Odd Lots - John Hempton on Greensill, Archegos and What It's Like To Short Right Now

Episode Date: April 19, 2021

It's a weird moment for the markets. The big stock indices are near all time highs. And yet there have been some high profile meltdowns and blowups. There was the collapse of the vendor financing firm Greensill. And there was the wipeout of the Bill Hwang fortune. Meanwhile, numerous SPACs and other speculative stocks have been getting clobbered. So we talked to short seller John Hempton, the CIO and co-founder of Bronte Capital, for an explanation of what's really going on.See omnystudio.com/listener for privacy information.

Thanks for listening to Odd Lots. Follow the show on Amazon Music for more future episodes or just ask, Alexa, play the Odd Lots podcast on Amazon Music. Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy. Bond markets are massive, murky, and let's be real. Lots of firms throw a couple flashy funds your way and call it a day. But on Vanguard, at Vanguard, institutional quality isn't a tagline. It's a big line. It's a very big. It's a few. commitment to your clients. We're talking top-grade products across the board of over 80 bond funds, actively managed by a 200-person global squad of sector specialists, analysts, and traders. These folks live and breathe fixed income. So if you're looking to give your clients consistent results year in and year out, go see the record for yourself at vanguard.com slash audio.

That's vanguard.com slash audio. All investing is subject to risk vanguard marketing corporation Distributor. Hello and welcome to another episode of the All Thoughts podcast. I'm Tracy Allaway. And I'm Joe Wisenthal. Joe, I feel like it's been a pretty bumper year for financial frauds and scandal. And maybe bumper year isn't the right way to put it, but I feel like a bunch of them have sort of been coming to light over the past 12 months or so. Yeah, it's kind of a weird time because The stock indices as of right now, they're all basically right at all-time highs. But we've handled a lot of, I don't know if they're like per se frauds, but things going badly, blowups, companies collapsing, hedge funds, losing a ton of money. It's kind of into a slightly weird time because things that you don't necessarily expect at the top or maybe you do.

basically a lot of things going south, generally speaking. Yeah. I mean, normally it's like that Warren Buffett quote where when the tide goes out, that's when you see people swimming naked. But the tide by no means has been going out lately. As you mentioned, we have stocks pretty close to all-time highs. We have ample liquidity. It's a weird time for stresses in the financial system like this to be coming to light. And yet we've had quite a few. So most recently, we had Arkegos losing billion. of dollars. Before that, we had green sill blowing up. And then earlier, we, of course, had wire card as well. So, you know, the rule of three, we have three things happening. So we're

going to talk about that today with really a fraud or scandal spotting extraordinaire. Yeah, I'm super excited about this. You know, it's kind of like, you know, the funny thing is we do seem to be like at the verge of what like people think are like people are feeling optimistic like growth expectations in the United States are like running sky high like people aren't negative but what does seem to be clear is that like after this incredible bull run and whether you want to define it by the last year or the last several years there's just a lot of like sloppy behavior that's sort of coming up to the surface right now yeah and so yes I'm very excited about this conversation. Yeah. Well, as I mentioned, we have a sloppy behavior expert coming on. So we're going to

be talking to John Hempton. He's the co-founder and chief investment officer over at Bronte Capital Management. Also, a previous Oddlots guest and a man who was also early on a bunch of things, but top of mind is probably wirecard, valiant, and gosh, I remember Pontenegra way back in 2009. That was an interesting one. So, John, welcome to the show. Thanks so much for coming back on. Glad to be here. I was going to correct the quote. Oh, please. Warren said, it's only when the tide goes out that you see who's swimming naked. And he was wrong. The tide isn't out at all. I mean, market is at all-time highs, and we're already seeing people that are swimming naked. It's kind of a bizarre market. As a sort of very big picture,

It's been an expensive bull market for a long time. But the period from sort of the middle of November to the middle of February was a bizarre retail media where the most retaily stocks possible, tech stocks that have no technology, just flat broads, penny stocks, etc., all went vertical. We discovered in the middle of that that some very big money was also playing in them. So Archie Goss, BSX is a company that several people. have alleged the fraud. I have not done the work myself, but the arguments put out by both Carson Block at Muddy Waters and Anne Stevenson Yang and Jay Capital, alleging that GSX is a fraud looked very, very convincing to me. And despite that, the stock sort of doubled immediately. The good shortcase came out. And we now know that there was retail money, just retail money

on a different scale and a different style at Archegos chasing that up. That pressure has eased off lately. We're starting to see the nonsense stocks falling and often quite falling quite far. And if you go look at the Reddit checkboards now, you see that they're full of other Warren Buffett quotes, GV quotes about buying when there's blood in the streets. And it's almost comical at the moment that retail investors could be talking about blood in the streets at exactly the same time as the market is literally hitting new highs on a daily basis. Well, that change has changed my life because I short nonsense stocks and shorting nonsense stocks gave me the worst three or four months of my career in the lead up over the Christmas period and it has suddenly become exceedingly

