Taps Coogan – June 23th, 2020
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Legendary short seller and founder of Kynikos Associates, Jim Chanos, recently spoke with Bloomberg about speculative market valuations, his favorite shorts, and his continued bearish outlook on Chinese equity markets. With regards to China, he warns that the over-indebtedness of Chinese companies and state-owned enterprises has led to their continued under-performance relative to global markets.
He also warns that the ‘fraud cycle’ follows the economic cycle with a lag, meaning that investors should expect that the current economic turmoil will reveal a fresh wave of corporate fraud in the coming months and years.
(The interview has some audio problems)
Some experts from Jim Chanos:
“…Beginning in November right on through February (2019), the market had taken a really speculative leg up, the likes of which we hadn’t seen, dare I say, since late 1999 or the first couple months of 2000. And what made it different was that it appeared that for the first time in this ten year bull market, retail investors began speculating more aggressively in individual names. People have pointed to the Robinhood effect and zero commissions and I know that there is a debate about that, but it was unquestionable in our minds… that the speculative fever kicked up a few notches in the fourth quarter of 2019 and the first couple months of 2020. The Covid selloff in March really punctured that for all of about three weeks and it has come back with vengeance in many cases and in many cases stocks are trading meaningfully above where they were in January and February… I think that the massive central bank liquidity injections have certainly emboldened investors to feel that the Fed has their back…”
“What is constant about China is the debt situation. It just keeps going up and this has put a damper on Chinese equity returns over the last ten years… In terms of the large state-owned enterprises, they are just not very economic and that goes for the banks. So, China still has this debt situation that it has to grapple with. Residential real-estate is still a massive part of the economy. Basically it’s the same-old same-old and the problem for investors is that the same-old same-old keeps returning very mundane returns to equity holders. It has just not been, in aggregate, a great place for western equity investors to place their money. No return in the equity market in ten years, as other markets have doubled and tripled, is kind-of saying something. The other area that we are worried about is Macau. We think that the US operators in Macau have an additional risk which is not priced in which is the fact that their concession come up for negotiation next year…”
On the “Fraud Cycle”:
“The fraud cycle follows the business and financial cycle with a lag. So, typically as economic expansions go on and bull markets go on, people’s sense of disbelief drops and they begin to believe things that are too good to be true… and companies with questionable business models can get funded… It’s not until the markets generally turn down that people start to get a lot more conservative with their money and begin to question business models that they here-to for had embraced. So, that’s why you will often see the waves of fraud being exposed after the cycle turns… People don’t realize that they are being defrauded until they want their money back. So, I think that that wave of realization is ahead of us not behind us…”
There is much more to the interview, so enjoy it above.
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