Now we're going to talk about a short seller, why he's short the market, and we're also going to talk about what's going on with consumer savings, consumer spending, and which companies could actually win bigly. I Think this is going to be one Not only you want to want to watch in full, but you're going to want to pay attention to the companies I mentioned at the end of this because they're not my traditional companies that I talk about. But let's first listen to why this guy Jim is shorting the market hedge fund dude coming to you out of Miami in an interview with CNBC Let's listen in. what does he have to say? Let's bring in fam shorts! This is our headliner for this evening Jim Chanos founder of Chanos and Company Jim It's a pleasure to have you with us. Thanks so much for joining us! Welcome To My Hood I Know your new hood or not. Relatively relatively new under 20 years? oh 20 years I didn't realize that long? Yeah, what do you make of this This memo? This notion that that we could be at war with China It feels like people don't want to believe it or don't believe it. yeah. I mean the the war in the Pacific is serious stuff. I mean let's not forget we have a land war in Europe going on right now I mean sort of a World War II Tanks, artillery things we haven't really seen in in our lifetimes and uh so shooting war in in the Pacific you know all bets are off I mean I I Certainly hope that doesn't happen and um, but yeah I mean it. It upsets everything because of what God Said I mean Whether it's Supply chains, um whatever. I mean we having having China go to war with the West would be this apocalyptic how does that factor in if at all to your view on China and how you view that Mark in terms of opportunities for you? Yeah, um well obviously our view on China which is now 12 years old I mean has been based on the financial system and the debt and real estate markets over there and not a whole lot changes. Obviously China will become more insular. um I've been watching the the China reopening trade like everybody else has for the last six or nine months. Um, and uh, it's sort of marveling at it. But I don't think there's any way to handicap it from my perspective as an hedge fund manager. I mean again, if it happens, it's uh, it. The unintended consequences would be severe. Okay, so a little bit of a warning about maybe war with China but let's be real. I Don't even think he expects that tail risk is going to happen. So let's get into why. maybe a little bit more. He's actually short. Jim Do you think though, you know going forward we're just seeing, you know I guess the um, you know the situation with Russia and UK Regular simple U.S Multinationals had to take a stand about the uh, the Russian aggression. It's a little different with China when you think about our Reliance from a manufacturing standpoint, our U.S multinationals interest in that emerging middle class which has been a part of the bull case for 20 years now. in China how would that play out because I really feel like that could change the dynamic for a lot of U.S Companies Yeah I mean again I Think that that we're far more intertwined into the Asian economies in particular China And and so I want to mention here, Holy smokes, the amount of Investments Starbucks is making into China insane I Just went through the Starbucks earnings call and I'll probably do a separate video on it. But it's worth mentioning that in 2018 Starbucks had 3521 stores in China. By 2022, they added almost all of the stores that they added 97 of the stores China or that that Starbucks added in the world went to China 97 of them, another 1737 stores and they, uh, they're now at about 6 000 stores here in Q1 6100 I believe yeah 6100 Q1 2023 Q3 2022 they were at about 53.58 and they expect to get to 9 000 stores in China know and by 2025. it was remarkable about that growth is their their Starbucks is really telling you and they're screaming at you. We think that uh, they're gonna make it uh, they're gonna make big profits. Big Tendys in uh in China Let's keep going. We'll see uh, anything that that would end that and bring into a cold war, much less a shooting. War um I mean just has to be. It has to be just a major major event for not only markets but geopolitics. I mean it's yeah. scary stuff Jim We talked about multiples of this: Market Expensive, not expensive I mean thirty thousand feet? What are your thoughts Again, that don't fight the FED Mantra that's been out there for some reason. People want to look past it when it doesn't sort of line up with the market going higher for them. Um, well I think you know we. we don't try to time the market. Um, but like anybody else, I have opinions and things are not cheap. I mean they're not as expensive as they were say a year and a half ago. On the other hand, the market is at 18 times forward. Profit margins are all-time highs so that has not been reverted and one of the most Mean reverting Time series in all of economics and finance is Corporate profitability and it's been stubbornly good. and and High Um, but since I've been on the street 1980, not one bear Market has ever traded above 9 to 14 times the previous Peak earnings. So whether it's 87, 89, 90, 90. I Just want to take a quick pause there and mention what he's saying is that we are at such a high level of of