The Pomp Podcast - #1235 Carson Block | The King of Short Selling Reveals His Secrets

Episode Date: August 21, 2023

Carson Block is the founder of Muddy Waters Research. In this conversation we talk about the short selling environment, ESG grift, AI stocks, US & China relations, and what exactly is happening with tech companies with sky high valuations in private market & have come out in the public market. ======================= Backed by world-class investors, including Google's AI Fund, Range has redesigned wealth management from the ground up. Range delivers a tech-first experience that provides fast, high-quality, transparent wealth management services making it simple to optimize and grow your wealth.With Range, you get comprehensive services like tax optimization, investment management, and estate planning with no hidden fees. That means no AUM fees.Get started today with code POMP15 for 15% off any quarterly plan for your first year at ⁠⁠⁠⁠⁠range.com/pomp⁠⁠⁠⁠⁠ ======================= Sign up for a StartEngine account today using the link below and explore live investment opportunities where you can start investing with as little as $100:⁠⁠⁠https://invest.startengine.com/?utm_source=podcast&utm_medium=anthonypomp&utm_campaign=startengine-own⁠⁠⁠ The information provided in this marketing material is for illustrative purposes only and should not be considered as financial advice. Past performance, including the success of certain individuals, is not indicative of future results. Investing in any market, including startups, involves risks, and there is no guarantee that similar opportunities will yield comparable returns.Number of Users is determined by counting user profiles with unique email addresses which are active and have been confirmed*Includes $760M in funds raised as of May 9, 2023 via Reg. CF and Reg. A+ combined through StartEngine’s funding portal and broker dealer, StartEngine Capital, LLC and StartEngine Primary, LLC respectively, as well as StartEngine’s own raises. Also includes $470M in funds raised previously through offerings conducted on http://www.seedinvest.com outside of the StartEngine platform. In May 2023, StartEngine acquired assets of SeedInvest, including email lists for SeedInvest’s users, investors and founders seeking to raise funds. ======================= Pomp writes a daily letter to over 250,000+ investors about business, technology, and finance. He breaks down complex topics into easy-to-understand language while sharing opinions on various aspects of each industry. You can subscribe at https://pomp.substack.com/

What's up everyone? This is Anthony Pompliano. Many of you know me as Pomp. You're listening to the Pomp Podcast, which is my effort to find the most interesting people in the world and sit with them for hours while I ask questions in an effort to learn. So it would mean the world to me if you would subscribe to the show on your favorite audio platform, watch episodes on YouTube, and tell your friends and family about the podcast. My goal is to help millions learn from the world's most interesting people. So let's get into today's episode. Carson Block is the founder of Muddy Waters Research. In this conversation, we talk about the short-selling environment, the ESG grift, AI stocks, US-China relations, and what

exactly is happening with all of these tech companies that had sky-high valuations in the private market and now have come out into the public market. I always enjoy talking to Carson because he understands public markets, both the long and short side, and his track record is absolutely incredible when it comes to finding and publishing research on tons of companies that are misleading or fraudulent. This conversation delves into a lot of detail and I hope that you enjoy it. Here is my conversation with Carson Block. This episode is brought to you by Range. Are you day trading, a crypto enthusiast, or a tech worker? Or are you just an overall investing enthusiast? Listen up, you need Range. Backed by some of the world-class investors, including

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live investment opportunities where you can start investing with as little as $100. Again, run over to StartEngine.com and you can explore those live investment opportunities today. Anthony Pompliano runs Pomp Investments. All views of him and the guests on his podcast are solely their opinions and do not reflect the opinions of Pomp Investments. You should not treat any opinion expressed by Pomp or his guests as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his personal opinion. This podcast is for informational purposes only. All right, guys. Bang, bang. I've got Carson here with me. Carson, I thought a great place for us to start this conversation

is this idea of a reappearance of short selling. But there's kind of two different stories from my external view. We have on one side, folks like yourself or Hindenburg Research who have these great track records of shorting stocks coming out and kind of exposing a lot of whether they're actual frauds or kind of mismanagement and just bad behavior in the market

and kind of a check on the people who are just ultra bulls, ultra long all the time. On the other side, we see short selling coming up a lot when it comes to these meme stocks and these short squeezes that are occurring, it appears that usually the people who are shorting there are kind of more traditional hedge funds that don't necessarily specialize just in shorting. Can you give us a little bit of your understanding or kind of like your view as to on one side, it seems like short selling is working and people are making money and they're

calling out the bad companies. On the other side, it seems like people are getting blown up left and right and people on Reddit are having a field day. And so like, which one is it? right well it can be both um and i think what a lot of people don't understand about what we do as activist short sellers short selling itself is a niche and activist short selling is a niche within a niche and the the issue is um so vast majority of the shortable universe consists of companies that are just basically melting ice cubes so if you're going to short it you have you think it's melting faster than whoever's on the other side of this thinks it's melting um and that's that's fine but for activist short sellers that's not what we do

we're not going out and at least good activist short seller isn't going out and screaming like i think the competition is going to erode margins faster than the street does my model beats that No. The crux of what we do is we're looking for situations in which generally management has manipulated the information that it's giving to investors. And that's usually so that management can pump the stock and dump it. Sometimes it's because they're able to get the companies to engage in transactions with companies they have interests in. But in any event, it's when management is misleading, egregiously misleading, or outright lying, or concealing, you know, lies of omission, concealing material information. So that's where activist short sellers come into play.