nice. We're making money on both sides, book at the moment. We're making money on longs because we're long, ordinary stocks and the market's making new eyes and we're making money on shorts because the nonsense stocks are deplating. And I don't know how long this will last, but it's extremely pleasant and having been extremely unpleasant. We should also talk about our friends at Greenfield, and I don't want to link Greenfield and Archegoth, other than to say the symptoms of the extreme indivocal market. But I've heard lots of Donson said about Greenville,

so I might start here. Right. What would you say then is that when you say started Greenill, what is your big picture thought on them? The big picture thought is, that old stuff is new again, but without even realizing what is radical and what is new here. Trade finance has been, in the 19th century, was an enormous business.

And being an Australian, I'll talk about it pro-gilly. You, as a wool farmer in Australia, or for that matter, a cotton farmer in America, would be selling your stuff to the looms in the UK, where industrialisation meant that they just had vast-bloom fabric factories. And for an Australian selling wool to the UK, it was six months to deliver it, and another sort of six months before you got the message back that it was delivered. And the farmer couldn't wait a year to get paid. In fact, it's completely unreasonable to expect them to wait a year to get paid.

if you were an American cotton farmer, it was way less than a year, but it was still an unreasonable amount of time. And so what you would have is these multinational banks that would effectively buy the cotton in America or the wool in Australia, you know, finance the purchase of it, finance delivery, and it would all be settled up over time. And there were three great trade finance banks around the world. And they also, came actually, unsurprisingly with the British Empire, two of whose names you will know to this day and one of whose name has been consigned to history. The two that you'll know to this day are Hong Kong and Shanghai Bank and Standard Chartered. And they're both big Asian banks, with HSBC

being a big global bank, headquartered in London. And the idea that a bank whose name is Hong Kong and Shanghai banks would be headquartered in London, who's its origin. to the fact there was a giant trade finance bank. The one that you won't know was a bank called English, Scottish and Australian. And English, Scottish and Australian would have once been mentioned in the same breadth as HSBC or Standard Chartered, and up until 1972, it was headquartered in London as well. In 1972 or three, I don't remember the year, it moved its headquarters from London to Australia, renamed itself ANZ Bank and is now one of the big four Australian banks.

It also sold its operations in the Middle East and India, so it used to own a giant in the Middle East in India called Grindleys. But when I worked for A&Z Bank, and this was in the late 90s, ANZ Bank still had the residual of the giant trade finance operation. A&Z Bank alone amongst the Australian banks had branches in over 200 countries, which is pretty well every country in the world. And that sort of thing was the residual of a trade finance operation. Now, with modern communications and busts delivery et cetera, trade finance has gone from being

a very, very big and very important business to a small business. And the idea that SBC was at, or A&Z was at its heart, a trade finance business, now looks a little bit absurd, but that's what it once was. And now a typical thing that might be involved in trade finance is I know a guy who strips down cars for recycling. He has a huge car yard at the outer part of Sydney. And one of the businesses is stripping down alternators, which is a sort of electric spinning part of a car. And they contain about a kilo of copper, maybe a kilo and a half, which is, I guess, $5 US worth of copper, but somebody has to unwind it. and the process is that the alternators get stripped down in Australia.

They're shipped on ships to a low-wage country, in this case probably Indonesia, but if it's the United States, almost certainly Mexico. The things are disassembled, some are reconditioned, some are just stripped down to their copper, and then the copper is sent to smelters probably in a country that has historically been tolerant of pollution, but these days mostly China. And the process is shipping millions and new.

millions of dollars of copper around the world, because the people in the low-wage countries can't afford to finance those millions of dollars of copper, there's almost variably a trade finance company in there. And the typical sort of risks that you might be taking is that ultimately the recycled bits of metal are going to be sent to, say, 30 or 40 different recycling yards in China. And those recycling yards, you've got a credit risk. against them. And, you know, the two ways of solving that they buy the copper up front or some kind of cash on delivery system. And the alternative way of financing it is that you have some kind of expert in trade finance who knows that those Chinese are good for it.

