Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value in fixed income is not easy. Bond markets are massive and murky. Lots of firms throw a couple of flashy funds your way and call it a day. Vanguard takes a different approach. The Vanguard lineup includes over 80 bond funds actively managed by a 200-person global squad of sector specialists, analysts, and traders. Lots of firms love to highlight their star portfolio managers like it's all about that one brilliant mind that makes the magic happen. Vanguard's philosophy is different. They believe the best active strategy shouldn't be one person. It should be shared across the team. So if you're looking to offer your clients funds that are built to deliver consistent results, go see the record for yourself at vanguard.com.io. That's vanguard.com.io. All investing is subject to risk Vanguard Marketing Corporation distributor. The news doesn't stop on the weekends. Context changes constantly. And now Bloomberg is the place to stay on top of it all. Hi, I'm David Gurrah. Join us every Saturday and Sunday for the new Bloomberg This Weekend. I'm Christina Rafini. We'll bring you the latest headlines, in-depth analysis, and big interviews. All the stories that hit home on your days off. And I'm Lisa Matteo. Watch and listen to Bloomberg This Weekend for thoughtful, enlightening conversations about business, lifestyle, people, and culture. On Saturday mornings, we put the past week's events into context, examining what happened in the markets and the world. That on Sundays, we speak with journalists, columnists, and key political figures to prepare you for the week ahead. Join us as soon as you wake up and bring us with you wherever your weekend plans take you. Watch us on Bloomberg Television. Listen on Bloomberg Radio. Stream the show live on the Bloomberg Business App or listen to the podcast. That's Bloomberg This Weekend. Saturdays and Sundays starting at 7am Eastern. Make us part of your weekend routine on Bloomberg Television, radio, and wherever you get your podcasts. This is Masters in Business with Barry Ritholtz on Bloomberg Radio. This week, we have an extra special bonus episode, live from Future Proof. My conversation with Muddy Waters, Carson Block, really a fascinating conversation, not only about how he developed an interest in shorting fraudulent equities and companies, but how his firm has evolved into a comprehensive research shop and a long short hedge fund. I thought the conversation was fascinating and I think you will also, with no further ado, my conversation with Muddy Waters, Carson Block live at Citywide Future Proof Miami. I'm so fascinated by your career, what you've done, what you've built. I first kind of became aware of you, I don't know, it seems like it was a long time ago, with the reverse Chinese mergers and Cino Forest and wait, China is doing what? I don't understand any of this. Tell us how you kind of fell into that aspect of markets and how you ended up becoming an activist short seller. I will try to nutshell this. I grew up in investing, my father was an equity analyst and was working with him from 99 to 02 long side covering micro caps and we were just getting lied to incessantly by these management and back then they had 45 days to file their forms for so we take them on non-deal roadshow to meet institutions, stock would go up and we'd find out later that they hit the bid. This is the same time that you had the largest companies in the world like Enron, Worldcom, Health South, Adelphia blowing up an accounting scandal. My realization around 2002 I was really demoralized, it's like, look I want to be an investor but this market is riddled with financial predators from top to bottom. How do I protect myself against that? I went to law school with this amorphous idea that would give me some tools and fast forward decided to practice law, ended up in China, Jones Day, left to start the first self-storage business in mainland China, I don't recommend it. Anyway I was trying to keep that business from failing in 2009 when my father got really excited about a bunch of these Chinese companies that had gone public in the US via reverse merger and I had my own problems, I wasn't really that interested but he asked me to look and he asked me to look at this first one called Orient Paper and the first thing he told me, he'd been at a conference that these guys had gone to and what he's hearing is, oh, Chairman Leo, he's different from other Chinese company chairman, he doesn't smoke and he doesn't chase women and my father's telling me this when I'm late night in Shanghai and I'm like, I'm sure neither of those things is actually true but the fact that this is making its rounds at the conference, somebody is trying to game Western investor psychology. So that got my attention, early 2010 went up to see the company and it was a Potemkin factory, I never believed that such a thing could exist where at the time its market cap was 150 million, had just reported 103 million dollars in revenue and the real revenue, two to five million dollars, that it was empty box. So I exposed that with a 30-some-odd page report and the only reason I did that was I felt like I was stuck in my business in Shanghai, like a few hundred people who are leaving their stuff in my facility, the industry did not exist because it's a bad industry to be in in China and I don't know, there's like a power and feeling like you have nothing to lose so I just threw the ball as far down the field as I could, wrote that report, it went viral, quickly found out this was systemic and one year later Bloomberg's like, oh, he's one of the 50 most influential in global finance with Ben Bernanke and Warren Buffett and it's like, well, yes, of course, that's the natural path from self-storage. That's every 30-page analyst report tends to lead to that. So it's funny because you and I kind of came of age in the market's similar period, the dot-com implosion was certainly fundamental to my view of both markets and short sellers and then the financial crisis, how do you look at how the markets have changed over the ensuing decade as between QE and zero interest rate policy and more recently the CARES Act and the mask of fiscal stimulus, I grew up thinking short sellers were the ones who kept the market honest and responsible, that seems to be a minority view these days. Yeah, well, I've come to the view that there's an inverse