And we're not usually looking forward to say, we think this is what's going to happen. We're looking backward. The company told you this, this was misleading because blah, blah, blah, and they didn't tell you that and so you know up to you investor you know you extrapolate the future based on a past that you've just been shown was a lot less positive than you thought it was so that's that's what activist short sellers do and you know it really in the post gfc environment um you know it's it just seems like every public company ceo it feels like it's his god-given right to monetize at least like 50 million dollars worth of stock and the environment is has been so corroded because like you know pretty much in so many of these companies are really pushing you

know they're they're close to the line in a lot of respects and i guess what's different is the long side at least you know until maybe 22 and arguably still the case though the long side began cheering this on because it became clear in the post gfc world that on the long side you were no longer being remunerated for caring about risk right so the guys who cared about risk got derided as value investors and sort of laughed into a corner and you know the dudes who are like yeah give me some narrative give me some blue pill i'm going to crush that up and you know blow some rails those were the people who were you know rewarded financially so um that's why there is this there's still this target rich environment for activist short sellers is because the behavior has just

become so pervasive and so egregious on the part of company management now when you look at the bigger picture and these and how you've got more and more funds saying okay we're not going to do single name shorts anymore so that's that there's somewhat different dynamics there so most long short funds historically the dirty secret is they didn't really care about shorting it's just a way to get a higher fee structure right like they're trying to make their money on the long side and you know charge a 2 and 20 instead of just being paid you know like like 100 bips on you know on assets under management so they're sort of reluctantly shorting now those you know those are the pretend shorters as well as the real ones they're usually looking for the melting ice cube

type of shorts and um you know that's fine but really that was never a strategy that was designed to make money it was not an absolute return strategy it's like we're looking to generate alpha so you know we're going to be you know we're like you know we're like 150 gross and we're you know we're net long 50 and you know we're just trying to create alpha uh with our shorts and every now and then you have a year in which the market goes down and that's when those shorts are are actually going to provide some absolute return but by and large you're doing it to smooth volatility um so that generally worked except the problem is um allocators got really tired of losing money um you know on the short side because you know i mean at least until you know late 21 22 the market

was just going up that's it so so you had that dynamic and then something else that also i think a lot of um a lot of short sellers you know have been in the game a long time because look the reality is you haven't had a lot of people since the financial crisis come out of the woodwork to say you know i want to be a traditional short seller so these are mostly people who were you know whose careers started well before the gfc what they don't understand is when they look at their book and they say well i'm short you know 50 different names or 30 different names um so there's diversification there they're short the same factors in many cases so you know and this this is something this is a more sophisticated way of looking at market movements and understanding

them is looking at what factors are actually responsible for the movement so it's no longer just saying you know beta drives markets it's factors style factors like momentum or you could have you know tech etc so when you're short when you when you're concentrated in these factors in your short book you know and and something moves against you um i mean like especially the guys who were shorting kind of the scammy little companies or the ones that are out ahead of themselves they're short the momentum factor and so when momentum starts you know popping i mean they took real losses so that's part of the reason that even prior to the meme stock phenomenon a lot of funds that were running short books decided that they were going to do

short indices instead of shorting single names or short etfs um with the meme stock thing yeah i mean it's it's just one more thing that you know it's a it's another bitter pill i guess for short sellers because it's like hey you've got all of these retail investors who individually are pretty small but they band together in order to pursue completely non-economic behavior you know like what are you going to do about that like if you know if they're going to say yeah i'm proudly going long you know amc you know or or tupperware i mean yeah what do you do if they want to be non-economic so it's um you know it it's being a traditional short seller again you were never out there trying to make absolute returns except in down years um but it's it's only been worse

and harder but again for guys like us you know we're more activist short sellers we're like investigative journalists digging into companies to expose dark secrets. Rather than selling subscriptions and ads, we take risk and trade alongside these investigative reports. It's different from what most traditional short sellers did. Talk to me a little bit about the anatomy of one of these deals. How do you guys come up with the ideas? Is it somebody giving you a tip? are you guys doing a kind of on the ground research? Do you have kind of a bucket of names and you're like, okay, let's see if we can go find, you know, kind of a thread to start pulling, like maybe like, where do the ideas come from? And then in each one is probably a little different,

but like, what is the process at which you then say, okay, we've got a kernel of information that we believe this could be a potential fraud or misleading or whatever. How do you get and build the conviction to eventually go put a short on where if you're wrong and you put a report out, you're drawing attention to the name it could go against you right and people say no actually we disagree and you lose money so like how do you build that conviction where do these ideas come from sure well i'll take i'll take the second idea first because it'll help inform then where where the ideas come from so the when you when you look at our process i'd say they're basically two stages to it. So if you were, say, a tiger cub, which they generally do, they will short

the fraudy type companies, the stock promotions. That's been a tiger specialty. So by the time they get conviction internally and they have the meeting and say, yeah, this sounds like this is a problematic company. Let's put some risk on. Let's short it. So we probably take more or less the same amount of time to get to that level where we say, this is a problematic company. And call it two or three weeks. But the issue for us is we're going to go public. And I've referred to this as market-based prosecution. We're trying to build a case against the company and often the individual managers of the company in the public. And we're not trying to talk to other short sellers and say, you should short this. Actually, we don't want that. We don't

want other guys shorting it and crowding it because it does make it more squeezy we're talking to the longs so what is going to be you know so we need to present an overwhelming case that's going to make longs say wow i didn't know this i've been misled you know what i gotta i gotta reevaluate this position here and um it's hard because a lot of people on the long side they get really defensive you know and they take it almost as a personal affront like you're challenging their their intelligence and like you can be a really really sharp investor and you can still get scammed you could and i've been defrauded hard even in the past 13 years that i've been doing this like i was the victim of a major massive fraud carried out right under my nose

um so it's not that you know so unfortunately when longs take these things as insults to their intelligence they shouldn't i mean it's you know but in any event that's the type of resistance that we're going to meet and everybody wants us to be wrong everybody on the long side wants us to be wrong and the companies are going to come back with everything they have they're spending other people's money to try to throw oftentimes throw like a tidal wave of public relations at us to try to push the stock back up and get out of trouble. That will take months for us. We've taken, in some cases, over a year to build the case.

It depends on exactly what the thesis is, but a lot of times it involves field work. We've done some stuff recently, late last year, and we've talked a little bit about it this year as well. We're short a European company, German and UK real estate, and we were short the bonds. So this isn't something that US investors know, but they've been taking valuation gains on their assets. Basically they say, oh, it used to be worth 30 million euro, yeah, now it's worth 40 million euro and they're borrowing against this inflated base.

We send investigators out like, well, this building is completely shut down. It's covered with graffiti. It's got broken windows. It looks like a real piece of shit. Like, how are you going to say that it's suddenly worth like 10 million more euro and worth 40 million euro, which, you know, we know it's X square meters roughly on a per square meter basis is way too high. So that's the type of thing we'll do.