And the idea that you have some expert that knows which 150 Chinese recycling yards are good for the money in the West is a pretty difficult idea. I'm not an expert in, you know, broad detection in China, but I would have no way of credit assessing 150 copyyards. Now, there are businesses insuring this, and the classic business insuring this is a French business called Oiler Hermes, and I was talking to a Frenchman who pronounced it Yula, so I'll have to go with Yula.

but Euler does sort of trade finance insurity insurance. And it's a pretty reputable player and it's been around for a very long time, but it's not an enormous business. And then along comes other insurance companies wanting to get in on the act. And I'm thinking of my local one, Insurance Australia group, who did a joint venture with Tokyo with a tied broker in Australia. and they were insuring this sort of stuff. And the first time I actually came across them was when they were ensuring a whole lot of coffee yards in China and they defaulted similar. So what was really going on was that copper was being sold, and it was metal recycling,

being sold to recycling companies in China who were taking delivery and paying a little later, and it might have been $50 million of copper in a shipment. and suddenly these guys order sort of three, four hundred million, and they're at 30 of them. And I'm surprised if the scandal hasn't sort of hit, but it's one of the bits that sits inside this insurance chain on trade finance. Now, that insurance paid on trade finance included IAG, it included Tokyo Marine, is also included the Australian but London-based Greenshild. And the kindest way you can say this is that they walked into a shrinking business and they grew it like crazy where all the counterparties are obscure. Now, I'm an old sort of guy and the most scary thing in the world to invest in is a fast-growing financial. Because anybody can grow a financial fast by just taking more risk.

You want to grow a subpride financial fast. you just stand up on the New York subway and say, does anyone want to borrow $1,000 and waive the money here? You'll have a very fast, large loan book very fast. It won't be very good. And essentially, the kindest version of this is this was the trade finance version of the same. Now, at some point, it went from being the trade finance version of that

to an unadulverated Ponzi. and I don't know what that point was, but if you're a financial institution that has lost a lot of money, there are two parts. One is to admit it, and the other one of which is put the foot flat to the floorboards and hope to grow back fast. And somewhere along the line,

Green Sill became that. And then there were a bunch of people who needed money. one of the interesting things in this world is that the people who really, really, really need money have the knack of finding the people who really, really, really need to lend it. Right? So, you know, if I was sitting down, if I was sitting on the New York subway waving around anyone want to borrow $1,000, I get a fair few takers the first day, but by the fifth day, what would be happening would be everybody who, who was a completely desperate degenerate to be at my doorstep.

And so somewhere along the lines, they went into, they got to that point and attracted the most degenerate gambler in the market. And the most degenerate gambler in the market has blown up. Yes, its name is Mr. SoftBank. John, can I just press you on one thing about SoftBank? Because I wanted to ask you about this. So SoftBank's Vision Fund invested in Green Sill. And when you look at something like Green Sill, you know, it's basically,

trade finance or cash advance, it doesn't strike me as a company with a particularly strong technology angle or pitch? What exactly do you think the attraction was there? Entirely honest, it had no pitch, right, which is a good way of raising money. So specialty finance with like a tech valuation? Yes. The way to get a valuation for a bullshit insurer in the US is to call it FinTech. Right. There are several FinTech specs, which, are just completely bad bullshit traditional insurers, but they are the most highly valued insurance companies in the world.

The way that you get a high valuation for a junkie lender is to call it tech. But that would be the kind interpretation for SoftBank. The not kind interpretation for SoftBank was that that capital that was invested by SoftBank in Greenville, leave it up, and then was invested by Greensill in softbank entities. So there's a company called Viewing, being an example. And View Inc is a legitimate attempt at electrochromatic dimable windows. You have a skyscraper where when you need a lot of heat in, you have the windows being completely transparent and when you don't need a lot of heat in, you make the windows quite dark.

the sun is shining on them. And we see that with chromatic glasses, but you can do it much, much better if you make the windows in some sense electrochromatic. This is a legitimate ESG idea. But Vue Ink was a soft bank company, and for good reason, I suspect, there was a legitimate, you know, tech idea.

And to be mild, it was a disaster. And if you go look at Glass Door on Viewing, and you go through the reviews on Viewink in 2018, the reviews are along the lines of, well, you know, on the plus side, there's a lot of room in the car park. And Viewing was absolutely a death store. It's cumulative revenue, 15 million. Cumulins spent hundreds and hundreds and hundreds.

And it just didn't seem to get traction. I don't know whether it didn't get traction because the product doesn't work or the product was badly marketed. do they genuine, or that the cost structures just didn't work. I have no idea, right? But this thing was absolutely clearly on the way out bust. And then Greenfield lent it $400 million and called it trade finance. Now, it can't be trade finance because viewing hasn't sold anything,

so it's got no receivables to factor. It's just an unsecured loan to a soft bank entity of about $400 million, dealers, which doesn't make any sense. Now, in this case, there's a good chance that SoftBank might get the money back because viewing looks like it might be a bit better now and it might get spacked. But to pretend that this was trade finance at the end and that they were provided, I mean SoftBank must have known that this was not technologically driven trade finance because they were lending to SoftBank controlled entities.

at the end this was just a Ponzi that was taking money from anybody in whether that anybody included soft bank. It's beingly or unknowingly, soft bank was clearly a beneficiary. Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy. Bond markets are massive, murky, and let's be real, lots of firms throw a couple flashy funds your way and call it a day. But not Vanguard. At Vanguard, institutional quality isn't a tagline. It's a commitment to your clients. We're talking top-grade products across the board of over 80 bond funds, actively managed by a 200-person global squad of sector specialists, analysts, and traders.

