Chanos On Glencore: "Let's Just Say I'm A Potential Purchaser"

Jim Chanos, founder and president at Kynikos Associates, joined hosts Stephanie Ruhle and David Westin on Bloomberg TV’s new flagship morning program, Bloomberg <GO>. Chanos discussed his short on Tesla and SolarCity and the challenges in the green technology industry. He also spoke about how Glencore is suffering from the change in its business strategy in 2012 and hints that he took a short position in the company.

When asked whether he went short on Glencore last week , Chanos said: “We’re not going to comment on our position on Glencore. But I will say is we know the company pretty well.” He added “Let’s just say I’m a potential purchaser…to close out a short position you have to buy stock.”

When asked about shorting Tesla, Chanos said: “We haven’t disclosed our position officially in Tesla. Let’s just say I’m not very positive on the company and we’ll leave it at that.” Of Volkswagen, he added: “If anything I think we’d be looking at Volkswagen on the long side. But we have not invested in Volkswagen.”

Chanos: I’m a Potential Purchases or Glencore Stock

Chanos Talks Commodities, Cheniere and Glencore

[drizzle]

Chanos Explains His Short of Tesla, SolarCity

Chanos: Greece is a Precursor of Problems in EU

Word Association with Jim Chanos

FRANCINE LACQUA: We’re going to find out what Mr. Chanos thinks. The potential mini sale is just one of the latest deals driven by this massive drop in commodities. While PIMCO said last week the worst is behind us, Goldman and Citigroup say the pain is far from over. In fact Citi’s Ed Morse said over the weekend cost deflation will only make the cycle worse.

Jim, welcome. You are short natural gas producer Cheniere (PH) and your short, what is that Coal Company Console. Where do you see opportunities in commodities right now?

JAMES CHANOS: Well, the commodity space has been under general deflation since 2012. The commodity super cycle that took off when China entered the WTO in ’01 is really sort of a once in a lifetime type event. We saw capital spending go globally in mining; go from $14 billion a year in ’01 to $125 billion in 2012. I mean that’s just amazing growth. Of course because of our friends in China.

LACQUA: Our friends in China?

CHANOS: Our friends in China. And so as China inexorably slows and it’s slowing and inexorably as it builds out its infrastructure and finishes doing that, demand for hard commodities, copper, iron ore and so forth are going to be under pressure.

And what has happened as always happens but made worse this time is that people expanded their investment in the space to meet that demand as if it would never end. And now we have the hangover from that. Who knows how long that will last?

DAVID WESTIN: But going back to Cheniere (PH) for a second.

CHANOS: Yep.

WESTIN: They have a lot; at least they say they have a lot of their business locked up in long-term contracts.

CHANOS: Right.

WESTIN: Which they say should protect them from some of this.

CHANOS: Well, about half of their estimated 2020 or 2021 EBIDA of $4 billion is locked up in the take or pay about $2 billion of that. So it’s a little bit of a myth that all of it is accounted for. They still are going to be dependent on the spot market for a huge amount of the what the bulls think they’re going to make. And in fact the spot market’s in disarray already in liquefied natural gas.

WESTIN: But how much of your short on Cheniere is based on the assumption they’ll have to be modification in those long-term contracts?

CHANOS: None.

WESTIN: If you knew all those contracts would be honored–

CHANOS: Yeah, we think they will be.

WESTIN: Does it affect your position?

CHANOS: No, not at all, because if you think all of these so-called trains, they’re expensive David. They’ll probably over $30 billion in debt Cheniere when they’re done building these things out. That will be $2 billion in interest annually. $30 billion worth of plant and equipment in the swamps of Louisiana is going to depreciate we think about $1 billion a year, 30 year life.

RUHLE: All right, let’s assume fundamentally you’re right. You’re going up against Carl Icahn.

CHANOS: Carl’s a good investor. You know? But we never worry about personalities when we invest Stephanie. We’re always looking at the actual fundamentals of an idea. And you’ll have to ask Carl why he’s in it. But we just think that the numbers don’t pencil out.

