We are covering the WSJ Heard on The Street Event. Below are some (very informal) notes from Jim Chanos, who just wrapped up his presentation. For more coverage including the most hated man in Argentina, Paul Singer, check back later and/or follow us on twitter.
It is the 28th anniversary of the hedge fund and for the past few years, especially the last twelve months, we have seen speculative behavior the like of which we have not seen since the 1990’s.
Jim Chanos’ concerns about China
What concerns Chanos most about China is not only the flawed model, but that the economy is being driven by excess credit. SOE was 100 percent of GDP and is now at 200 percent, growing about 40 percent a year. Now we are beginning to see things that we saw in 2005 and 2006, and the Chinese learned nothing from our experience.
China is much too focused on GDP. Global capex in the mining sector went up 25 percent CAGR per year, and the whole boom in Australia and Brazil peaked in 2012.
We are seeing dot com 2.0 and massive speculation in companies with very limited floats, and speculation is starting to grow in the market.
Jim Chanos calls it the “celebrity market”. It is increasingly about who is buying a stock and not why; you did not see that in 2009 at the bottom of the market. This is not an exact measurement but it is a barometer that the market is too high.
Jim Chanos on Tesla
Jim Chanos provides a dislcaimer that any stock he mentions the audience should assume he’s short,, but cannot confirm this for certain. Tesla Motors Inc (NASDAQ:TSLA) has gone beyond interesting innovation to a cult stock. These stocks are now based on wild predictions.
He notes that his analyst realized that a sell side analyst had only $5 out of the $200 price target based on current earnings. However, based on valuation it seems investors are just chasing momentum lately.
Corporate profit margins are at all-time highs. Gratham points out that we are so far away from reversion to the mean that if they don’t revert we should have valid questions about capitalism—especially some corporations from MLPs.
90 percent of assets are short—almost the opposite of a mutual fund, which basically has to be long. Chanos’ overweight (short) in China, but in the U.S. and Europe is more eclectic. Some industries are particularly vulnerable; as we have discussed PCs, as well as energy are seeing major changes.
Jim Chanos says that increasingly inflation is driven by asset prices and not labor wages. This will probably continue in the future.
John Bader of Halcyon Agri Corporation Ltd (SGX:5VJ) is also on the panel, and he disagrees, believing that inflation could “potentially get ugly” in the long-term. John Bader is shorting REIT indices and other similar instruments.
Chanos believes that deflation is not a risk (even if he is right about China). He also agrees that there is a lot on both the long and short side in the shale segment. Most companies have moved long natural gas contracts and short on many leveraged companies needing to sell fields now. BHP Billiton Limited (ADR) (NYSE:BHP) (ASX:BHP) one year ago was paying a huge amount per acreage and it has just been a disaster.
Bader says he is confused and does not understand Japan. He thinks short JGBs is short trade, but is an accident waiting to happen. Even if you are a country, you cannot operate like this. It pays to be fearful when others are greedy—but now people are too greedy. Richard Robb on the panel disagrees, and notes that the Japanese are ‘obedient’ and will buy JGBs if needed. Halycon predicts that there will be a big bust in the next ten years. Chanos closes by stating that he only pisses off one Asian country at a time.