Jim Chanos, Kynikos Associates founder, shares his thoughts on whether the practice of dealing advance information is fraud upon the markets.
Jim Chanos videos embedded below
what’s new is that there’s a group of profit seeking people between traders and investors and the exchanges. that’s what’s new here. but it’s not unknown. i sat at my trading desk this week, we know they’re there. we know they’re extracting a slight tax. we turn our portfolio over slowly, about once a year. for the half a penny or penny we may be losing out on transactions, it’s not material. however, it is there. i think that michael lewis raises the one good point, which is is this disclosed, are people giving up information? about clients that they shouldn’t be giving up? i think that gets to the point of is there fraud upon the market. jim one know they’re there. i’m not sure retail investors knew that until 60 minutes this week. do brokers have obligation to disclose this? that really at the end of the day — and does it chip away at the macro policy story, does it chip away even further with investor confidence? right. i have a different question. it looks like the fbi and others are now going to investigate this. they’ve been investigating for a year. do you think that they should go back — what might look to some retroactively and criminalize the process if in fact you do find people to front-run the system? at the same time, at least within the industry, maybe not publicly, the last five years we’ve all understood this take place. the regulators clearly have. i leave that up to the fbi and justice department. some might say they haven’t criminalized what already is criminal, apropos of today’s article. which is far more important than hft. and i would urge everybody to read it. if you don’t have consistent prosecution on what i believe was wholesale fraud, during the financial crisis, going after this, i think might be seen by some, it’s there in front of us, we better look at it.
Jim Chanos, Kynikos Associates founder, discusses whether gaining first-hand access to information is deceptive.
we did have an evolution of specialists and market makers and exchanges all of which sort of had these defined roles. i sent around a journal piece from 2000 about night trading and paying for order flow back then. we knew this has been around for a while. to me, you can make the argument like the journal does, it’s not as bad as it used to be. the idea you identify something that you know is not fair in the markets, you see it, do you allow it to continue? it seems crazy. spreads have narrowed. what’s the contra argument to that? would they be even more — i don’t know the answer. i don’t either, actually. we’re not a trading orient shop. the best we can do in our shop is create our own algorithms and know these guys are there and put them accordingly, try to best to cover our tracks. i don’t think i blame the investor class who’s participating in this so much as i blame the exchanges that allow this to happen, not only allow it but enable it. it’s as if predators will always be there and you’re letting this happen in the big game reserve in effect. that’s a valid point. to me, the valid point is, is our intent to deceive and are you disclosing this to all the parties? i think that’s one of the real issues. they’ve built a system potentially for the deception to take place. right, right. that’s the question. to get access. if someone wanted to pay for it, they could get there faster. but areabr.
One has to keep in mind that if you are a Western investor in stocks and bonds in China, you are participating in a scheme, not a market, says Jim Chanos, Kynikos Associates founder, sharing his views on investing in China.
china is the only major economy that knows its gdp for the year on january 1. i saw you said that. the fed has its own estimates for where it thinks our economy will be at the end of the year. of course as things h stalled slightly from 7.5% to maybe 7.2, they’re panicking. they’re putting another mini stimulus. they’ve done a mini stimulus every year that we’ve been talking about china. we will accelerate more on railroad investment, housing investment. the problem is, of course, that’s the problem. that’s the model. the obama administration knew the unemployment numbers leading up to the last election, right? huh? they set those. what is the trigger point that ultimately topples this if you think a toppling is in order? i mean, again, i want to point out that if you look at — i’m a financial markets player. if you look at the financial markets, this has been nothing but pretty much straight down for four years. and people just say, well, you know, jim when are you going to be right? well, okay, have you looked at the chinese market, looked at chinese stocks? they’ve dramatically underperformed. they are down on an absolute basis. they are down relatively hugely. so i think that one has to keep in mind if you’re a western investor in stocks, bonds and china, you are participating in a scheme, not a market. this is important. you are basically providing capital to them and you may or may not see profits or dividends from it. i think t alibaba deal will be interesting.
The oil companies are now saying we can buy Chinese companies that we like, says Jim Chanos, Kynikos Associates founder, sharing his derivative play on Caterpillar, as companies find a way to save money on capital expenditures.
sort of the firstvative like the iron ore companies — caterpillar has done very well. yes. you’re still short it. absolutely. absolutely. you read the eft yesterday, the oil industry, the oil companies are now saying we can buy chinese equipment we like down 40% and we’re trying to save money on cap ex because our investors are pressuring us not to spend so much money. there is deflation in not only mining equipment but oil and gas equipment, everything that they do, there is pressure. just to put it in perspective, capital spending in the mining area, which is $5 billion a year, in the early ’90s got to 15 billion a year in the early millennium. it got to 145 billion a year at the peak in 2012. it’s now down to about 120 billion. people really do not understand just how much of a boom there’s been in capital equipment ordering in the global commodity boom. and caterpillar was the number one beneficiary of that. have you increased your shortened position? when the price goes up, becky, you automatically increase your short position.
Jim Chanos, Kynikos Associates founder, explains why he is selling short PCs but is long disruptive companies like Apple and Samsung.
es. it is a slow death but it is happening. there’s no revenue growth in this industry. a lot of the big pc companies are oriented even in their services business, their pc centric. they’re tied to it no matter what happens. a lot of people have an erroneous view, if i’m in servers or services, i’m not tied to pcs but in fact some of the big vendors very much are. i should point out, we’re long the disruptive companies, specifically apple and samsung. right. i find it interesting that people are willing to pay 10 to 12 times earnings for the companies that are not growing and not innovating but only 6 or 7 times for the companies that are. so i think it’s a very — which companies aren’t? aren’t innovating, the hewlett-packards and the ibms, the people tied to that area, disk drive companies. the companies that are showing great returns on capital, incredibly cheap, are showing revenue growth, samsung more than apple, are trading at half our multiple if not less. don’t you need servers for all the stuff we’re replacing pcs with. servers are pcs. what drives — isn’t the cloud composed of servers? do you know who makes google and amazon servers? who? google and amazon. they do. okay. you’re talking about the conventional. yes. servers but not made by t people you think make them? exactly. that’s the problem. increasingly we see these companies using accounting games. for example, over half of hewlett-packard’s free cash flow is from factory receivables. they don’t bra ek it out on the cash flow statement. it’s in the footnotes. shockingly they changed one of management’s metrics for valuation to free cash flow. the value guys love it. it’s $9 billion in free cash flow. no, it’s not. why is microsoft at $41? microsoft has been making a successful transition to the cloud. that i wouldn’t be short. you would not. no. it’s not going to be windows on a pc anymore? windows will be problematic. they finally figured it out. when you look at some of the old guys who are selling iron, they’re stuck in the ’90s in the