RUHLE: OK. Well, you’ve got other personalities. Glencore, Ivan Glasenberg is known as one of the shrewdest business guys out there in the commodities space. Just last week John Mack who is on their board who doubled down and bought more of their stock when things went down, said he’s never been more confident in this company. In fact he said it was short sellers who caused things to go down.

CHANOS: Yeah, I think–

(CROSSTALK)

RUHLE: Not you specifically but are you one of those short sellers?

CHANOS: I think he said something similar in ’08 during the crisis.

RUHLE: Oh.

CHANOS: He blamed, I believe Mr. Mack blamed short sellers for the problems in the investment banks, which of course, turned out not to be true. We’ll leave it at that.

Look the problem with Glencore is that this is a company that was 80% trading 20% hard assets.

RUHLE: Mm-hmm.

CHANOS: Until 2012. Right at the top of the cycle they bought Xstrata. Changed the face of the company completely so that they’re now 80% hard assets, 20% trading. And the whole idea was, was if there was a downturn in the commodities markets, the trading acumen would help offset the hard assets. It didn’t work that way. The traders were long the same commodities the mining assets were.

And so if that was the reason to put this thing together one has to question that strategy. And if you look before that 2012 deal, Glencore was earning double digits on its capital. It was a trading house that was basically a good trader. Now they’re earning low single digits on their capital. It’s changed businesses.

RUHLE: You sure know a lot. Does that mean you went short last week?

WESTIN: Exactly.

CHANOS: Let’s just say I’m a potential purchaser.

RUHLE: You’re a potential purchaser.

CHANOS: I’ll let you think about that for a second.

RUHLE: A potential purchaser of what?

CHANOS: Well you have to close out a short position you have to buy stock right?

RUHLE: Ah.

WESTIN: What about the moves they’re making now? They’re selling cooper mines.

CHANOS: So they were buying assets at the top of the market.

WESTIN: Right.

CHANOS: And now that commodities have crashed, they’re selling assets. Does that sound smart to you?

WESTIN: But do you think that, I mean zinc they cut way back on.

CHANOS: Yeah.

WESTIN: Right? On Friday.

CHANOS: Yeah.

WESTIN: And there was indication in the markets as I recall, the terminal indicated that really the price was going up on zinc.

CHANOS: Right.

WESTIN: Do you think that they are in a situation–

(CROSSTALK)

CHANOS: They’re getting rid of the–

WESTIN: To support the commodities prices?

CHANOS: But if they’re getting rid of the asset and that makes the price go up, they don’t benefit from that right?

WESTIN: Right.

CHANOS: And that’s the problem. And so again it’s I’m concerned about a company that’s supposed to have this great trading acumen that seems to be buying things at the top of the market and selling them at the bottom. That just doesn’t sound smart to me.

And so I think that–

RUHLE: Well, until 2012 you’d be hard pressed to find them doing anything that wasn’t smart. I mean it was an extraordinary company. Like yes what you’ve laid out makes the argument they’ve left their core competency, they’ve jumped the shark, trading is what they do and they’ve left that. But this is really a big mistake but the first mistake we’ve seen out of them.

CHANOS: So they did very, very well in a bull market is what you’re saying.

RUHLE: OK.

CHANOS: And when the markets turned bad, they did not so well. I think at the end of the day that’s the issue is was this just simply a play on rising commodity prices as opposed to a company that made lots of money in both good and bad markets. And I think that certainly we can question that.

WESTIN: The eternal question, are you lucky or are you smart? And that’s the question. But go back to commodities generally. Are there particular commodities that you think will be hit harder than others? Where are the opportunities there?