We also pull filings from around the world. And this is one of the things that's interesting. The U.S., we consider to be a very transparent jurisdiction, but it's not when it comes to corporate filings. But I mean, Europe, Asia, pretty much all around the world, we can get interesting information, including subsidiary financials. And we'll look at those things. And sometimes the subsidiary financials don't add up to what's been reported in the SEC

consolidated financials. So that's something else we do. We'll talk to industry experts. and we want to make sure that we understand the way the business should look. We speak to a lot of former employees. And when we have these conversations, we don't do so as muddy waters. So we usually do those through these expert or consulting networks. So we're paying like $1,200 an hour for a call or something like that. And it's important to us that we position ourselves as potential long investors in the stock because we don't want somebody to go in

and think like, oh, they'll be happy if I give them the negative stuff. We're trying to get them to think we want the positive. And if negative things start to come out, then we drill into it. But those are really the tools of the trade plus a significant amount of accounting analysis on the actual consolidated financials and the disclosures. Now, where do the ideas come from? um as you noted there are far there are far fewer funds that are shorting single names so we did used to get pitched ideas all the time the way that funds once upon a time if they were short something that was kind of scammy they would go to the traditional media to pitch a story like enron um well the media is generally not in the business traditional media is generally not in

the business of reporting um you know bad things of doing investigative reporting into companies because the economics of that are just not there. It just takes way too much in the way of resources. A lot of people don't want to read long-form journalism, and they just don't need the threats or actual litigation. So they would come to us. Now, again, that has dried up somewhat because a lot of funds stopped doing single-name shorting. But for us, I mean, we're looking a lot of times, and it sounds almost flippant to say this,

But we're looking for the stuff that seems too good to be true. So if there's a lot of money flowing into a particular industry, the scammers are going to come out of the woodwork. And so it's not necessarily the first company in the space that goes public, not necessarily the second. But by the time you're on the third or fourth company going public in a given space to try to capitalize on the money grab, there's probably something to do there. Companies that have significant assets or operations in emerging or frontier markets, always worth looking at. Companies with complex accounting. So it's, you know, and then a lot of times it's just following people around, like certain key shareholders or stock promoters or investment banks or even lawyers, you know, following them around and seeing what they're involved in. And then, you know, because these guys, once you're in scam stock world, you generally don't

get hired into legitimate company world. So, you know, every few years they'll pop up in a new place and, you know, we look for those guys. What is the ESG grift? I know it's something that you've talked a lot about and it's one of these industries where a lot of money has flowed. We now are starting to see analysis of like ESGs all over someone's website. The portfolio may not reflect the ESG, you know, kind of talking that they're doing. We're now even seeing some people say, well, hold on a second. Some of the actions we're taking that are ESG friendly may actually be hurting certain countries or companies. Like what is kind of your take on that whole world right now? Well, I mean, there's a lot to unpack there. And, but I mean, at a high level,

one of the you know the issue is there are a lot of subsidies at stake and so the companies that have become really big are the ones that are best at hoovering up the subsidies and they're not doing it by coloring within the lines so for example if you look at sunrun and this is you know i think largely true of the other major residential solar companies um there are these investment tax credits that you get if you put a solar system on your roof and the vast majority of sunrun customers don't actually buy the systems outright from sunrun if they did they would pay roughly three dollars a watt for the system but what they do instead is they enter into power purchase agreements with sunrun so sunrun installs at its own cost it installs the system on the roof

and basically you agree that you're going to buy power from it for 20 to 25 years and so sunrun then takes these power purchase agreements, and sometimes they're leases, but it's a similar concept. They then take these power purchase agreements, and they stick them in an entity. And basically, each one of these power purchase agreements entitles somebody to have an investment tax credit. So Sunrun and the other solar companies lose money hand over fist. I mean, even their EBITDA is massively negative, which really takes a special type of business to do that consistently, but these are just cash incineration machines. So Sunrun's unable to use these investment tax credits itself, but it effectively sold them by sticking these PPAs into

an entity and kind of selling off an interest that receives the tax credit. Now, the issue here, the grift, is that if you go back to my statement that if you bought this from Sunrun and said, yeah, hey, I'm going to pay cash, put it on my roof. You'd pay about $3 a watt. By the time Sunrun finishes all of these machinations and valuation games for the PPAs, because that's what it then gets the investment tax credit on is the agreement, not the system. They go and they claim credits that are based on about $5 a watt. It's like, whoa, wait, how? If the arm's length value is $3 a watt, how is it that just because you put a bunch of paper on it, You flip it into a different entity, it's $5 a watt.

And we've gone into this in detail, but I think the clearest, most abusive tactic that they use to juice the valuation is when they say, well, what's this power purchase agreement worth? They actually include the value of the anticipated tax credit in that. So like, oh, well, we're getting a tax credit of this.

So that automatically boosts the valuation of this by you know 20 25 and then of course now there's a little bit more of a tax credit so we boost it again and so it's this iterative you know process but you know it's just ludicrous now that's the problem when you have when you have a setup and i i understand why you know the government has certain pot you know they've got policies that they think are good for society let's subsidize the private market you know to do this but problem is you're always going to have people who are abusive and push you know and really push the line there or maybe are even are over the line those are the ones who are going to be the winners the ones who are just able to vacuum up the money

the best so that's one way in which esg is a grift just tremendous abuse and that's not just in the residential solar space it's in a lot of this green stuff wherever there are subsidies the winners generally are are abusing the system um you know then of course we have the whole greenwashing thing you know calling something sustainable and green when it's not and then as as you alluded to there there are a lot of questions about like well gee you know how i mean is is the solar panel really is green i mean a lot of times when they talk about you know the carbon savings they're excluding where it's made china what type of power is used to produce it coal-fired power how does it get over here diesel-powered boat and then what happens

when the sun doesn't shine well you generally have to have a backup generate generator online so when you look at the utility scale uh solar projects and wind projects they have to have a power plant that's idling because you can't just say okay well we're going to flip the switch and spin it up so it's idling and emitting carbon all the time so when you get these accounting when you get the accounting for the carbon emissions a lot of times it excludes that stuff and i'll just like to give an example one of them i think the most egregious examples of this type of accounting that i've come across um within the eu um companies like or countries like germany had shut down a number of their coal well they they were going to shut

down their coal-fired power plants but the way the eu's carbon accounting system works is if you take if you stop burning coal but you replace it with biomass or wood that is sourced from outside of the country then you can use that in your coal-fired power plant i guess there's not a lot of capex needed to change it over and it won't count against the country's carbon emissions but the reality is if you're burning wood to get a unit of energy you are releasing far more co2 into the atmosphere than you would with coal alone so they're basically saying oh look we're reducing you know our carbon emissions you know we're on target to meet the eu's you know the eu's goal but they're just burning a bunch of trees to do that so that's part of how the system is