These folks live and breathe fixed income. So if you're looking to give your clients consistent results year in and year out, go see the record for yourself at vanguard.com slash audio. That's vanguard.com slash audio. investing is subject to risk vanguard marketing corporation distributor. So your contention is that, you know, what was ostensibly some form of trade factoring, just, sorry, trade finance, just became sort of completely reckless lending to anyone. What did you, like this was, Greensill was a private company. So what, but you were early on along with others and sort of, I don't know, blowing the whistle is the right term, but sort of calling out their practices.

What were the hints from the outside early on that something was amiss? In this case, the idea that trade finance could be 10x is because it used to be. It is just an idea that flies in the face of history. There's a very, very good reason why trade finances are shrinking business on a 150-year basis. And the very, very good reason is better communications, better finance and better transport. right all of those right and the bits that are left are the bits that are by definition a little risky financing stuff sold to retailers is risky we know that because retailers default and if you look at oil oil as results oilers results go up and down with retail you right but the other things this whole sort of metal commodities chain

where you're financing to an unidentifiable company in china the idea that this could be a 10 times bigger business was sort of an asthma. I have to say that I'm completely reliant here on, I became very reliant here on certain journalists. The FT journalist Twitter handles Bondec, Robert Smith, and more importantly, the Wall Street journalist, Duncan Maven. And Duncan even sent me some questions about Insurance Australia Group, and I put two and two together and realized that Insurance Australia Group

might be insuring vast amounts of stuff on which it was likely to default. And I sent a quick, about a page and a half letter to the local regulators. And in this case, the local regulator is somebody who used to sit, you know, five chairs away from me in the Federal Treasury when I was a very junior employee in the Federal Treasury. And he's now the sort of head insurance regulator in Australia. So we sort of knew each other. and I put an edit adverted letter on my blog.

But to say that I called the whistle in any real sense overstates my role, the real whistle callers here were Duncan, Duncan Maven, Robert Smith, who were both fantastic journalists and certainly worth subscribing to their papers for. I looked at it and knew they were right, and I knew they were right because the idea of a very fast-trade, fast-growing trade finance company just didn't make any logical sense. Now, the second one of these blow-ups, I didn't mention Credit Suisse here. Duncan Maven had certainly asked several questions of Credit Suisse because Credit Suisse had this fund that was buying all the Greenfield paper, and it was selling the Green Seal paper to

clients on the basis that it was AA rated and insured. And either it is insured or it's not. And if it is insured, then Insurance Australia Group and Tokyo Marine in some order are going to take billions of dollars of losses. And if it's not insured,

then at first glance, the clients of Swiss are going to take billions of dollars at losses. But we know from the last cycle that if you miss sell crap to clients, just straight out miss sell, then those lobsters will slate back to you. And you can pull out any of the marketing documents for this fund.

It was absolutely clear. It was pitched to the investors as double A rated insured. And as far as I can tell, there was no due diligence done by credits with around those statements. And it's absolutely clear to me. if it can't collect from the insurers is going, without having to pay the clients out. They're at the moment saying, well, the problem is our client's problem,

which is, you know, a pretty self-destructive thing to do. Because, you know, if you're credit Swiss, your pitch to the world is that, you know, we're a good home to say, you know, high network people to have as their sort of generalized financial advisor. and then when the shit hits the band, okay, Hanya, where people were going to screw you? You know, screwing your clients is not a good business model anyway, and that's probably enough to think that credit Swiss is

long-term structurally challenged. But they must know that those losses are going to wind up with them. The second part of that is, you know, there's never only one cop. And we didn't know about Archer got it, but I'm actually chasing down and I'm not. going to name it another very big European fraud where we think that Credit Swiss is going to have 10 figures, low 10 figures of losses, something in the billion range. And, you know, this multiple cockroach thing at Credit Swiss is kind of amusing.