CHANOS: I think it’s been rolling, David. I mean, we were short iron ore, the iron ore companies a few years ago. And that commodity broke down in price and we’ve covered our shorts there. As you mentioned we’re very negative on the LNG market. And that’s again we sort of think that’s sort of where iron ore was 4, 5 years ago. All this capacity is coming on in Asia. To meet Asian demand that has actually been flat for the last three years. And we think we have a looming oversupply problem in LNG. This does not relate to Cheniere which is a US producer. But primarily in Australia and elsewhere in the Pacific basin, production is basically about to double in the next handful of years on flat demand. And that doesn’t sound good to us.

RUHLE: Are you short copper?

CHANOS: We’re not short copper.

RUHLE: Walk us through Glencore one more time. We understand what you think, help me understand how you’re positioned. Remember public school girl from New Jersey. It’s hard for me.

(LAUGHTER)

RUHLE: How exactly are you positioned?

CHANOS: We’re not going to comment on our position on Glencore Stephanie. But I will say is we know the company pretty well. And it is a company that was a reasonably high return on capital business in a bull market, as I mentioned. That has turned into a low return on capital and basically below their cost of capital. And for the past handful of years, not just the past year. This company was declining in its returns since 2012. And so it’s a changed business. It’s not a trading house anymore. It’s a collection of mines–

(CROSSTALK)

RUHLE: Then given–

CHANOS: –with a trading operation.

RUHLE: Then given where it’s trading today, we saw a steep decline. We obviously saw things move up. Not saying what your position was. But what would you advise me? Seeing how you view this company, what should someone do today?

CHANOS: I would stay away from the commodities space.

RUHLE: Entirely.

CHANOS: Generally speaking.

(LAUGHTER)

CHANOS: I think the deflation generally is going to continue in hard assets for a while.

RUHLE: Do you think there’s a risk they could take this company private?

CHANOS: That I don’t know. No idea.

RUHLE: OK.

WESTIN: So you talk about iron ore, you talk about LNG, what’s the next one? As you look out on the horizon what’s the next commodity that you think is riding for a fall?

CHANOS: Well, again, I think that those two are big enough. And the other one is of course we’re still pretty bearish on the domestic ENP (PH) space, the domestic US shale oil area. And we just think that whole business model is questionable. And that sort of separate from the price of oil. But I think it’s going to be a painful realization for a lot of people in the oil patch in the US to realize that the business model that they built around fracking doesn’t really work.

RUHLE: Do you agree with David Einhorn, frack is whack? That entire argument.

CHANOS: We’ve been short this area for 3, 4 years and we agree with him, yeah.

WESTIN: But that’s not entirely independent of the oil price. If the oil price were at $100 fracking would look a lot more attractive than it does at $50.

CHANOS: Well, by definition of course. But these companies were generating negative cash flow when oil was at $100. And they’re doing so at $50 too. And part of the problem is again the wells deplete so fast. And we just don’t think the companies are properly accounting for that depletion. And if you do, if you adjust your numbers for just how fast your business runs off, nobody would have ever raised a dollar in this area.

WESTIN: Go back to Cheniere just for one moment. There’s been a lot of consolidation in the energy sector–

CHANOS: Yep.

WESTIN: Recently. What happens to your short position if Cheniere gets bought?

CHANOS: I would lose money.

WESTIN: OK, well, that’s a simple answer. What is the prospect of that?

CHANOS: I don’t think so. I mean who’s going to buy a company where again the cash flows are dependent on something happening from 2020 out. And where based on at least our numbers, there’s no free cash flow even when that happens.

WESTIN: It’s already down 30% this year isn’t it? Something like that?

CHANOS: Yeah, but it’s up seven-fold or something over the past few years.

WESTIN: Yeah.

CHANOS: And the Chairman is selling a lot of his stock too. So maybe you should join him.

RUHLE: We have to go head over to our friend Matt Miller.

0714

(BREAK)

0716

WESTIN: Jim, what do you have to say? One quick comment. What do you think about Dell-EMC?

CHANOS: Well, we’re negative on this space and we’ve been public on HP. We’ve been short HP now for a number of years. We were short Dell when he did the deal. And the take under if you will. It’s just a tough space. We’re back to decelerating revenues in PCs and services for most of these companies. And so they’re looking for growth anywhere they can find it. And it looks like Dell’s back to acquisitions to do it.