essentially our multiples. Now on the S P 500 our price to earnings multiple, right? We're willing to pay 19 times S P projected earnings for the S P right now and Jim is suggesting we've got to get to probably 9 to 14 because historically that's where S P 500 earnings go now. I Actually do not disagree with this. It is one of the reasons that I really believe you have to invest in individual companies versus just the S P 500 over at least the next year to two, because I think S P 500 companies are going to get reamed with earnings? Uh, well, many of them. whereas individual companies that that you can select might end up showing improving more pricing power through this sort of recessionary dynamic and you might actually see a lot more earnings growth now. No guarantees. Okay, it's not personalized Financial advice for you, but that is at least something that I think individuals would have to consider. Let's keep going for the 2002 or 09. Um, if you think earnings are peaking now, give at 200. Um, that's a long way down, right? That's 1800 to 2800. Um, we're not anywhere near that. and uh, and so you have to hope Earnings hold up. Um, and you have to hope I Mean look right now, the market in the in the space of really six seven months has gone to corporate profits are going to be up 12 this year, inflation's coming down to two percent. The FED may be easing at the end of the year. I Mean that's pretty much Nirvana if you're a ball, is is basically here saying hey, look the Market's pricing in great things, corporate earnings up, whatever he's making the bet against the Spy Basically, that's but that's what markets actually forward pricing think right now they're wrong all the time. but people are praising in a pretty pretty nice Goldilocks scenario. Are you trading the markets directionally overall? Or is it just individual? No. I mean we in our hedge fund we are slightly neck short, slightly net long um and and so until recently we were actually slightly net long I Think we've gone to back down to zero line, plus or minus um and in our short, only funds were 60 to 80 percent. um and so it just depends on the individual names in those and and we try not to take a lot of systematic Market risk in our hedge fund. A lot lot of changes though when you go from zero percent interest rates to what could be five percent and certainly accelerate the fundamental stories you bet against when you do your defund mental analysis. So I'm wondering, are there are there positions that look even better now because that environment changes? Maybe the debt services to a heavier burden Etc Well, one of the areas I'm marveling that is held up as well as it has. with with a couple of exceptions and sub-sectors like Office, there's been commercial real. estate. Um I Just don't get people buying almost any kind of of commercial real estate that is that doesn't see good demand at this point at. first of all, hands down, 100 correct. The the fact that these these, uh, real estate funds are getting massive outflows right now totally makes sense to me. like why would you buy real estate and get you know, uh, five percent cash flow when you could just invest in Robinhood and get four point one? five percent Like if it doesn't make sense And this is exactly why we see this as. first of all, we see a big compression coming in valuation for Real Estate which is exactly what we're preparing for with my real estate startup, House Hack. The whole point of House Hack is to wait for the pain and then get in right? Uh, and then we've got some really phenomenal ideas in terms of maximizing cash flow and being able to sort of cycle wedge deals over and over and over again, which we're really excited about. Uh, and and obviously we're working to bring to non-accredited investors as well. If you're accredited, you have a big Advantage by going to Househack.com reading the solicitation there, and potentially investing uh, before, uh, the end of February or the end of March because you get some more bonuses for future potential warrants, which are somewhat kind of like call options that you get for free. they're different. read the website you'll learn more about. But anyway, totally agree right now that real estate, especially some of the REITs really expensive, especially commercial like office rate. We just had a New York developer start giving stuff back to the bank and I hate it when people say that because it basically just means you sucked and you had to turn around and give up and admit Nell But this New York developer is like, yeah, I'm giving properties back to the bank, I'm just handing the keys back to the bank and I'm like, you know it doesn't really work that way like you're getting foreclosed on is what it is. Uh, it's it's disappointing, but uh. anyway, let's listen in here more to the short seller and then we'll add some commentary about U.S consumers they're spending and where we might be going with: Consumer Debt three percent, four percent, five percent so-called cap rates. It makes no sense SL Green which we are short New York Offices Uh, been short now for a couple years. Trades at a five percent cap rate and it's levered massively to its cash flow. Um, and I just don't want to buy New York Office Buildings right now at a five percent cap when the balance sheet is leveraged 15 to 1.

