Jim Chanos (Trades, Portfolio), the most famous dedicated short-seller, and James Grant, permabear of the Grant Interest Rate Observer, recently got on the stage together and talked about frauds and risks.
While fraud and risk are not really most people's favorite subject, it is an absolute delight to hear these two, who are pretty much the foremost experts in the field, talk about it. You can watch the entire talk below.Â
The talk is rather long, but here are the key takeaways.Â
Bitcoin
Grant talked briefly about bitcoin after being prodded by someone in the audience. It is not a favored subject here, so I'll keep it short. Grant called bitcoin the "reinvention of the wheel we didn't need."Â Grant thinks gold already functions perfectly fine and it doesn't need to be plugged in.
Fraud
Both agreed fraud is still very much present in the corporate world. Someone in the audience said that there isn't as much going on anymore, but Chanos told him: "Just wait."Â The fraud cycle follows the financial cycle. As we are currently in a goldilocks period, as Dalio famously called it, there isn't as much coming to the forefront, although Chanos mentionrf Valeant Pharmaceuticals (VRX) and the private Theranos. Because we are in a bull market, a lot of stuff is masked, but Chanos said he expects a lot of things to come out in the unicorn space -- startups financed by venture capitalists with values exceeding $1 billion.
How to recognize fraud
Chanos mentioned that there is one "SLAM BAM problem indicator" that always seems to precede problems: massive executive departures. He means 20 to 30 executives per year leaving a company.
There are two companies that come to mind where this happened: Enron and Valeant. If you see a company like that, he thinks you should run. He goes on to indicate Tesla (TSLA, Financial) as a current example. Chanos has two to three pages with lines of insiders walking. On other occasions Chanos has indicated he thinks Musk may have misled investors, and they have held a short position for quite some time.
China
Grant called China the most extraordinary living laboratory of credit formation and credit abuse. Both had a very negative opinion of China. Concerning China, nobody knows anything. Grant qualified his comments, saying that they were based on the premise there are data and they are credible. China created credit at twice the growth of its economic growth. Bank credit compared to GDP is far greater than anyone else’s. If there are no consequences, the world has truly been remade.
Chanos is also a known China bear and had some scary comments to add to Grant's. He mentioned non-chinese investors have no recourse in the Chinese legal system. Even if people are caught red handed defrauding investors, there is no recourse. Alipay was removed from Alibaba (BABA) without compensation and put into the private holding company of its Chinese owners. That was that and thank you very much.
Cliff's notes:
- Bitcoin not interesting.
- Private Unicorn universe is full of fraud.
- Short Tesla.
- Short China.
Jim Chanos and James Grant, "Fraud" from NYHS on Vimeo.
DIsclosures: The author is short the ISHARES CHINA LARGE CAP UCITS ETF and long Valeant.