relationship between interest rates and the amount of dishonesty in society. So the lower your rates, the more easy money is, the more dishonesty you get in society and so the emergency monetary policy outlived the emergency and what I felt is that just each year I've been doing this that investors are more and more anesthetized to risk. Now the flip side of that is that behaviors that were once really only present in micro-cap land, well those bubble up to mid-cap land because of the inflation of market cap. So on one hand my business has gotten harder because unless it's something really, really egregious, like people don't care, but then yes, you'll find that type of behavior now even in mid-cap companies and in an environment where, and just to be clear, it's a small minority of companies that are frauds. The world's bigger problem is the gray zone, right? The things where nobody's going to get convicted, it's tech, lawyers have signed off, the auditor is okay with it and that gray zone behavior whereby you can significantly misrepresent economic reality, that is almost maybe the norm in many respects. So the secret is to corrupt the attorneys and the orderlers and then it's home free. Wait, corrupt the attorneys? Right, so you mentioned micro-cap, small-cap, mid-cap, I read a note of yours not too long ago talking about the big caps and the mega caps where so many people have been calling this a bubble and so many people have saying, gee, I'd like to short Nvidia, you kind of went out of your way to say, hey, maybe one day there's a downside play here, but this freight train is really difficult to step in front of. What are your thoughts on the hyper scalers, the mega cap tech companies? Three things. Number one, there are easier, better shorts out there than Nvidia. Number two, the reason why I was making those comments is that flows have driven so much of this. You have obviously the passive bid and it squeezes floats and by squeezing floats, it's not a linear impact on stock prices, it's a parabolic impact on stock prices, at least of the winners. So the idea that something is overvalued, that's a reference to its fundamental value, but I think you have to consider its technical value and that's what everybody fails to say when they're criticizing these things on a fundamental basis. It's like, well, what are the technicals of this? Now, that's my second point. My third point is, up till one month ago, I was completely sanguine on S&P and markets in general and the economy and my view has 180. And I think the wrong question is, well, what do you think of the valuations or stock prices of XYZ of these AI companies? And the right question is, what is about to happen to society and to the market as a result of AI? And like I said, 180 on this. Like a month ago, I wouldn't even refer to these models as AI. I had this rule. These are large language models. They're not going to create new information. They merely process information that's already out there. Don't call it AI. They're LLMs, but I call it AI now. Right. They're neither artificial nor intelligent. They're something else. But given that, and given this 180, we're going to dive right into AI in a minute, but since you built your reputation before the firm has pivoted into a full service research shop, both long and short, you've criticized SPACs, crypto, thematic ETFs, NFTs. Where has there been the biggest destruction of investor wealth in that group? Well, in that group. Okay. So it's a little bit in vogue, I think, to point toward private credit right now. And the reality is like, who knows, right? There's no data. It's really opaque. My concerns there, and I recognize that data is not the plural of anecdote. But in the past few months, some of the research we've done, like I've looked at some ABS issuers, and this is not private credit. But I was really surprised to see, as I went down the rabbit hole of ABS issuances, that a lot of the paperwork that should be done to basically show release of leans of loans that are being securitized and filed publicly, that paperwork is not being filed publicly. And at first I thought, oh my God, we've got these guys on fraud. They're selling off loans that are still encumbered. And I spoke with a couple of securitization attorneys, and they said, no, no, no, that's market practice. The warehouse lender just provides a letter saying that the leans are released. It doesn't get filed publicly. And so I asked each of them, well, what's to stop the sponsor of the securitization from forging the letter because he thinks, look, the loans are, the ABS is already over-collateralized. I can double pledge these. Because if the warehouse lender, if it's not public, the warehouse lender wouldn't know if somebody forged it. Yeah, that's a good point. And so when I see that the largest financial institutions are not dotting eyes and crossing T's, that conversation with somebody recently who gave me a data point from a private equity firm that's doing a lot of CLOs, the conversation from somebody who's on the P side going to the CLO guys was like, hey, so what do we know about the performance of the underlying loans? Like, how are they performing? Huh? Why would we track that? We don't service them. Like, this is reminiscent of... Right out of the big short. Yeah, this is reminiscent of some of the behaviors and credit. So then, okay, I combine, again, it's not data, these are anecdotes, but I combine that with also what I noticed starting a few years ago. You know, every time I talk to an allocator, you know, we're actually, we run a fund, we're a hedge fund. So, you know, we're talking to allocators all the time. And you know, what do you guys investing in? Everybody all of a sudden starts saying, private credit, private credit, private credit. You know, that also reminds me of the Internet bubble because the way I used to think about that as it was happening is there's too much money chasing too few investable companies. So I don't think if there are problems in private credit, like my first bet is not that it's at Apollo, but I also know we have looked at the insurance industry. And so I know a lot of these insurers have been bought by smaller PE firms. I mean, they're basically using these things to finance their deals. The FT did a great article a few, Alphaville a few months ago on the credit ratings agencies. I mean, it's not even S&P and Moody's. The number one is Egan