gamed and um and part of why it's really i mean just top to bottom and you know right to left i I think like ESG is largely a grift and you know, bottom line is the one energy source that we always should have focused on was nuclear, but the greens hated that. And so, yeah, I mean, you want something that's cheap, renewable and you know, and basically limitless. Yeah. Nuclear. The funniest part to me is when you see the ESG company rankings come out and the oil

companies are above like Tesla. Right. without even getting into all the details you're like all right something's going on here we probably should look at um another area where i think a lot of people have questions and i know you've got a lot of expertise because a good part of your early career was actually on companies based in china and you had immense success in terms of finding these businesses kind of calling them out shorting them and not only profiting but also i think kind of cleaning up a lot of that market what is kind of your view of u.s china relations and even chinese companies both based

in china and then trying to cross listen to the us it seems like there's like a geopolitical conversation and you know are we in competition are we working together maybe both you know kind of what's going on there and then these companies when you start looking at some of the the legal structurings of the cross listings the companies that are in china it seems like there's still frauds that continue to pop up there like just kind of talk a little bit about us and china and kind of how you're viewing those two markets right now wow yeah i know that's that's there's really a lot to unpack there too um oh boy well maybe the place to start is you you characterized our earlier work as having helped clean up the space and that was true for a moment in time

but um what happened so i i started doing this by accident really i was out of the markets i was living in china i had a business there and my father was a microcap investor professional investor he got really interested in these chinese stocks that had listed in the us via reverse merger you know they're all growing so quickly so profitable and um and what a you know what a gift to american investors that they chose the u.s to list so i had no notion that there was widespread fraud here but he asked me to look at one company initially it was a company called orient paper and you know he told me some things about it that just seemed like red flags but i you know i didn't really want to look at this company because i had my own you know just every

day was like a grind you know with my business there and it's kicking my ass so i but ultimately this was my father so i took a look at it and just before going up there to take a look at the factory that's when i finally read the filings and it was filled with obvious lies i mean these filings i mean just like prices the valuation of land of equipment i mean just just shit that you know because i've been in china and doing business there long enough i guess i was seeing the matrix and i knew that these things were lies so wrote a report exposing that having no idea that this was systemic and immediately was contacted by a lot of people who said, these are hedge funds who'd been shorting these things. Look at this one, look at that one. And just

opening the 10Ks, I'm like, oh my God, obvious fraud. So very soon realized that it was systemic. Now, why was this systemic? To some extent, the entire finance industry, there are just massive conflicts of interest and people can point fingers in other directions but that's really acute when it comes to china but ultimately you know of all the from the first wave of fraud so we we then sprinted so this was june of 2010 we published this first report and you know i'd say that this wave ended in late 2013. most of the companies value chinese companies valuations in the u.s at least the reverse merger ones were in the toilet by then and um you know people the zeitgeist was china is uninvestable and nobody wanted to look at chinese companies and so what it what

had happened was you know during that that whole wave of fraud and that's chronicled in uh the movie the china hustle that you you talked about um only one company chairman ever has done material jail time in the U.S. That's because he was actually a citizen of Taiwan, not of the PRC. Otherwise, China drew a moat around these guys. Then, Chinese policy banks like China Development Bank began financing take privates of some of these obvious complete frauds. Investors in the U.S. were actually, or investors in quotes, if you're along these things, some of them got paid huge premia as these you know as these things were taken out and so what china knew about us that you know we evidently don't know about ourselves is that

it's really easy to wipe our memory so again as china's cleaning up some of these total frauds and most of them had just basically gone to well below a dollar and traded on the pink sheets if traded at all. By taking out a few of them, 2014 comes around. Alibaba is going to go public. Everybody wanted Alibaba. Man, that was hot. It was sexy, this and that. All of a sudden, we're off to the races. Then you got this next wave of Chinese IPOs. These were generally online companies. They were real businesses in most cases, like the RTOs, reverse merger chinese companies and from the first wave i mean they weren't real businesses they most of them were just basically empty boxes with like a facade of a factory but um

these were more real and they're online so it's harder to prove now we would look at the filings for a number of these things and we would see that the tax treatments were up and that's pretty common with these frauds because when you're making things up you know one lie basically leads to you know you need like a hundred lies to cover up one lie so that's you'd often see the strains in the tax treatment but going public and saying to investors who you know were just so desperate for more growth narrative especially you know since the u.s was recovering slowly from the gfc um saying like hey we think it's a fraud because this tax and these taxes don't make sense now people want the photos they want the overwhelming proof and i mean at the end of

the day they didn't want us to be right and by that point in time we were also up against this kind of institutional barrier which is all of these guys who basically pegged their careers to being long china stuff well i mean if you're now saying this you know these larger more established you know companies are also frauds what are they going to do with their careers you know like this is you know like they'll die on this hill and so there was so much institutional resistance um in those instances and then china also overtly turned hostile to people like us and that actually happened in the summer of 2012 when they sent out a ministry of state security personnel to basically every investigative firm in china and you know who are your foreign clients

what are they looking at you know are there any of them hedge funds are they short sellers and basically chilled that industry, and they put a lot of the government filings on lockdown as well. So today, it's almost impossible to get these filings, but that's part of China's generally closing itself off. But everybody had forgotten about this and didn't care in the US until Luckin Coffee came along. Now, we didn't do the work on Luckin. Somebody else did. We publicized it. I mean, we went into their data room and validated it. And I know who did the work, So that also spoke to me a little bit more. But yeah, I mean, the fraud there was just so bad that the the auditor actually had no choice but to find it when doing the audit, you know, right after we had publicized this third party's work. And so it's just funny talking to reporters after Luckin imploded when they're saying,

wow, this is incredible. Like, bro, this has been the game forever. And understand this. And I think this is the big, big point that people really should take away from the situation is if nobody gets punished, which again, nobody except for one guy who is Taiwanese has done prison time in the US. And I'm sure none of them have done prison time in China for defrauding US investors. It's heads I win, tails I don't lose. If this thing works out, I make, you know, I used to say tens of millions. Now it's hundreds of millions, maybe even north of a billion. If it doesn't work out, whatever. What have I lost from doing this? So that's the thing.