But deflation is again the key word in this space.

RUHLE: Deflation and going short. The only thing Jim Chanos is long is the Green Bay Packers. First time they won over the weekend.

WESTIN: They won this weekend.

CHANOS: Thank God.

(BREAK)

WESTIN: Jim Chanos is with us. He is one of the most notorious, if that’s the right word, China bears out there. Notorious you are, Jim. You predicted China’s slowdown as early as 2009. So you’ve been consistent on this subject. Last week here on “Bloomberg Go” we had David Rubenstein; I’ve talked to Warren Buffett. They were a little more optimistic about China. Let’s take a listen to that.

(BEGIN VIDEO)

DAVID RUBENSTEIN, CO-CEO, THE CARLYLE GROUP: China grew for 10% on average for 30 years in a row. No economy in the history of the world’s ever done that. It now has an economy it’s roughly an $11 trillion economy. It’s unrealistic to think it can grow at 10% a year any longer on a consistent basis. Probably it’s going to grow at 6-1/2 to 7% this year.

DAVID WESTIN, “BLOOMBERG GO” HOST, BLOOMBERG TELEVISION: You’ve traditionally been pretty bullish on China.

WARREN BUFFETT, BERKSHIRE HATHAWAY: I’m bullish on China.

WESTIN: For the long-term you’re big on China.

BUFFETT: Long-term China has got a long way to go.

(END VIDEO)

WESTIN: So there are some pretty astute investors who have a different view on China at least in the long-term Jim. You want to respond to that? What do you know that they don’t know?

CHANOS: I don’t disagree with either of them. I think that long-term China’s going to be fine. And I think Mr. Rubenstein said that it had been growing at 10% for years and years and years. It’s unrealistic to think that’s going to stay at that rate. And that’s consistent with what we’ve said.

When I started looking at China, China’s nominal growth rate was 15% GDP in 2010. It was 10% real, 5 inflation. Now it’s 5, 7% real, 2 deflation. It’s basically been on a 2% per year negative ratchet down each and every year for 5 years. I see no reason why that won’t continue.

Again the law of diminishing returns, the first international airport in a region is a boon for growth. A second one is questionable. Third one is folly. And we’re between the second and third to just use this analogy in the way China is basically continuing to throw money at fixed asset investment. Again, that’s the problem, it’s the model.

The model despite all the China bulls saying that they are reforming to a consumption-driven economy, in 2009 household consumption was 37% of GDP. 2010 it was 38%. It’s just not happening. And so this is the problem, people say it’s happening and they give lip service to it. But the data doesn’t support it.

RUHLE: Now the data that we’re getting out of China or the data that you believe is the truth? Because in the past you’ve said you do not believe a darned thing that they put out there.

CHANOS: Well, I–

RUHLE: So have you changed your view in any way?

CHANOS: No, no, no. I’m using their numbers. So–

RUHLE: So you’re now believing their numbers?

CHANOS: Well, I’m just saying, using bad apples to bad apples Stephanie. So it’s not going to be any different methodology. And if China is saying we’re going to consumption and even they’re saying it only went up 1% in 5 years, I think we’re on pretty safe ground to say it’s not really growing.

RUHLE: Is their stock market reliable enough at this point that you can play? I mean it’s what you do. You go short. Many people this summer simply said, the rules in this game are changing at such a rapid pace it doesn’t matter what my view is, I can’t play anymore.

CHANOS: Yeah, we’ve not been long and short Shanghai at all in five years. I think the Shanghai market is completely detached from the economy in China. It’s a retail market. It’s a highly leveraged market. The government is now heavily involved as you point out since a year ago in both pushing people into it and then sort of botching failed rescue efforts this summer.

We’d rather look at either stocks that trade related to China in Hong Kong or elsewhere in the West. Or just simply in companies that are involved trading with China. But playing the Shanghai market is like going to the casino.