I knew who Bill Fang was because I followed him before he had blown up because he actually owned some Chinese frauds that I was short. And the guy was always very aggressive then. But if you had a diversified portfolio, some of which were frauds, but all of which were in China, and you did this over since 2011, you did all right until, you doubled down and then doubled down again and then doubled down again. But when he no longer took public money, the sort of strengths of taking public money, which is one of which is that it's pretty hard to be seven times leaver because of your clients don't trust you. disappear and the guy turned into a, you know, revealed himself to be a complete degenerate gambler, but I knew none of that. And the complete degenerate gambler took likely diversified positions in controversial stocks leap at six or seven times. Now, the problem is that if you take,

if you buy controversial stocks and you're right, you tend to make a lot of money. But it's more than once that the crowd is going to be right about a controversial stop. And the one that allegedly did him in was Viacom. Viacom at one level is just a giant global old media business, like News Corp or for that matter, like Disney. But it's probably a more controversial one than the others, because when you look at Viacom's businesses, they scream out yesterday. Right? The movie studio doesn't, but CBS TV certainly does. My son is 21 and I haven't seen him watch Free to wear TV at all in the last five years. He watches a lot of video, right, but it's almost all non-linear video. The second thing that they own is MTV,

Nickelodeon, and both of those look pretty challenged. Nickelodeon because our friends at Netflix are spending billions of dollars on children's TV. Children's TV is one of particularly young children TV is one of the ways that you guarantee loyalty to net. But, you know, music channels no longer seem particularly constrained. And even their biggest part of the movie franchise, which is, I think, James Bond. James Bond feels a little bit tacky these days. You know, I kind of like a James Bond film, but there's a dose of sort of 21st century sexual cringe about James Bond. right, the jokes that were acceptable in 1980 just aren't acceptable now.

So that feels a little yesterday too. And so when I think of yesterday, I think of Biocom. And buying massive stakes in what should be a declining business doesn't look particularly sensible. Yeah, just to jump in for a second, I mean, one of the things that's actually really struck me is that if you look at Viacom's chart, You obviously have the big 50% raise during the blowup, but it hasn't bounced back at all. In fact, it's sold off further even after everybody was sort of aware of the block trades. But before we go on further, I just want to ask, to be clear, just for listeners, I think you said, are you short credit suisse or were you or are you still?

I am short credit Swiss, but I was short credit Swiss in fairly big quantity in the past. I'm now short credits with in very small quantity. So you can probably think of me as a credit Swiss buyer, but a buy to cover. Now, even then, you say Viacom, you know, Viacom year to date is flat, right? Well, it's actually up. If I go back to one January, it was $36.60.

It's currently $39.77. Right? The idea that you can blow yourself up buying a stock that is flat year to date on leverage is pretty astonishing. And the only reason this was possible is it went from 36 to the princely sum of about 100. So he must have, every time it went up, he must have bought more. Now, there's an old scam in funds management, which is to buy a. bunch of illiquid stocks and walk them up, buy more of them, and your performance is great. And so because your performance is great, you buy more, and then you buy more, and they walk

up a bit further, and you're suddenly the best performed fund manager in the world. And retail investors are often not very sophisticated, so money flows in, and eventually you're left as a giant bag holder full of illiquid stocks. and that can be done or it can be done accidentally by a deluded fund manager and if I think of the accidentally by a deluded fund manager

I probably think of the great Woodford scandal in the UK where a lot of what was happening was there and if I actually think accidentally by a deluded fund manager I would think that Arch Genetics Fund looks an awful lot like that to me right but the idea that

somebody that comes out of the tiger complex. You know, it was a protege of Julian Robertson. You know, this guy had pedigris, and he was doing the scale that he was diluting himself on biocom is a pretty astonishing thing. It didn't surprise me that the lender that lost the money here was Credit Suisse, but I didn't know about it in advance. And part of the reason why I am a coverer of Credit Swift is that when you get lucky, and I did get lucky here, you've got to take some off the table. Now, we got lucky because we didn't know that Archigoths was going to happen. But we did know that we looked in several places and we found shit knee deep at credits with.

And if we can find approaches, there are probably a few more. So just going back to the start of this conversation, what is it about the current environment? We were talking about it earlier. You know, you have stocks at very high valuations. you have ample liquidity, the economy is recovering. By most accounts, things should be going pretty well for a lot of businesses. But what is it in the environment that is making some of these scandals come to fruition or that's showing up these latent stresses in financial business models?

I don't know. Long answer is if I knew what it was that turned the environment from unbridled euphoria back to slight realism, I'd be the richest hedge fund to manager in the world. I genuinely don't know. But what we have been through a period of complete unbridled mania. The period November to February was complete mania. And at the end of such a period, you can expect a bunch of things.

we've had a bull market of pretty enormous proportions with a little two-month indirectness. If I look back, 2011, stocks were objectively cheap and people were scared because they are up a bit from the bottom. By 2015, stock ceased being objectively cheap that you could make a case for them. And then they continued going up. The period over last Christmas was a period where the Reddit crowd, complete nonsense to the moon. And that Reddit crowd taking complete nonsense to the moon turned out not just to be the Reddit crowd, but certain aggressive funds like Archiegotts who decided to play along with it.