You know, so people then after Luckin, what happened then was the SEC really started looking at it again, but they hated, the SEC hated and hates China cases because just the amount of time it takes to get stuff from China, then you have to get it translated, incredibly resource intensive. And even once it's translated, you don't understand the legal context. You know, if you're an SEC enforcement attorney, you have to bring in people who are experts to explain it. It's super resource intensive and you almost never get anything out of it because they're able to sit in China and give the finger to the U.S. regulators.

And then China codified that into law in 2021 where any company must, you know, with people or assets in China must get express approval from the China Securities Regulatory Commission before cooperating with an overseas regulator. So China puts that in law, that basically you can't even respond to the SEC, even if you're listed there. So, you know, there's no way of protecting U.S. investors. And, you know, I'm glad to see that the cynicism toward China has returned. But, I mean, that was only after countless hard lessons have been learned by investors. And you know what? The moment China's GDP really, you know, not the lie, the bullshit GDP number they give you, but like in reality, the moment China does start turning things around economically, everybody's going to want to forget these lessons and rush in with a bunch of cash and claim to have edge. And, oh, I know, you know, I have Guangxi over there. And, you know, the cycle will repeat because in the U.S., we just can't help ourselves. We're capitalists at the end of the day. Another area where a ton of capital continues to flow is

artificial intelligence. It seems like in the private market specifically, that is basically holding or propping up the venture capital funding environment. It's just put AI on the end of a name and money will show up at your door. What about in the public markets? Are you guys seeing the same type of thing where there's tons of money pouring into legitimate businesses or the illegitimate? What are you seeing in AI? Well, you're definitely seeing a lot of companies do the global find and replace you know taking out servers and putting ai or software ai so yeah everybody's suddenly an ai play um i mean maybe one of the just most laughable ones and you know we're we're short this name we haven't published on it but this company called

applied digital those guys seem like a bunch of jokers and some very questionable dealings with the investment bank b riley um but yeah i think we're we haven't seen a bunch of companies going public yet that are you know ai plays that are total scams i mean i'm that's coming right but we're we've got kind of a you know we've got a bit of a weak market that's you know i think been holding up the ipos but uh you know i mean if if this were a few years ago before the sec really um put a chill on the SPAC market. I mean, the AI SPACs would just be like the golden age of being an activist short seller all over again, or that plus the China reverse mergers. But yeah, it's coming. Guys like us will be all over it. And at the end of the day, though, we do need more

of these companies out there because what happens when there's so much money flooding into space, If there are really only a few places for it to go, like NVIDIA, good luck. I'm not that NVIDIA is a scam, but even if it were, good luck trying to break that because it's the focal point and there are relatively few focal points for the money flooding into AI. But once you start increasing the denominator here, the money gets sprinkled around, then it's a lot easier, you know, it's a lot easier to come out and break the stock price when you can present compelling information about why the, you know, investors have been misled. How do you think about short sellers making money? One of the things, and not your firm, but there's an article about Hindenburg, right? And obviously they've been writing a bunch of short reports and stuff. But somebody broke down the math of what they possibly could have made in some of these

shorts. And what was fascinating to me about it was less about how much money they are making or not making, because it wasn't fully confirmed. It was all kind of loose guesstimates, if you will. But it was more of, we're now having a conversation about it where people are realizing this could be a viable investment strategy. It could actually make money. People have been talking about longs like that forever, right? And kind of the ability to go long and make money. And we can see you bought the stock at X price and you got it at Y price, whatever. I was actually pretty surprised

to see folks trying to back into the math of like, hey, how much are the people actually making on the short side without sharing specific numbers or kind of whatever you're comfortable with? Like has the opportunity widened in terms of, you know, the economic kind of capital you can gain here, Or has it actually shrunk as there's less short sellers or less public companies? Like what are some of the dynamics that maybe feed into the ability for short sellers to make money doing this? Well, okay. So it's for, for one thing, there are a lot of activist short sellers out there.

You just haven't heard of most of them. I mean, so on seeking alpha on any given day, there are a bunch of guys screaming at the top of their lungs, you know, this is the worst thing ever, you know, like writing about some 90 million market cap piece of shit and you know like the world doesn't notice them in the u.s we're we're we're used to this sort of public criticism so guys like that don't move the needle and and a lot of them will try this for a little while and then just you know flame out because it's they're not getting traction and what a lot of people forget about hindenburg um is that you You know, that's, I mean, Hindenburg and his principal, Nate Anderson, when he was grinding

it out for years as an activist short seller, didn't really have much of a brand. And, you know, this was reported, I think, in the New York Times. But, you know, he was at one point worried about getting evicted because he, you know, he was having problems making his rent payments. And then they broke through on Nikola and just, you know, I mean, blew up overnight, right? You know, the Hindenburg brand. and they do great work and now they're noticed but that's the thing like you it's a very tough

space at least with u.s companies to break into it's a lot easier in europe because they're you know europe is much more a culture of you know not criticizing people and companies publicly and p.s you don't have the speech protections outside of the u.s that you do in the u.s Um, so that's, that's another dynamic. Now, even when you look at guys like, you know, like me, like Nate, um, whatever, you know, we make, we make good money. I mean, by most people's standards in the world, like we make pretty nice money, but in finance, if you think about it in, in finance industry terms, first of all, you know, the, the amount of brain damage per dollar that we earn is way off the scale, way off the charts relative to, you know, just being like the close

your eyes and buy kind of, you know, business model. Because of all the litigation, you know, like, I mean, I've now been through, you know, fucking three investigations, France, Germany, even the US, which the US wasn't supposed to happen and millions and millions of dollars of legal fees and just bullshit, time sucks, et cetera. You know, on top of the companies that sue us and and shit like that um you know the death threats etc so you know even if you're you know even if you're like oh that's good money i think i can make what carson block makes a lot of people when they start doing it they're just like fuck there are easier ways you know if you're bright and you're talented there are easier ways in this industry of making that kind of money

absolutely why do i do it i mean it's what i want to do like so that's the thing and it's cliche but it's cliche for a reason it comes back to this you know you really have to enjoy what you do you have to find meaning and purpose in it because if you're like yeah i'm going to do this for the money you're going to be gone in you know within months probably because you're just going to find out it's such there's so much bullshit here and it's so hard um so yeah i mean there there are a lot of guys who like i said you know a new one is probably born every day to go on seeking alpha and scream about something, but the people who are relevant, who have staying power, there aren't that many of us. And, you know, like, and there's some, some of whom I have very high

