Right now, Jim Chanos is carrying an injured knee. The story goes that he hurt himself at a Snoop Dogg concert. Is it true?
“Actually I was at a jazz festival and a guy fell on me,” he replies. “I made a joke that I was at a Snoop concert and someone popped a cap in my knee. I’m not an OG.”
For a short-seller, those noted villains of the financial markets, Jim Chanos comes across as a very personable fellow indeed. Sure, Elon Musk, head of Tesla – in which he holds a significant short position right now – might not think so, but Chanos says that he, and several others like him, are doing good for the market.
“Short sellers are the market’s real-time financial regulators and archaeologists,” he says. “Regulators will tell you how you lost money five to ten years after the occasion. Short sellers have got an incentive to weed out fraud right now.”
Chanos is perhaps the most famous short seller in the entire hedge fund industry. He made his name when he uncovered fraud at Enron before anyone else and acted on it, giving him a decent return and an even more decent reputation. The skill, he says, is something that came to him in his first job as a young analyst at Gilford Securities where he was asked to look at piano company turned insurer, Baldwin-United Corp. With a bit of forensic investigation and a keen perceptiveness he discovered “a monstrous fraud” which eventually led to the then largest financial bankruptcy in the US.
“After that, the firm’s clients called and asked ‘what else does the kid not like?’ so I figured that I could carve a research niche out of this,” says Chanos.
That was back in 1982. The 35 years since then have proven that Chanos has indeed a good eye for jiggery pokery. He says that there has certainly been some luck involved for him – a case of being in the right place at the right time. But what about talent, I ask? He pauses. It is something he has reflected on.
“When I started I thought short sellers were a mirror of investing,” he says. “I’m not so sure about that any more. I think that there are behavioural financial reasons for this. You need a stronger constitution doing this because the entire world is shooting against you.”
And that’s the nub. Being a short seller involves ranging yourself against the world and not flinching when the world tells you that you are wrong. Following the herd is usually the easy method. Following iron-clad and superbly researched principles can be hard. Yet he continues to do it. Chanos scored big with his shorting of financial companies pre-financial crisis in 2006 and 2007. A more recent success has been Valeant Pharmaceuticals – the market darling that was championed by fellow hedge funder Bill Ackman – which is down 96% in the last two years. In 2014, Chanos sent Ackman a 26-page analysis of his short position which was ignored. He probably should have listened.
Chanos’s beginnings were small. He set up with $15m in 1985. It was a time when that was possible. These days getting off the ground with less than $100m is pretty hard, and launching with $15m like he did is impossible in the US. It is sad, he says, because it keeps talent from the industry. And while Chanos has been heavily critical of the hedge fund world, and specifically the fees charged by hedge fund managers, at the same time he says that the industry has some of the best people working in it – and not simply for the job they do.
“Some of the best people in finance are in hedge funds,” he says. “That’s not just from a financial perspective but philanthropically too.”
He admits that things are tougher than they have been for some time. Hedge fund returns are down while the wider market is up, making it even more difficult to justify fees. But it is a particular trait of the bull market that when stocks rise, passive investments climb and hedge funds decline. And things will reverse.“The hedge fund industry is always in flux,” he says. “It is challenged by the ongoing bull market which is where hedge funds by nature will underperform. So people are asking ‘why pay fees when hedge funds are lagging the market?’. It is a hard argument to refute. But this will change – when the markets reverse people will look to hedge funds again, which make money by taking clever risks when others are fearful.”
The crystal ball is working overtime right now and the question I want to know the answer to is: what does it tell him about the future? First off is China, one of the biggest shorts on Kynikos’s radar in the past half a decade. Chinese woes uncovered themselves early last year and it paid off for him. But was it exactly what he had anticipated? After all, he had said China would be on a treadmill to hell. Actually, he believes there is much more to go.
“The treadmill of China continues,” he says. “Our criticism is on the country’s financial model. Their economy continues to add debt at twice the GDP. You can’t grow at two times the GDP forever, it’s just not sustainable in any way. It is the ultimate treadmill to hell.”
Hopes of 3% to 4% growth are not going to happen... In the 1990s when we had 3% growth we had a lot of immigration happening
He does not believe that China “will be in smoking ruins” nor should it impact the rest of the world like the US with its subprime crisis, since it is not economically interconnected in the same way. But he believes the difficult credit set-up will continue to unravel like Japan did with its zombie banks, 20 years after its credit bubble burst – which is a good thing for short sellers like himself.
As for the US with its soaring stock markets, here again the confidence in economic growth is pretty unlikely to be matched by reality.
“Hopes of 3% to 4% growth are not going to happen,” he says. “In the 1990s when we had 3% growth we had a lot of immigration happening. A big part of the growth was from bringing people in from outside. Now we have 1% economic growth and a lot less population expansion than we did then. I don’t see the US administration as being pro-immigration.”
He says that the US rarely goes much longer than ten years without a recession. Having had nine years of recovery so far, things look set for a turn. Of particular focus for Chanos is the US healthcare system, which currently constitutes 20% of the country’s economy. Obamacare has been wildly profitable for healthcare companies since it was implemented in 2010 – US citizens pay twice what the rest of the world pays for their healthcare. The problem, however, is that Trump wants to repeal this – a move that’s not going to be good for those that have made hay on the back of it these last few years.
“Any attempt to reign it [Obamacare] in will have disastrous implications for these actors,” Chanos says. “Stay tuned to what Congress does – it may be that nothing happens. But this is an absolutely huge portion of the economy.”
So these are the shorts – but what else does he do? Outside of uncovering corruption, mismanagement and fraud, Chanos is a supporter of benevolent causes. One of the more interesting ventures is his work with the Prince’s Trust charity. Chanos and the Prince’s Trust crossed paths ten or so years ago at an event at the Palace of Whitehall. Kynikos had not long opened the London office and he says the charity’s mission resonated with him.
“I understood the mission and the accountability aspect,” he says. “It’s not just handouts but microloans and training with job skills to lift young adults out of a hole, which makes it unique. I can’t help but notice the simple numbers and qualitative stories – it’s incredibly hard not to be moved. They are clearly making a difference to people’s lives.”
He currently helps with the US donations arm of the Prince’s Trust. He is also a donor to the Tate Modern and indeed seems quite a Europhile – his children are educated in the UK and he visits Greece, his ancestral land, every year. He tells me that he is also a great lover of European history – currently on the reading list is the first world war. Before that it was Waterloo and Napoleonic history.
But there is one final thing I have to ask that I am rather intrigued about – can he really bench press over 300lbs?
“I can still do 300lbs,” he says casually. “Though I haven’t passed my best of 345lbs. I own a gym and have a great partner to train with, who actually used to be a world strength champ and who gets mad when I lose too much weight. I enjoy it because it gets the aggression out.”
That 300lbs really is no mean feat for a 59-year old. In between setting the world to rights he has got a lot resting on his shoulders. And his chest.