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High profile short seller Jim Chanos believes that the market still has more to fall as investors are not prepared for interest rates 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, you know, 30 times cash flow and 40 times cash flow still, after the declined,” 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 rating ushered in when Charles Schwab Corp. eliminated 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 wanna speculate,” he said. “Cathie Wood was getting inflows for most of the first quarter, in some cases record inflows.”
Chanos explained the market frenzy heightened in the first quarter of last year when blank-check companies, also known as SPACs, were raising billions of dollars a day.
“For a couple week period, SPACs were raising, 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 and said 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, you know, raises all kinds of other risks to the multiple, and whether or not they can actually, you know, 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 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 on the podcast. “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 15% to $17,599 on Saturday, levels not seen since late 2020.
“Really this vast ecosystem that sprung up overnight around it to basically extract fees from unsuspecting primarily retail investors,” Chanos added.
Recall on Tuesday, Coinbase cut headcount by 18% to position for economic downturn.