opinions of others of whom I think suck and they cut corners and they're doing shit they shouldn't be doing. So it's like every other industry, you know, you've got people who operate at a high level and do the right things. And then you've got people not so much. Yeah. It's interesting. you describe it this way in terms of like the brain damage per dollar. One of the things I've been fascinated with and I've talked with a number of investors who, you know, most people would know their names and are highly respected as to why has there not been a new, young, long activist investor, right? If you go back to the days of the Carl Icahns, you know, all these people who like now are kind of seen as legends of Wall Street or people who have been doing this a long

time and really kind of took the activist approach and went in and fixed these businesses and suggested things made a lot of money doing it it doesn't seem like there's really been anyone who's kind of said hey i'm going to go do that and one of one of the thought processes has been it's a hard life right like yeah yes there's social media there's all these things you get but just because you're long the stock same as being short the stock like you're still telling someone they're doing a bad job right and and so it i wonder how much of that plays into you know people just not wanting to be as public maybe as maybe they were back in the day before social media before there was so much interest on this activist, you know, type of investing in either direction.

Well, I'm speaking a little bit out of school now, because it's not what I do. But I mean, we have looked at long side activism as a business model in the past. And so here are my impressions. Similar to short activism, it's very hard to break through. I think there are a lot of managers out there trying to do long side activism. But, you know, number one, And for most of them, unless and until you raise a meaningful amount of AUM and can really accumulate significant shares of the voting stock, you're irrelevant. So how do you raise a bunch of AUM? Well, you do it with a track record of activism.

Okay, but so you have this chicken or egg problem, number one. Number two, with all those years of free money, a lot of the low-hanging fruit was plucked long ago in terms of easy strategic fixes, governance fixes, business fixes. What you ended up getting into was I think a lot of long-side activism did become this form of extractive capitalism basically where it's like, you don't have enough debt on the balance sheet. I want to run the business conservatively for rainy day. Now, shut up.

You know, if you oppose this idea of levering up your balance sheet, you know, selling your real estate and leasing it back, et cetera, then, you know, we're going to, we'll go to a proxy contest. So what a lot of it ended up becoming in the U.S. was financial engineering, which, you know, I'm no fan of that. I mean, a lot of what we look for are companies that are overly financially engineered. You know, the accounting is legal, but it's very misleading and it's covering up a lot of rot within the business.

But it's this type of extreme, highly aggressive financial engineering by long-side activists that can create the conditions for muddy waters to later come in. But yeah, I mean, why should I as an allocator give a dollar to this guy who's trying to break through and be a financial engineer when there are these other better established players over there? But the final thing is, and this is, you know, and this is, I think, maybe, you know, if you talk to the established players, this is probably the answer they would give you is that, look, we're very effective, but we don't have to go public to do it. we don't want the goal is not to go public and have a war the goal is to be constructive behind the scenes work with the board work with management and you know and and basically generate you know create value that way so um so yeah i think a lot of the most successful activists i think they define themselves maybe that's a little bit too strong statement but i think a lot of the most successful activists are actually looking for you know non-campaign

campaigns just quiet behind the scenes um you know situations so yes it just it doesn't generate the headlines but that's where a lot of the action is yeah that makes sense um one of the last questions i have for you is you all manage a fund so it's not only just your capital it's also outside capital um you've had this impressive track record i've seen in filings where you guys have talked about you know i don't know if it's eight nine ten different d listings after you guys have kind of published on companies and so what is like the lp or the institutional kind of appetite for this type of stuff right and what i mean by that is i think it's twofold it's like one there's an investment strategy right of kind of activist short selling but then there's also this idea

of like if i allocate to muddy waters uh i also and then dealing with like is carson gonna get a death threat today right is like you know is there gonna be a lawsuit like there's all these other components to it and so like how have you seen maybe that change over time as well especially when you first started out, you were based in China, you were going after Chinese companies. It was kind of like you were really doing research and stuff like that. So like now you're a full-blown asset manager who's got a track record. And I think most people would agree are one of, if not the best short sellers over the last 15, 20 years. How does the institutional world kind of respond to this or what does that environment look like today? So yeah. I mean,

Look, our LP base is, it's generally speaking, smaller institutions and ultra high net worth individuals. And the reality is with activist short selling, people might look at the numbers and say, whoa, great numbers or whatever, but it's not scalable. Really, you could not manage a billion dollars in AUM in an activist short selling strategy. Like it just, no, I mean, because you just, so you're only be most of us.

I mean, us anyway, we're generally going to be out there five or maybe six times a year on a company and the trade capacities, the companies that are, that are generally better situated, um, for activist short selling are the ones that don't have as much sell side coverage. So they're, they're mid caps and actually very few short activists can swing a bat in the mid cap space. most are in the micro cap and small cap space because that's where you get the most egregious behaviors so we have the resources to really deconstruct complex mid-cap type situations but

you know at the end of the day these are not large caps so we can only have so much money in the trade like the trades only have so much capacity and if we're doing this only five or six times a year i mean call it even four to six um there's just not that that much money that we can actually put to work productively so that's the you know the the issue with short activism people could look at the numbers and be like wow great numbers but yeah you can't scale it to be that big and you know and if you do then the tail starts wagging the dog you're looking for like large liquid companies as opposed to problematic companies you know let's look at this large liquid company and see if we can find some problems so i think that you know i i think

really trying to scale you know much bigger than we are i mean we we returned capital at one point um you know because we're just like look this is too much you know we we can't put this much to work so that's the issue there now i mean in terms of lp base um yeah so smaller institutions i mean we'll we'll never be pretty enough in this space for sovereign wealth fund i mean our our investors generally are like look we we we're not worried about headline risk we don't have that big a name so like nobody's going to give a that you know like blah blah blah backs muddy waters now we do have a few investors who do have some name brands based on the type of institution they are but you know they i mean look they they they believe in what we do they

understand that we're keeping markets honest um and they have to get comfortable with the idea that you know at the end of the day if it came out that you were invested with us like it's not it's not going to be the end of the world right like people would forget it pretty quickly and it's not even a story to begin with so um so there's that but yeah we uh you know um there's a lot of you know i i gotta tell you you know they're you know we we spend a lot of time or i've spent a lot of time uh insulting certain sovereign wealth funds and their governments so like the saudis um so i don't think we're ever gonna get like uh pif money uh you know and like some of the other you know and we've we've made we've made comments about norges bank