WESTIN: We’re going to check on the Bloomberg here. Matt?

(BREAK)

CHANOS: I think China has a hot money problem. And I think your chart is indicative of it. And that’s why they sort of panicked in my view in August when they unrolled the yuan depreciation policy and then sort of had to backtrack so quickly.

RUHLE: Jim, why is it a hot money problem? If you actually look at the amount of potential consumers in China, if you look at the sheer volume of their population, there’s many investors who simply said once we can unlock that market there’s tremendous opportunity. I mean we’ve heard Stan Druckenmiller say that over and over.

Now those same investors have gotten burned in the last few months. But it doesn’t necessarily change their outlook of the potential there.

CHANOS: They’re not inconsistent Stephanie. I’m not saying anything about Chinese consumers. What I’m talking about are Hong Kong, Singapore and Western investors who went and borrowed in Hong Kong dollars–

RUHLE: Ahhh.

CHANOS: And put the money into China usually in high yielding paper, so-called wealth management products. Shadow banking assets yielding 12, 15% borrowing at 6, earning 12 on the so-called carry trade and then assuming that the currency would appreciate as well as an extra little bonus. Those flows are tremendous. And when China indicated that it might be thinking about depreciating the yuan to help exports or manufacturing, that money has begun to panic. And thus Matt’s chart.

RUHLE: And what’s the trade in China to do?

CHANOS: I think typically investors should just avoid China as an investor. Trade with China, be a tourist in China. But don’t commit your capital there. And that’s the problem.

RUHLE: What’s the trade?

CHANOS: In terms of?

RUHLE: So you’re saying don’t invest but trade around? Where do you want to trade around?

CHANOS: Well again I want to be short commodities. I want to be short Macau.

RUHLE: There you go.

CHANOS: I want to be short a number of things that are–

(CROSSTALK)

RUHLE: Short commodities and Macau.

WESTIN: Fortunately, Jim Chanos is sticking around for the hour.

(BREAK)

RUHLE: Mr. Chanos, you’ve got a Must Read for us and it doesn’t come from “US Weekly.” What are you reading? What are you looking at?

CHANOS: Well, one of the books that I just finished re-reading was Tim Clissold’s “Mr. China” and it’s a great, great story and kind of a cautionary tale. Tim and his team correctly after Tiananmen Square saw that China was going to be this great, booming market.

He spoke Mandarin. His team in fact did all the right things. They hired the right people. They scoured the country for great investment, manufacturing investments and whatever. Sort of a cautionary tale, he wrote the book in ’05 I believe about getting out with almost losing all their money.

RUHLE: I want to share a quote that stood out.

WESTIN: Losing all their money.

RUHLE: Can we pull this quote up? “The idea of China has always exerted a pull on the adventurous type. There is a kind of entrepreneurial Western who just can’t resist it, red flags, a billion bicycles and the largest untapped market on earth. What more could they want? But in the end it’s an illusion.”

There you go. That’s the part that matters to you.

CHANOS: Right.

RUHLE: Why?

CHANOS: Well, again, it was hard for him as a Westerner even though he had done everything right to make any money. Because at the end of the day money was either stolen from him, literally money taken out of bank accounts of his companies or he was lied to or whatever the case might be. He confronted issues at every turn in China. And this has always been the illusion about China this great market, this booming growth market, and yet profitability for outsiders has been again, illusive.

And it’s a great cautionary tale. I mean, Tim Clissold is a big, big bull on Chinese people, Chinese culture, the history. It’s just making money that is very, very difficult if you’re not specifically Chinese or wired in specifically to the various different businesses.

WESTIN: And is the rule of law, or the lack of rule of law–

CHANOS: Lack of rule of law.

WESTIN: The central control of the economy as we’ve seen the intervention in the equity markets. I mean what is keeping us from–

CHANOS: He tells this wonderful cautionary tale about some bank documents in one of the chapters. And how the bank documents in China have to be, as opposed to having signatures have to have these seals on them. I’m forgetting the term that they use.