it just makes it. And I mean and there's all kinds of stories like this out there in the commercial real estate. Um, as you know, we're short the data centers, which I think is one of the worst businesses I've ever seen. Um, they traded 100 times earnings and and the earnings of the metric because Capex equals depreciation. Uh, is that wrong? I mean some of the the data center REITs trade very, very, very expensively. Uh. I personally prefer investing in the chips I don't know I Feel like chips themselves are like the uh, the pickaxe, the backbone of it all. and so there's just all sorts of odd anomalies in the valuation space of things that are just in the stratosphere. Still, that sort of make no sense to us. Yeah, sometimes things look cheap and they're actually more expensive than like the Intel Quarter for example, was a disaster in that world. debt ceiling and the politics are boring. We don't really talk about them and I'm not suggesting we're going to go down 2011 path when U.S debt got downgraded, but it's clear that there's a faction of people that want to push the envelope on this. Is that something that concerns you? We just sort of slide through this like we typically do. No. I mean again, it's another black that would be kind of another Black Swan that no one thinks will happen, including me. I mean just one push comes to shove I Think we're going to pay the interest on our debt. Um, but who knows it could be wrong. All right. So there's our little CNBC interview. Now, we got to talk about the consumer here, because the consumer I think is going to be a big piece of this as well as a market. So uh, first of all is, is it possibly true that uh, you know there's more pain to come in markets? Absolutely. In fact, here's the biggest thing reiterating Jim's point right here. This chart right here is called the yield curve. It is the three month ten year and if I hide myself for a moment. what you could do is you can compare the.com crash of the yield curve here to the Great Recession yield curve bottom to uh, approximately the 2020 yield curve inversion. Uh, and then which is anything under zero which is over here, right? So there's your zero line to where we sit now, which is massively inverted And folks look at when the yield curve hit its lowest point, it was at the beginning of 2001. you still had another year to go of Hell before the markets bottom markets didn't actually bottom until over in this region, substantially higher. When the yield curve went substantially positive. Again, the yield, the markets did not bottom in the Great Recession until the yield curve was substantially positive. Again, in fact, it went super negative at the beginning of 2017.. Now that's the remarkable part about this. Market is the biggest thing that bears have going for them right now is that historically the yield curve is suggesting the most painful part is actually still ahead. The only reason you could suggest that the most painful part is not ahead of us would be to argue that we'll wait a minute. The entire reason markets are selling down is because the FED is trying to get rid of inflation. As long as inflation goes away and the FED can then relax, earnings per share will continue to grow, they'll go back to growth. We'll put the pain of 2022 in the beginning of 2023 behind us, and we'll be right back to growing and booming. That's sort of the bullish idea, and it's really the basis in the argument of this time is different, which are the four most dangerous words in investing. This time is different. Very dangerous. so that gives a lot of credence to short sellers. so we always want to be as neutral as possible on a channel. Obviously everybody's got their biases, but the goal is to be as neutral as possible. And look, you got to give credit where credits too. the yield curve is the most concerning part. Now, you could try to explain this away. You could say that we had structural differences between the recession of 2001 where you had basically an Econ a market that was running solely on Tech valuations which had bubbled to insane levels and has collapsed. our market today is so much more diverse. Our economy is so much more diverse, and by having a so much more diverse economy, it doesn't really matter that certain, like spax or whatever here recently have fallen like 90 our broader economy and the consumer is still strong. We'll talk about that consumer in a moment, and that potentially businesses can take this as an opportunity to invest Kind of like you're seeing Chipotle Doing You're seeing the chips companies doing. You're seeing a lot of companies throughout. America Saying look, the hard part is going away. The second half of 2023 should be very strong for them. That's the argument. Will that hold true? We don't know, but we're also looking at different structural causes of a crash now than we had in 2006. and 7.. in 2006 and seven, you had a real estate disaster. dead people getting loans, people who couldn't qualify for loans, getting teaser rates of negative interest rates that ended up adjusting to seven percent. And then they had to go into foreclosure. So you had a foreclosure crisis. We don't actually really have a clear fundamental disaster that we could see right now, but then again, that's why they call it a Black Swan because maybe we're just blind to that potential Black Swan and maybe that Black Swan is coming and then we could go. Oh yeah, there were real fundamental problems in which case, the inverted yield curve would be correct, that the pain is still ahead of us and that gives Credence to what short sellers like Mr Jim are saying. Now, other folks look at what consumers are doing and say that consumers are basically building up a consumer credit bubble. In fact CNBC Just posted yesterday, this particular piece here which shows that U.S credit card debt jumped 18.5 and hit a record total credit according to TransUnion hit a record annual Aprs are already sitting at 20 on average basically meaning more and more money of individuals. Uh, income is going to debt payments. You've got the an average balance on credit cards of 5.8 thousand dollars and you're returning to levels of Consumer Debt Uh, in terms of a payment of their personal disposable income that resemble what we saw before the pandemic. In other words, we're getting back to levels where people are spending more potentially than than they're actually able to save. And this is very easy to see by just looking at the personal savings rate. A personal savings rate was just 3.4 percent in December. That is a disaster compared to the usual five to six percent where we sit. And it's certainly a disaster relative to the Covet era. But then again, we were getting a lot of money that we could save via stimulus checks. So we are in this little consumer savings glut at the same time as people are taking on more debt and at the same time that we're actually going back to 2019 levels of spending. Uh, debt spending as a percentage of personal disposable income. Now the good news is, if you compare to the last recessions, the.com Bubble and the Great Recession or the recessions of the 80s, you actually had consumers spending households. households were spending over 11 of their disposable income on debt. We're at 9.7 right now, which is in line with the lower levels of about 9.7 between 2010 and 2020.