as well about how i mean you know they're they're great like sec lenders you know if you see norges in something i mean they own all this dog around the world but um anyway so yeah that's uh it's kind of it's a very niche type of lp who's interested in investing with us and i guess the final thing is to that like you know for me um i'm not going to be what a lot of institutional investors would want me to be right you're not going to come into the office meet with me and i'm not going to wear a suit um you're not going to have that institutional looking office i'm not going to refrain from you know saying this that um and like that's that's those are the behaviors that you undertake if you really care about raising money but you know my attitude is

like look i want you to understand what we're all about because you know if you you know if you have a problem, you know, with this, then like, we're not, we're not a good match. Let's save each other time. And, you know, and you're not going to, you know, worry like, does he smoke weed? Because the answer is yes. Not before meetings and stuff, but you know, like I just, you got to be comfortable with us personally and professionally, you know, to is, is my view. And so, yeah, I, we are not going to pretend to be, you know, more polished than we are. Yeah. That makes sense to me. My last question for you is there's a bunch of companies that were really really hot private companies they went public massive valuations i'm thinking we work i'm thinking buzzfeed you know

all these different businesses they now have drawn down significantly some even argue maybe they are mid-caps at this point right and kind of like in i'm not saying that they're doing anything wrong i don't even know if anyone has come out and publicly said that they you know done fraud or anything like that but just like now the size is significantly lower than they were what do you happens to those types of companies? Is that like things in motion stay in motion and they're likely to just keep going down over time and eventually get delisted? Do you think that there's like a theme in some of these really hot private companies from years ago? Hey, the market's just down and like it'll come back and those companies will benefit. How do you kind

of think of maybe like this cohort of I'll call it like tech and tech enabled businesses that got tons of private funding went public and the public markets essentially have rejected those valuations and reset them at something much lower? That's an interesting question because the short answer is I don't know, but it's interesting because I used to joke some years ago that 700 million is the new zero, right? Like nothing ever went to zero.

And now I think you could even say like the new zero is like north of a billion. I think there's a lot psychologically that happens here where investors will look, just reflexively look like, well, peak market cap was like, you know, 22 billion. So at like 1.3, you know, there's got to be some value there, which is a totally non-scientific ass backward way of valuing a company. But I think that that's effectively what goes on. So, you know, what ends that? So I don't know. I mean, you look at WeWork, it's it's funny because i mean that business model has always been a bad business model it's

just a rent arbitrage i'm like yeah it was cool you're like cool offices right you spent a lot more on your you know on your cap x you know on your ff and o then like regis did but regis has been bankrupt at least once i think maybe twice um it's always been a shit business model so but do people will it always hold some allure for a long time hold some allure because it used to be like SoftBank valued it at like what, almost 50 billion. I mean, people still think SoftBank is smart money. Like people still care what Masa thinks. I mean, it's, you know, it's the biggest joke on the planet. So, okay, maybe not the biggest, but in Masa and SoftBank have certainly been, you know, the butt of many jokes internally, even before, you know, like all this stuff hit

the skids um where we are but uh but yeah i so i don't i don't know um but i i think that inherently that we work business model um a rent arb is just such a difficult business model maybe you could run it profitably at a relatively small scale but you know that's probably a better private business than a public business yeah that makes sense and it um i think just speaks to kind of like the way you think about the business right it's like at the end of the day you could put the bells and whistles on it it's a rent arbitrage business and is that a good business or not and um one of the aspects uh that i think i've really paid attention to is the public narratives on plenty of business both public and private uh it isn't the same as maybe you know kind of a direct

just boil it down to what is it and i do wonder how much of that is uh in the mainstream media uh certain journalists they just don't they're they're ill-prepared to combat the professional communications teams like i think a lot about you know like if you are um a journalist at one of these mainstream outlets and i have plenty of friends that are there that are amazing and i have plenty of friends there that i'm like hey you probably should go find a different you know role right and and they probably know that but the ones who are not skilled who are not trained have not been doing it for a long time they get run over by the communications teams right and vice versa the ones who are really good they're calling bullshit left and right it's like you

The referee who just throws the yellow flag every single play on the football field. They're like, that's not true, that's not true, whatever. And so you described earlier short sellers like there's really good ones and there's ones who aren't so great. I think you see that in companies. You see that in the journalism side. And so really it's when you're reading this stuff, trying to figure out who are the really high-quality journalists that when you read it, you know that they're just not rewriting the press release. They actually have done work and you can kind of put more, I think, weight on it. And so how many articles got written about WeWork as a rent arbitrage business?

Not that many, right? I mean, there's a movie. They don't really talk about that that much. Yeah. Well, it's funny. I know one of the venture, I know a principal at one of the WeWork's venture backers. And this is before, this is maybe a couple of years ago. I sat down with him and it's just funny.

We had these really different takes on Adam Neumann. and i i was i i got into it first i was like you know as soon as i read this article in the ft about how he was having these retreats and you know and he's and he's preaching veganism and you know but he actually apparently really eats meat like i knew this guy's a like a total scammer like that's that's a that's a glimpse of how he really thinks about the world i you know i assume you know you really are you know would never you know put money with a guy like that again he's like no you're wrong like he was probably the best salesman i'd ever met and you know i'm like but yeah that's a problem right like that's a guy i want to short a good salesman

he's like no that's a guy i want to go long in venture because you know he's going to be able to you know convince more people to put in more money at higher valuations and eventually convince somebody to you know bring like you know bring them public and subscribe to the ipo and you know So in the venture world, they want the salesmen. The short sellers, we want the salesmen. We're just different parts of the life cycle, I guess, is the irony. You should go look at that venture capitalist portfolio. Maybe there's good short ideas in there for when they're public.