That's all we're seeing at the moment, in some sense is a few little blow-ups at the edge of that. There's going to be 15 or 20 archicocs out there. There's going to be a bunch of really stupid stuff out there that blows up and we're going to think, how the hell were we that stupid? But to be honest, I don't think it's, I mean, that's barely started. And I don't think there's any particular reason why January was so good for nonsense and March was so bad the nonsense.

It's just what happened. I genuinely have no idea. But you think stuff like Archie goes, more is coming, not necessarily that scale per se, but more blowups are coming. Yeah, it's not possible to a bull market of the scale that we've had and not have some people running around with no clothes who think, they're wearing God's binary, right? It's just the emperors are going to get exposed.

I wish I knew who they all were. I know who a few are, right? And a surprising number of times when I know who the emperor wearing no clothes is, the lender to that emperor is Credit Swiss. There's probably a good reason why it's Credit Swiss too. I mean, the last time you had me on the podcast, I was thinking about European banking margins

and how the banking marches are terrible. But the Swiss banks had had another big problem, which is that once upon a time they had a very large competitive advantage. And the very large competitive advantage was secrecy. And secrecy got taken away from them. They're almost definition-leveled. Swiss banks are just not just a shadow of what they used to be. They're a much smaller business. And their core business has compressed margins too.

and the Swiss establishment, they want to blame the previous CEO who clearly wasn't of the Swiss establishment. But in fact, I think that's just missing the point. The real problem is that this bank is a shadow of its former self. Its revenue opportunities have disappeared. And it's a very large organization and a very large organization financial whose revenue opportunities disappeared will solve for the lack of revenue by taking more rich. And that's why they wound up, sidling up to an obvious Ponzi artist like Lex Greenshill, why they decided that lending money to somebody who had previously run a criminal funds management organization and lending it not on small scale, but billions and billions and billions of dollars,

was worth it. It's because they had a need. They had a need to lend, just like Lex Greenfield, had a need to put his foot flat to the floorboard when his business wasn't doing very well. So, you know, you ask why now. Well, you know why in general, which is credits where this is less of the business and so it lent. And that's going to be a particular European problem. And, you know, the frauds that I'm following in Germany, which I'm not going to name, has been an extremely big. borrower from banks that feel they have a need to lend and make a spread.

I should just mention here that when we first wrote about your short position in Credit Suisse, we did ask the bank for comment and they declined to do so. But we'll follow up with them again. John, you also mentioned ARC investment very briefly. What's your take there? Because you were sort of talking about them in the context of this idea that you could be buying liquid stocks and pushing the price up. and sort of generating your own momentum.

Is that what you think is going on with some ARC funds? It's most obvious with the ARC genetic fund. If you have a look at the Archienic Fund, a very, very large number of the companies in at the reverse mergers of moderate liquidity, about eight or nine of which we would regard as natural shorts. And when it started getting outflows, it started selling or reducing the size of its position in regeneron.

And regeneron is a biopic of the highest quality in the world, but it's highly liquid to buy more of these companies that are under pressure. And if you look at the way that the Ark Main Fund has behaved, it's done the same thing but with Tesla, but not on the same scale. So they have sold relatively good conditions like Google to buy controversial names like Tesla, as Tesla got weaker. Now, the genetics fund looks to me like a mass exercise in marking book. The main fund much, much lesser, right? The main fund makes some sense to me.

The genetics fund makes no sense to me. And the genetics fund is an area over which we have considerable expertise. And I should disclose here that we both own and like regenerons, and we're short a few names in the fund. So it was sort of amusing to us watching them sell regenerons by the names. We're short. But, yeah, the genetics fund is a very large fund holding lots of illiquid positions. And it's had flowed.

Eating well shouldn't be complicated. But somehow it turns into recipes, prep. clean up, and half your Sunday gone. Factors solves all that. These are fresh, ready-to-eat-eatians, delivered to your door, and ready in just minutes. No prep, no cleanup, no excuses. And it's not just about convenience. You're getting real food, balanced nutrition, and zero artificial stuff. Meals that help you stay on track for all of your goals, without the grind of doing it all yourself. Grilled chicken, roasted veggies, steak plates, postables, they taste like something you get in a restaurant, but they come out of your microwave in two minutes flat.

If time, cost, or effort have been holding you back from eating better, Factor just took those off the table. Right now, get 11 meals, free shipping, and free sides for life. Hurry, this offer won't last long. Go to FactorMeals.C.A. and use code fit. That's 11 meals, free shipping and free sides for life, but only with the code fit at Factormeals.ca. Factor, Canada's number one ready-to-eat meal delivery service.

