Why Jim Chanos Bets Against Fraud and China

(Bloomberg Opinion) -- What do you do when you are a Wall Street cynic with a long history of identifying fraud?

If you are like this week's guest on Masters in Business, Jim Chanos, you launch a short-focused hedge fund. Today, Chanos is a famed for helping to expose some of the most famous financial frauds, including Enron, Baldwin-United and Drexel Burnham. His firm, Kynikos Associates, just celebrated its 35th anniversary.

Chanos explains why his portfolios are simultaneously long and short, in part because markets do tend to rise over time. Kynikos is long the S&P 500 and the MSCI indexes; it then selects individual companies to short.

He explains that views on China have changed: The hardening of U.S.-China relations now are widely embraced, including in Europe, and among free-trader advocates and Democrats, especially in the wake of the Covid-19 pandemic. Credit quality and expansion in China continues to be an issue, from mortgages, personal debt and corporate borrowing. “Chinese apartment are still the most important asset class in the world,” he said.

We also discussed investing in an election year: The American public won't be happy with more corporate bailouts, especially after the corporate tax rate was lowered to 21%. Chanos points out that the balance between capital and labor goes through 40-year cycles (1935-75; 1980-2020), and he thinks the pendulum that has favored capital has begun to reverse again.

His favorite books are here; a transcript of our conversation is here.

You can stream and download our full conversation, including the podcast extras, on Apple iTunes, Spotify, Overcast, Google, Bloomberg and Stitcher. All of our earlier podcasts on your favorite pod hosts can be found here.

Next week, we speak with Jim Bianco, president and macro strategist at Bianco Research.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Barry Ritholtz is a Bloomberg Opinion columnist. He is chairman and chief investment officer of Ritholtz Wealth Management, and was previously chief market strategist at Maxim Group. He is the author of “Bailout Nation.”