Well, he's actually one of the guys who's more of a purist and zealot. It's something I puzzle over. with a, you know, so several, a couple of years ago, we had some interns and I brought him to New York and I sat down with a guy who's CEO of a reasonable size investment bank. And he, you know, he finished making, he made a point or he told a story. And then he said to the interns, I said, you know, reputation is everything. And, you know, you can't sacrifice your reputation. You got to be honest and above board and this and that. And, you know, I'm like nodding and like, yes, that's exactly correct. But then he told this story, which is a great story, and I'll try to nutshell

it. But he got into the business in investment banking in the 80s. He went to a school that banks didn't recruit from. So he sent in applications. He was getting rejected everywhere. So he took his first Boston rejection letter, and it was signed by somebody in HR. So he called up the first Boston switchboard in New York. And he said, yeah, I want to talk to a vice president, not understanding that everybody at a bank is a VP. And the switchboard operator said, which one? And he's like, well, just start reading from the directory alphabetically. So Jim Adams. Yeah, I'll talk to Jim Adams. Jim Adams picks up the phone. He says, hi, my name is so-and-so. And he looks at that letter, the woman who signed it, the HR person who signed

it and says, yeah, Sharon Michaels told me I should call you to set up an interview. Oh, oh okay yeah so he totally like finagles this interview goes in the guy's like man you're great let me introduce you to uh you know my director and the director's like man you know great interview you know let me introduce you to an md and so by the end of the day an md calls the calls down to the person in hr and it's like yeah you know we're giving this guy an offer she's like well we we can we rejected him they're like no you're hiring him so he got hired like what a great story like the you know the the chutzpah like it's awesome but we just finished saying don't bullshit people you know be honest your reputation's everything and so the lesson

here is that there's an acceptable if not optimal level of bullshit in this world and that the world especially in finance runs on some level of bullshit and so it's an interesting philosophical question to ponder you know when have you crossed the line like when when is your level of bullshit too much and i think if we look at elon musk it's you know it's like a great case study i mean this guy lies a lot but he also delivers on stuff too like he built the car the rocket flies etc so you know like net net where you know and on the short side i will admit a lot of people have Elon Musk derangement syndrome, but, you know, but he does lie a lot. So it's, it's, it's an interesting, it's an interesting dynamic. Yeah. This is fascinating to me because

how do you get at, if you were talking to the founder, right? Let's say you're talking to Elon and you said to Elon, Hey, why did you say X? And I don't know, let's say it was delivering the vehicle on a certain timeline. It's like one of the critiques, right? It's they'll say a timeline and then the car's not delivered. And he would say at the moment when he says it, he's like because we're going to do it but he full-on believes that he's not you know bullshitting and trying to lie or manipulate the stock price or whatever so let's just hold constant for a second the the assumption that like he fully believes that is the timeline and because he chooses the timeline that is ridiculously short and aggressive he doesn't hit it what i've always wondered is

like in on one regard like we need a guy like that to be able to make the car and fly the rocket and like do all that kind of stuff on the same side right like when you evaluate what he's saying you're like this is bullshit there's no way he's going to deliver a brand new car in two months right and like even the engineers probably working on are like dude two months like if i sleep at the factory maybe three right but like two months is like impossible i guess it like kind of gets into this weird world of like if he believes it and he's just being overly optimistic and he eventually does deliver the car but it's like a timeline thing versus take like an enron where it's like a just an accounting fraud and it's just like hey these

people were lying right how does the market view that because i think elon's this fascinating example of like there are people who literally will yell and scream all day long about how elon is the greatest thing since jesus and then there's other people who are like this guy lies all the time and is full of shit and like by the way i'm complaining on twitter right right where like he's it's like i don't know how do you like balance it and maybe there isn't a right answer but i think he is maybe like the epitome of this you know kind of conundrum if you will yeah no i i mean he's definitely he definitely is the epitome of the you know of that that tension you know we all believe in honesty but you know and the reality is so i or i shouldn't say the reality is my

assumption is i think he understands a lot of times that he's lying and and it's not just you know making pronouncements about the future that are too optimistic but even saying talking about things that are or are not um but i think he understands this but you know the short case was always predicated on hey you're gonna get crushed by the majors right you're not you don't have a large enough sales base you know so your unit costs are going to be too high and everybody was looking at the manufacturing base but what elon i think was focused on and what only he understood and you know like everybody on the short side it just took too long to under many i think do not understand this is that what mattered was the capital base so by by getting

tesla's market value so high right even if you know like the i mean they're they're not going to run out of cash because they can keep issuing stock all the way i mean there's so much you know i i mean i'm not sure where the cap is right now but as of a couple of years ago when i when i had this this thought it was about double that of toyota motors right so i think he got that hey in order to compete with these guys in order to have staying power i need to have massive market cap and i think he said i'm going to do whatever it takes to have that massive market cap so you know maybe maybe it's a bit you know of an armchair quarterback to say well yeah but you really didn't have to be that egregious in a number of these bullshit pronouncements you know

um i mean maybe he didn't uh but you know and do i think that he should still be held accountable despite the fact that and like people on the short side hate when i say this but he did move the needle he pushed the world toward electrification of vehicles much faster than it would have gone without the majors. Now, again, we can dive into this and explain why, well, if you're filling up your car with coal-fired power, you're probably better off with a six-cylinder internal combustion engine. But putting that to the side, the future of humanity at some point does need to be based on electrification, which I would argue for nuclear-powered electrification. But yeah, he's um you know but but i think that i think that's what the game was he just he knew he

needed the market cap because otherwise he couldn't he couldn't do it um but unfortunately i feel like he can't turn off that you know it's he was rewarded you know as he pushed the needle i think he i think he's changed a lot personality-wise over the years i mean i don't know him well like i met him one time back in like 13 but i feel like he's changed a lot personality wise over the years because if you're you know if you cross the line and you get a positive reward it's very pavlovian i think this process so um i don't know that he's what i would consider to be a good person anymore uh good at heart but look he's done some he's done some things that need to be done and i guess when where i'm where i most admire him is actually in the

space realm because uh you know i i knew somebody who used to be very senior at nasa on the technology side and i mean he told me things like the average age of a nasa engineer at that time was you know like in the upper 50s and they still program in like fortran because these are government jobs and it's clear like the future of space for america is it has to be private sector so and you know boeing sucks you know overruns and you know and elon's gotten it he's got it done in that in that area so um you know hat tip to him carson that's a great place for us to end where where can we send people to find you on the internet or find out more about Muddy Waters?

Well, I mean, I've got a, I'm not that active on Twitter or X, which is something Elon has fucked up, but that's at Muddy Waters Re. And we publish our research MuddyWatersResearch.com. Unfortunately, we don't check the info box as often as we should, but there's also, yeah. So, but anyway, that's, that's the best way to do it. Awesome. I appreciate you taking the time to do this. We'll definitely do it again in the future. All right. Thanks, man. Enjoyed it.