You have the desire to help a real difference? The College of the program Dependence and Scenta Mental. Acquare the competences essential to accompany and sustain the persons confronted to the difficulties of health and dependents. Construise a career enrichingance to service of the community francophone of all the country. Donnay of quality in French, it's possible with the Cite.

Visit Collage Lacite.compte.com. An initiative of the Consortium National of Formation in Health Health, Souttened by Santee Canada. John, I'm sure Tracy is going to be really annoyed with me because I bring this up. while, but, you know, when you, you mentioned that period, like, kind of like from December through the middle of February where things just went absolutely ballistic. And that's when I noticed that, like, the fuel cell companies, which we actually talked

about when we talked, when we had our arc episode, they went absolutely nuts. And for me, like, I remember them because those all went nuts in the late 90s and then collapsed. Do you hit, like, you know, all of these, like, electric vehicle, battery specs. fuel cell companies, charging companies, and so forth. Like, do you see much there or, in your view, as most of this junk? I'm not going to name names, but we're short about a dozen different names that look a little like that. Now, the only one I will name is Nicola.

And Nicola had an extremely confident short case written on it. whereupon the stock doubled. Now, as of today, the stock is trading 20% below the extremely competent shortcase. But that's a sort of extreme version of the retail mania. As far as anyone can tell, Nicola has nothing. Nothing worth having except billions of market cap and a good bid in their stock. You were talking about the fuel cell companies that were once big, and the obvious name there is plug power.

And plug power was a very hot stock in the dot-com era. It was going to be the future. And I guess, you know, it's still the future. Maybe it always will be, right? But the thing that amazes me about plug power is the share count. I've just pulled up the numbers. So I'm going to read you share counts going back to 2000-ish. and it's a remarkable series.

So 4.3 million, 5,000, 5.1, 7.2, 7.3, 8.5, 8.6, 8.6, 8.7, 12.7, 12.9, 13.9, 13.9, 138.2, 106.1, 173, 180, 191 million. 228 million. 303,458 billion. That share count is the sort of share count pattern that you see with a multiple reverse merger dilusive penny stock. It's not the sort of thing that you see in a company that had relatively recently 60 billion of market cap and was raising money in billion dollar long. So yes, you name it. Plug power is to me astonishing. It's certainly a technology of the future.

It may always be one, right? But it's astonishing to me that a company with 629 employees has both needed to and manage to raise money on that sort of scale. Just in general, what is the environment like right now for identifying shorts and also monetizing them? Last six or eight months, I would have said the ideal, the environment of identifying shorts was like shooting. fish in a barrel. It was so easy to find a piece of overpriced nonsense. The only problem is up until you know, mid-February the fish shot back, right? You know, you would short the most obvious fraud, and it would double or triple in your base. The fish had stopped shooting back. So the environment has been distinctly better from my perspective. I'm well aware that retailers in 40 million accounts

in the period post-pandemic. And, you know, some people have got a taste for gambling on the stockmasses and the fish might shoot back again. But the identification thing is dead easy. The managing the book is incredibly hard. And almost all of my fellow shortsellers have had an extremely rough year because they were very good at the identification. They thought this is money for jam.

Then they lost a lot of money. So just on this notion of retail getting more interested in stocks and maybe participating in them in a very speculative way, has that changed the way you invest at all? Or do you think it's going to change the way the hedge fund industry operates? Well, there are certain things that I've done that I didn't even imagine. One of which, for instance, is we have had to calculate an estimate of the gamma in every stock in the, stock market. The reason is that we became all there in January, but then very, very intensely February of the risk of gamus squeezes. And the idea that a small number of options could drive a stock to the moon and that retail could be persuaded again. And the idea that the most active

option contract in America for one day, I think, was an $800 short-dated. game stop call is so absurd, but we had to live in a world that looked like that. So the amount that we needed to tighten up our risk management was remarkable. Now that it's that much tighter, my guess is that it's not going to get loosened off very much, you know, once a bit and twice shy. We didn't lose meaningfully large amounts of money, but it was still an extremely unpleasant period. We were underperforming like crazy. And the best thing I could say is that all my competitors were going out of business and we weren't. Right. But that should make life easier

for us in the future. But a lot of the risks that we thought were theoretical turned out to not be just theoretical. They turned out to be absolutely anything. And the idea of a portfolio that looks like four and a half times leave it long, short, all the same trade, a la, and the particular trade I'm thinking of that case is the Plotkin trade, which was long the future short parts. So you're long booking.com and Google and Apple and your short Blackberry and Research and Motion, Blackberry, your short retailers like game stock and Dillard's, your short their landlock like Maserich.