now that one percentage point doesn't really seem like a difference, but between 11 and 13 is where we sat during the recessions. And if you see the chart either, it's actually a substantial difference. So we've got a substantial way to go. However, this is where I Think the problem could actually come. If inflation rears its head again, then you're in this really interesting environment. Because think about this for a moment. What I think you have right now is right now: you have people borrowing. They're taking on more debt to get through the inflationary period, right? So debt now as a bridge. Think of it as a bridge, right? You're bridging to get through the painful period. So yes, consumers are taking on more debt. This is just my theory. As long as inflation goes down, then we can refinance the debt and that debt payment as a percentage of This personal disposable income plummets. Again, we have to rely on being able to refinance that debt. However, if we get a second wave of inflation, this debt stays expensive and then we potentially go back to the this this sort of era that we had in Prior recessions where people are spending way more money on their own debt as a percentage of their disposable income. So you go back to 2006 and 2007, 2008 and 2009.. you go back to a.com bubble and you actually confirm what the Bond curves are telling you. You confirm that the worst part is still yet to come and then guess who ends up being right Jim the short seller. So if debt is not just a bridge, but it actually stays because inflation pops up again, then the bond markets inversion of the yield Curve will be correct. The painful period is still to come. The earnings decline is still to come. The S P 500 is still to fall. The short sellers will be correct. as earnings collapse, the market will go to crop. However, if inflation goes down and that fundamental reason for a crash now goes away, then guess what could end up booming? And this is what I teased earlier with which companies could win all of this debt that's being taken on on credit cards in excess of 20 right now, Or personal loans that are being taken on like crazy right now. something crazy is going to happen to that debt. Let me just reiterate, currently, what's happening with personal loans? Look at Sulfi's earnings. Okay, three months ended December 20. Uh, 21. 1.6 billion dollars in personal loans done by Sofi One year later, 2.46 billion dollars. In other words, a 50 increase in personal loans at Sofi Sofi is taking money and deposits. and they're lending it out like crazy. Which means people are borrowing money like crazy. And this is reiterated by what we're seeing in the numbers. This is why Sofi Beat on those earnings. They're making a lot of new loans. Not only are they making a lot of new loans, but credit card debt is skyrocketing. Consumer Credit has been skyrocketing. We get new Consumer Credit numbers next week. So yeah, you've got a lot of crazy numbers going on in the world of debt. But what happens if indeed, those inflationary numbers go down and all of that debt? What's going to happen to that debt? Focus What kind of Boom are we going to have if inflation? Falls Let's write it down: if inflation plummets, who wins and what companies win that we haven't talked about yet? Refinance companies, Baby. Think about it. Any lender who makes money off of making loans wins. so that's probably going to be companies like Sofi Because think about it. the loans they have are more valuable because they're paying a higher interest rate. And if people refinance, those loans so far wins because you have more refinancing income and more more actual processing. Revenue Right, and their costs go down. Who else wins? Probably Think about like a rocket mortgage. or what about a UWM right? Uh, United Wholesale Mortgage Company The real estate mortgaging companies win because a lot of people have been buying homes with interest rates between five to seven percent. rates go back to three percent. You're gonna have a huge refinancing boom and so you're going to have some companies with massive PP massive pricing power. If that inflation comes down, we have that, uh, that uh, refinancing boom and then all of the debt that consumers have taken on actually doesn't become that big of a deal. You could have Consumer Debt as a percentage of disposable income right now, literally as high as 2007 levels. But if rates plummet and people refinance it away, that burden goes down really, really fast. Also, think about this: Autos the entire Auto sector will be a whole lot more affordable for people to go buy cars because then they can go Finance cars again at three percent instead of you know the five to seven percent they're paying right now. So you will as long as inflation Falls Consumers: What they're doing is they're borrowing through this recession. I Really believe that to be true that consumers and businesses are borrowing through this recession I Believe that's what's happening. and if the recession lasts longer, we're screwed, right? So if inflation doesn't plummet and the recession lasts longer, we're screwed. But if inflation plummets and therefore rates plummet, the refinance companies win bigly. the Autos win Bakery And we don't end up having an EPS disaster at uh at American companies. Why? Because people can keep spending. So that's a really big thesis and sort of a big conclusion there that all of this credit spend is inflating a massive bubble, but that bubble would actually be manageable if inflation continues to go down. If inflation pops back up, we're all screwed. It's that simple. So that's why looking at the inflationary numbers is very important. Looking at the Jobs Report yesterday was important because it reiterated the downtrend on average hourly earnings. but it also reiterated that we could potentially Dodge a recession in that maybe we don't need a a bunch of people to lose their jobs. People losing their jobs is bad for recession, right? Best case scenario: we don't lose a bunch of jobs and inflation just goes away. Best case scenario: it's a Goldilocks scenario and that's somewhat What Markets Uh, some markets are pricing in now with the FED potentially uh writing. um well basically uh with with markets pricing that the Fed's going to cut rates eventually. So we shall see. We shall see.