WESTIN: Chops?

CHANOS: Chops, exactly, very good.

WESTIN: Yeah everybody has their own chop.

CHANOS: And as long as the chops–

RUHLE: Their what? What is it?

WESTIN: It’s a chop. It’s a little thing that’s like a–

CHANOS: It’s a wax seal.

WESTIN: Yeah exactly. You have ink and your chop. And you have like a number of executives up the line and each one has to put their chop on it–

RUHLE: Chop, chop, chop.

CHANOS: Right.

WESTIN: Exactly. It’s unique to you. It’s like a signature.

CHANOS: And as long as the documents have them, they’re legal. Except that there is no mechanism for seeing that the person that actually put the chop on there had the authorization to do so. And so he ran into this problem and it turned out to be quite costly. Again just one of these things that you don’t think of in the West.

RUHLE: We’ve got to get to a Twitter question but I’m going to trump them because I’m sitting here. The fact that they’re having this big anti-corruption initiative doesn’t give you anymore, doesn’t make you feel positive? Or you just feel like it’s just another story?

CHANOS: So I think the rise of Xi Jinping is an important thing and we’ve been talking to clients about that since 2012. Prior to Xi Jinping China was open for business. Under Hu Jintao and (INAUDIBLE) as long as you made money anything went, by and large. And you didn’t upset the political apple cart, buy a Ferrari, send money abroad. Do whatever you want, just grow.

And under Xi Jinping it’s changed. Anti-corruption has now come to the fore. He’s taken a very anti-Western tone in his outlook and how companies do business. And so the landscape has changed dramatically both politically and economically under his leadership. And he’s a very strong leader.

WESTIN: But the anti-corruption should facilitate investment and making money right? I mean that’s part of the rule of law.

CHANOS: It should.

WESTIN: Having the money go where it should instead of where it shouldn’t.

CHANOS: It should except it was also the grease that moved things along. And now you have people paralyzed to do anything.

RUHLE: One more time? I don’t follow.

CHANOS: Well corruption actually made things happen.

RUHLE: Ah, ah, ah, yes, yes, yes.

CHANOS: And now you have managers and Party Officials who are actually terrified of even any perception–

RUHLE: Too afraid to go gamble in Macau?

CHANOS: Also too afraid to maybe put that investment, that new bridge that they had put up five years ago which added to GDP.

RUHLE: Ah! All right. We’ve got to share a Twitter question. Twitter user Davidblanco asks: Are you short only Chinese equities or are you short the S&P 500?

CHANOS: I’m short neither. So we’re actually long the S&P in the way we do our fund because we’re long the indices and short our stocks. So I think that’s an easy answer on that. And on short Chinese equities, we’re only short certain Chinese equities on the Hong Kong market, not in Shanghai.

RUHLE: Let’s go from China to Europe. Really in the beginning of the summer David loves to talk about this, everyone had Greece, Greece, Greece in focus.

WESTIN: Yeah.

RUHLE: When the real problem was China. Let’s put Greece back in focus.

WESTIN: Yeah you know Greece.

CHANOS: Yeah.

RUHLE: More than just a vacation destination for you.

CHANOS: Yeah, I was there this summer. Look Greece is a difficult situation. And our view is that the country is now a vassal state of the EU. They really have lost their sovereignty. They lost it this summer when the country basically voted overwhelmingly in the referendum to not sign further austerity and the government caved anyway. And I think they had no choice because the German’s and others had their banking system basically in a tight bind.

And so this is a country that really now does not in any meaningful way make its own decisions. They’re all–

RUHLE: When was the last time it made its own decisions?

CHANOS: Well, certainly, you know, before 2010.

WESTIN: It made some pretty bad ones it turns out.

(LAUGHTER)

CHANOS: It did make some pretty bad ones. And look it should have never been in the EU. And that’s the real issue here. But it is Greece is just in my view a precursor of the problems of the EU. Because Spain, Portugal and Italy are one more recession away from where Greece is. Their debt to GDP–

(CROSSTALK)

RUHLE: People say Spain is doing so much better.

