Legendary short seller Jim Chanos sees more rough times ahead for the market

Jun. 19, 2022 9:07 AM ETTesla, Inc. (TSLA), COIN, HOODBTC-USDBy: Joshua Fineman, SA News Editor194 Comments

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High profile short seller Jim Chanos believes that the market still has more to fall, because investors have not realized that interest rates will continue to rise.

"That’s the one thing that people are not prepared for still, is interest rates resetting meaningfully higher, because it hasn’t happened in most investors’ lifetimes,” Chanos told Bloomberg's "Odd Lots" podcast on Wednesday. “The idea that actually interest rates are not going to be 2% or 3% for the foreseeable future is going to be hard for a lot of investors to deal with."

"I still have lots of shorts in my portfolio where the companies are barely profitable and they are trading at 30 times cash flow and 40 times cash flow still, after the decline," Chanos said.

Chanos blames the current market instability partly on the Fed's decision in late 2018 to pivot to a stance of easier monetary policy. He also cited free stock trading, ushered in by Charles Schwab Corp.'s elimination of trading fees in the fall of 2019, as another reason for the stock trading mania that started.

"I’ve been kind of surprised since November, just how much retail investors continue to want to speculate," he said. "Cathie Wood was getting inflows for most of the first quarter, in some cases record inflows."

Chanos says the market frenzy peaked in the first quarter of last year when SPACs, also known as blank-check companies, were raising billions of dollars a day.

"For a couple week period, new SPACs were raising on average $3 billion in cash every night," Chanos said. "And that was equal to the US savings rate. So for a brief period of time SPACs were taking the entire US savings rate, which just struck me as the height of absurdity."

While higher interest rates are problematic for riskier assets, Chanos doesn't see that many places to hide in the current market. He says that traditionally defensive sectors, including real estate, consumer goods and utilities, may also be areas of concern.

"Just take almost the whole cross section of REITs," Chanos said. "It just seems absurd to us that you’re gonna be buying, you know, apartment buildings at a 3% cap rate that's before capital spending. That’s pre-tax.”

Chanos, who in recent years as been known for his short of electric car maker Tesla (NASDAQ:TSLA), said he's still short though puts and doesn't believe investors understand the company's reliance on China.

"We and others have a large suspicion that a disproportionate amount of the profits are coming out of Shanghai," Chanos explained. "And that, of course, raises all kinds of other risks to the multiple, and whether or not they can actually pay, you know, get their hands on that money."

Chanos, who announced he was short crypto-exchange Coinbase (NASDAQ:COIN) in March, sees more downside for the company, as well as for rival Robinhood Markets (NASDAQ:HOOD). He said that Coinbase was "over earning" last year as it benefitted from retail investors.

"If you look at Coinbase’s first quarter in 2022, retail trading volume was huge compared to institutional," Chanos said. "They earned almost a billion in commission revenues from retail traders during the quarter. And they earned less than $50 million from institutional investors."

Chanos is still highly skeptical of the cryptocurrency industry. Bitcoin (BTC-USD) on Saturday plunged as much as 15% to $17,599, levels not seen since late 2020.

"Really this vast ecosystem that sprung up overnight around it is to basically extract fees from unsuspecting, primarily retail, investors,” Chanos added.

On Tuesday, Coinbase cut headcount by 18% to position itself for an economic downturn.

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