joke that I'm in the insurance business, basically.
It's great. All right. So before we get into stock-specific stuff, several weeks ago on this show I spoke about the role of short selling in the markets and I want to get your thoughts here. Another good thing about short sellers is they can dig deep and uncover some issues that were either unknown or misinterpreted and bring them to light. For better or for worse, we have entered a period of deregulation in the financial sector. And with that may come less oversight and enforcement from both the SEC and the DOJ. It is more important than ever that investors do as much as they can to both inform and protect themselves, including hearing a bearish point of view.
So, don't believe everything you've heard about short sellers. They play detective and can sometimes bring issues to light. They provide liquidity to the markets and can act as a reality check and they even play a role in the bond markets. So, Jim, give me your thoughts on that. I assume you agree with a lot of that, but anything you want to add?
I would agree with that. I mean, short sellers along with the financial journalists are actually the only actors in the marketplace that are incentivized to ferret out fraud. So I think it's one of the biggest asymmetries about short selling versus other types of investing in that there is a real societal impact for many things that short sellers do. Not everything, but certainly finding and bringing to light companies that are crossing the line when it comes to nefarious activities is one thing, and this is one thing the SEC has acknowledged down through the years in terms of its encouragement of fundamental short selling. But again, I think that the way we look at it is as a hedge to traditional long activities and one which can reduce risk without necessarily reducing returns.
Well, given the construct in D.C. and what we're seeing actually or not seeing from regulators like the SEC as it relates to investigations and enforcement, it's more important than ever that investors arm themselves with as much information as they can. Many times though, investors and regulators for that matter don't want to know what might be lurking on a balance sheet or missing from an income statement. So I think like me, you want to actually help investors by arming them with information especially when you think management is up to no good. So talk to that because many times it's the stock that actually trades lower that makes people start to look or people just don't want to know.
Well, so I've called this the golden age of fraud, Danny, as you know, and one of the things that I teach in my course about the history of financial fraud is that the fraud cycle follows the financial cycle with a lag. So, the longer a financial boom goes on, the more fraudulent activity you get, but it's uncovered after the financial cycle rolls over. And we saw that in the dot-com era when Enron and WorldCom and Tyco and others came to the surface. We saw it to a lesser extent after the GFC because a lot of it was happening in the mortgage market. But I suspect this cycle will be the granddaddy of them all when it comes to corporate bad behavior.
And I think that it is important that investors, you know, pay attention and understand that an awful lot of corporate activity is in the gray area. But it can really hurt your investment portfolio and your pocketbook if you're caught up in these, particularly if you're not, as a lot of retail investors are not, well diversified. You know, you buy one stock because it's a hot stock. You hear about it on social media or from a friend at the country club. And it turns out it's a stock promotion and you end up losing everything. So it's really important to get all points of view, as you pointed out, on a stock from bulls as well as bears.
For sure. A few weeks ago, my guest on the show was best-selling author Bethany McLean, known for the book Smartest Guys in the Room about the downfall of Enron, which you just mentioned, and she credits you with turning her on to the Enron story. Talk about the evolution of your Enron trade, and what was the catalyst that finally revealed what you had already known.