CHANOS: Spain is doing better off a low bottom.

RUHLE: Ah.

CHANOS: As is Portugal. But if you go back, I was just in Portugal last month and there are construction cranes everywhere. So I mean they’re getting back to that same old game of building condos.

WESTIN: Construction boom.

CHANOS: Yeah. And so all of those countries have higher debt to GDP than they did before the crisis. And so again you’ve got this problem where you’ve got a dominant player in the EU, Germany. You’ve got a number of weaker players and you don’t have any ability to rebalance within the EU.

When Florida gets in trouble, we don’t cut it loose. We don’t put it on its own austerity program in the US. When we have regional problems the federal system and the way we do budgets and banking enable it to basically balance out. That doesn’t happen in the EU. And that’s an inherent problem with the structure.

(BREAK)

RUHLE: Jim, last week, you and some like-minded tech analysts were down on Tesla. Walk us through, is this simply because you think this is an overvalued battery company?

CHANOS: Well I think first of all it’s an overpriced car company. And one of the more interesting things about Tesla is now comparing it to other car companies. And in September we think that BMW which is a little company in Germany sold just about as many electric cars in the US as Tesla did, about 2,000.

RUHLE: Really?

WESTIN: Wow.

CHANOS: The i8–

RUHLE: Hey do you even think that?

WESTIN: No I’ve actually driven the i8 but I did not think that.

RUHLE: Matt Miller, do you think people are aware of that? You’re a car guy.

MATT MILLER: Well, I think you have to look at it more as an i3 story. Because the i8 while it is an amazing car didn’t sell nearly as many used as the i3 which is a smaller and cheaper one. But no, I didn’t know actually Jim told me in the Green Room and I was surprised.

CHANOS: And in fact BMW, their press reports from BMW is claiming that almost their entire fleet will be electric by 2025. Well of course so what Tesla had is innovation and a head start in this market that other companies are now catching up to. And they have to be become a car manufacturer. And becoming a car manufacturer is a lot more difficult than becoming a high tech darling.

And that’s the reality here is that returns are relatively low in the car business. It’s very capital intensive. You need huge networks and all these things when you’re selling 50,000 cars a year they’re all sort of bells and whistles. When you’re going to sell 500,000 to 2 million a year they’re essential.

WESTIN: You’ve been the first one to say it’s a good automobile actually.

CHANOS: Yeah.

WESTIN: You’re not criticizing the product.

CHANOS: No, no. By all accounts it’s a great product.

WESTIN: And I’ve always wondered, it looks like BMW wouldn’t be a buyer but I always wondered whether really the play here is for them to build up a pretty good IPE, patented protection and then sell it.

CHANOS: Right.

WESTIN: To Ford or GM or someone who needs to get into the electric business.

CHANOS: Except that the problem is most of their technology is other peoples. The battery technology is Panasonic’s.

WESTIN: Oh.

CHANOS: All you have to do is read their 10K to find that out. And so again, they’ve sold the sizzle here and not the steak. And if you look at Tesla’s market cap it’s about half BMWs. But BMW sells two million cars a year. And Tesla sells 50,000.

RUHLE: Jim, are you short Tesla?

CHANOS: Well again I’m a potential purchaser Stephanie. So we’ll leave it at that.

(LAUGHTER)

RUHLE: Make it a bit bigger than. We learned in August you were short SolarCity.

CHANOS: We are short SolarCity.

RUHLE: Then let’s just talk about Elon Musk. Is it Elon Musk that you’re short?

CHANOS: No, I think Elon Musk certainly his name has added something to the valuation of both those companies. At the end of the day, as we talked about earlier on Glencore, it’s not about personalities; it’s about a business model. And SolarCity we joke is akin to that old movie “Tin Men” with Danny DeVito, they’re selling aluminum siding door to door. SolarCity is basically leasing you solar panels if you’re a residential customer at what we think is an uneconomic deal.