And dare I say, your short buy a com. part of the problem bycom, because Viacom looks like the past as well, that trade, which, you know,

I would normally associate with geniuses like Drunken Miller, that trade's a great trade, just don't lever it five times, right? Because if you lever it five times and the retail crowd kept cotton on your debt,

right? I actually like the trade. I just don't like it on the scale of stuff. So do you feel like the, the retail froth, the whole Reddit, everything,

insane, aggressive, almost weaponized. Some people put it call buying. Do you feel comfortable that that peaked some point in Q1? I'm not going to manage the book on the basis that that peak is permanent. Right? You ask how it's changed, you know, hedge management. Well, you know, it's scared. Right?

And I'm going to stay scared because I always do. But yeah, it has peak. Whether that's a peak is permanent, I have no idea whatsoever. Gambling's fun, right? So it's always a possibility that people decide that gambling's fun again and do it on an even grander scale. I try not to get them.

I try to work out how to manage my risks, but, you know, I've got to be aware that there are non-rational actors there whose goal isn't to make money. Their goal is, well, they tell you their goals to make money and they hope to, but their goal is, in fact, just a gamble. Well, John, it's always great. having you on. Thank you so much for coming on another episode. That was great, John. Thank you so much for coming up. It's a pleasure. Thank you. So it's always a pleasure talking to John. I mean,

he has such a great track record when it comes to spotting inconsistencies in financial models. And I always find it really interesting listening to the way he thinks about taking on short positions and how he comes to those conclusions. But one of the thing that struck me there, is just this idea that, I mean, it was kind of amazing to listen to him say that he had to do gamma squeeze analysis on all their short positions because of what happened to GameStop in January. And in that way, GameStop and retail participation really is kind of changing the way the market and the hedge fund industry is working.

Yeah, it might end up be that the GameStop story was like just like some sort of like true peak of the mania. Like if you look at, on the terminal, like, if you look at like call option volume, other market volume measures, things like that, it basically is like right around when GameStop happened and a bunch of other things. And so, you know, like, you know, the market's still at all time highs and people are still gambling on all kinds of things. But it could end up being that a lot of the charts that sort of like really capture that moment, like we're really right around the GameStop peak. Yeah, but it's opened the door, right, to this kind of behavior.

Like, it's created a possibility that I don't think people thought was actually there before, which is that you could force a squeeze with tactical call buyings and things like that that would be massively painful for anyone out there with a short position. That was pretty wild. Just in general, though, like, I love, like, hearing how John thinks about everything. And just like the degree to which he sort of like understands the sort of the basic of like business models or hearing him talk about like the history of trade finance and why it emerged. Right. When you go talk about Green Sill and he says, well, we have to look back to trade finance over 100 years ago.

Like that's such a great beginning to your conversation. Yeah. And it makes sense like this idea that like essentially it's solved a sort of. of like information gap. And that in a world in which like you sort of know your counterparties and you have good information and everything, like it shouldn't be like a rapidly like super, you know, super big business is like a pretty good, an interesting sign or an interesting tell. Yeah, for sure.

Should we leave it there? Yeah, let's leave it there. All right. This has been another episode of the Alld Thoughts podcast. I'm Tracy Allaway. You can follow me on Twitter at Tracy Allaway. And I'm Joe Wisenthall. You can follow me on Twitter at the stalwart. And you can follow our guest, John Hempton, on Twitter. He's at John underscore Hempton. Follow our producer, Laura Carlson. She's at Laura M. Carlson. Follow the Bloomberg head of podcast, Francesca Levy, at Francesca Today. And check out all of our podcasts of Bloomberg under the handle at podcasts. Thanks for listening. You can get the news whenever you want it with Bloomberg News Now. I'm Amy Morris.

And I'm Karen Moscow here to tell you about our new on-demand news report delivered right to your podcast feed. Bloomberg News Now is a short five-minute audio report on the day's top stories. Episodes are published throughout the day with the latest information and data to keep you informed. Yes, there are other products like this from a variety of news organizations. But they usually rerun their radio newscasts throughout the day. That's not what we do. We create customized episodes that can only be used. heard on Bloomberg News Now. And we don't wait an hour to publish breaking news. When news breaks,

we'll have an episode up in your podcast feed within minutes. So you're always getting the latest stories and developments. Get the reporting and the context from Bloomberg's 3,000 journalists and analysts. We're all over the world. Listen to the latest from Bloomberg News Now on Apple, Spotify, or anywhere you listen. What separates good leaders from transformational ones? I'm Jessica Chen, and in season two of Leading By Example, we'll sit down with executives like Grace Chen of Bertie Gray to find out. It's important to understand where you spike, but also really acknowledge where you don't and find people who can fill those gaps. Listen to Leading By Example, executives making an impact on the IHeart Radio app, Apple Podcast, or wherever you get your podcasts.