RUHLE: OK, but that doesn’t make them subprime. You compare this to a subprime finance company.

CHANOS: Yes.

RUHLE: The subprime market is a lot different than guys knocking door to door saying can I sell you solar panel?

CHANOS: Well, not really because–

RUHLE: Why?

CHANOS: Because at the end of the day they’re taking credit, they’re taking consumer’s credit–

WESTIN: And they’re long-term deals right?

CHANOS: They’re 20-year deals.

WESTIN: Yeah.

CHANOS: And the deal is dependent for SolarCity on the backend. And that’s the interesting part. In addition SolarCity finances itself, its bonds yield around 8%. And that is certainly junk credit. So they have a portfolio that we think is yielding about 7% on the leases. And they’re financing themselves at rates higher than that.

WESTIN: But is this specific to SolarCity or are you there with green tech more generally?

CHANOS: No.

WESTIN: Because there’s a lot of talk about green tech including in China with investments–

(CROSSTALK)

CHANOS: We’re bullish on installation of solar. We think that’s just going to continue and costs are going to come down. All the more reason to be bearish on the residential installers. Because again they’re selling you power at, in SolarCity’s case it’s 17¢ a kilowatt hour. The average power bill in the United States residentially is 12.8¢ and it hasn’t grown.

So they’ve got to get that rate down. Solar is slightly more competitive than utilities in California for SolarCity. But it’s not cheaper than other solar providers. And that’s the crux. Other solar providers can get it to you cheaper than residentially leasing it from SolarCity.

RUHLE: Matt, you want to chime in?

MILLER: Well, I was talking with Jim in the Green Room earlier about how amazing I thought the price to sales ratio was for Tesla because this is a company with a $30 billion market cap. And it makes 15,000 cars a year, Ford has a $60 billion market cap and it makes you know 10 million cars a year.

RUHLE: And valuation is the issue, not the product.

MILLER: Yeah ,the valuation. But SolarCity is even more amazing. And I have it on my Terminal if you want to check it out. In green is SolarCity I probably should have put it above. Here’s Tesla 7.5 times sales is what it’s worth. SolarCity is worth 15.5 times sales. So the valuation there is even higher. Obviously the shorts are already very active in Tesla. I wonder if the opportunity is even richer in SolarCity.

RUHLE: And, Jim, you’ve got to tell me again, a purchaser. I’m not that smart. Are you short Tesla?

CHANOS: Well, again, we haven’t disclosed–

RUHLE: Don’t again me.

CHANOS: We haven’t disclosed our position officially in Tesla. Let’s just say I’m not very positive on the company and we’ll leave it at that.

RUHLE: All right. He’s not very positive on the company. Do you want to be short Volkswagen here?

CHANOS: No we don’t want to be short Volkswagen.

RUHLE: No? Don’t want to touch it?

CHANOS: If anything I think we’d be looking at Volkswagen on the long side. But we have not invested in Volkswagen.

RUHLE: Really?

CHANOS: I think they’ll survive.

RUHLE: You do?

CHANOS: Yeah.

RUHLE: There you go. Okey-doke. Thanks Jim we’ll be right back with “Bloomberg Go.”

(BREAK)

RUHLE: Jim, this is time for word association. We give you a word; you give us your immediate response. We started with art because last year when we were down there, you were talking all about the art bubble. Now you think a lot of this stuff is simply overpriced. So we’ve got to start there. Contemporary Art.

CHANOS: Bubble.

RUHLE: Bubble. Got to be closer to bursting by now.

WESTIN: OK, let’s get more practical. Tech day Lenovo.

CHANOS: Lenovo. PCs plus China. Trouble.

WESTIN: Trouble.

RUHLE: There you go. Hillary Clinton.

CHANOS: Frontrunner.

RUHLE: Do you like her as a frontrunner?

CHANOS: You know she’s the frontrunner of the Democratic Party.

WESTIN: OK.

RUHLE: All right.

WESTIN: OK, Joe Biden.