Jones. So corporate headquarters is like an eight bedroom house in suburban Boston, literally. And I think they did like 2,000 deals last year that they raided. I mean, if you lived through the GFC and were paying attention, you know, like starting to see some dots connect. So that does have me worried also. And if that does intersect with what I think could happen in the labor markets from AI job displacement, you know, like I know you want to pivot back to it, but I'm just going to put it out there. I think it's not unrealistic to say 15% of knowledge work jobs in the U.S. in three years are gone. And if it's not three, it's going to be five. But it might not be 15, it could be 20, 25%. I mean, that's, and I can work through how I got there. Let's dive deeper into AI. It's both an investable asset, a shortable asset and a tool that you're using to run a business. So I want to hit each of those things starting with how are you using AI as a tool to manage a business, to identify long and short opportunities? Long and short opportunities, what is true AI, not just LLMs, mean for your daily work? Well, I mean, in the past, again, since finding religion just a few weeks ago, I mean, this is something I've been hammering. Most of my employees have worked for me for over 10 years. We're an old firm for hedge fund. I mean, I used to joke that this is probably true that if you look at trips and falls per dollar of AUM, we maybe are the highest in the world. And that was kind of funny to say until I started saying, guys, why are you literally taking months to put together 150 page slide decks to discuss something internally? Stick it in the machine. And so one of my analysts, my longest serving employee, X Auditor, super bright, but always struggled with communication. I mean, one of my skills was over, you know, months, weeks or months, many, many hours trying to draw out of her the patterns that she sees, but she's just unable to elucidate. Now she's just pumping out the memoranda from Claude. And I'm like, wow, this is, I mean, Cindy, this has saved us like, you know, probably five weeks of, you know, like frustrated conversations in the conference room, like this. So from that perspective, it's helping, I think, hurting a little bit. You know, I've always felt that we have an edge as activist short sellers over our competition in terms of how I write and communicate. Like that edge is gone. I mean, you can go to Claude and say, hey, you know, write this up as a short report in the voice of Carson Block. And, you know, it's not bad. I mean, I, it gets you a lot of the way there. So, so let me flip the question on you and ask, how has AI changed the fraudsters toolkit? What can Claude do for fabricated document, deep fakes, fake video, fake voice, fake docs, fake everything? Has it just become an arms race between the good guys and the bad guys? Well, look, I mean, the tools for forgery never really needed to be that sophisticated. I mean, one of my favorite examples of that was the Peregrine financial. That guy had a post office box and an inkjet. And that's how we forged his auditor letters. And, you know, it was a few hundred million. But Bernie Madoff did not exactly use the most sophisticated technology. Yeah. I think the, I think the thing that will get to be more interesting is if you're a company CEO, and, you know, you're kind of, you know, like you're pumping your stock price, you're monetizing it and hitting the bed. I think the more interesting thing is querying it, you know, if I were the CEO of XYZ company, what would a short seller focus on? You know, like, what should I do about that? So, I think that we're going to get in this cat and mouse game of preemption and reaction. But I mean, at the end of the day, I mean, if you're, you know, if you're just ramping your stock price and mortgaging your future, and I think as activist short sellers, we'll still get there. But you could at least dig a wider moat around your, you know, around what you're doing, if you use these AI tools. So I always think of short sellers like Jim Chano, Sam, the original guys who really pioneered forensic accounting as being so deep into the documents, how useful are tools like Claude Cowork as a forensic accountant to help either identify patterns in every SEC filing or honing in on a specific company's filings and seeing what doesn't smell right. For me, that's a little TBD. I don't know yet. I mean, I'm not sure that you can just upload a 10k and say, oh, you know, what, what's dodgy about this? I mean, first of all, one of the, one of the secrets, it's not a secret, but what we do is we obtain documents from places people never look. So again, like we're, you know, we're pulling UCC files to look at asset securitizations. We love companies that have overseas subsidiaries because most overseas jurisdictions, there are publicly filed financial statements. So we'll pull those and upload them. And then also, I'm sure it really helped connect the dots with people. I mean, right now, or up till now, we've had to rely on memory like, oh, wait, yeah, this dude, you know, we've looked at 58 entities. This dude was in that entity. Oh, interesting. So the AI is going to get rid of it's going to make that part easy. But you still have to go out and do the legwork. And you know, a lot of times you have to send people in person to do document retrieval. So I don't think it's as simple as, you know, hey, I woke up today and I want to be an activist short seller, like, you know, what's you know, Claude, which company should I write about? And you know, what's my thesis, like, you have to still do a lot of legwork. But the accounting stuff you Claude has demonstrated internally again, turning my in my accounting analyst, the former auditor, turning her poorly expressed thoughts into actual words, you know, of course, she's iterating with it. No, no, no, that's not what I mean. But it's got real accounting knowledge. Oh, well, according to ASC, blah, blah, blah, and this does not meet the definition of the dadada. I mean, wow, I mean, that's, it's really interesting. I mean, look, I I think at the end of the day, part of the edge of being an activist short seller is the willingness to be sued, or the tolerance for being sued. So I'm not worried that a bunch of people are going to run out and commoditize this. And I think at the end of the day, also having a brand where if everybody can produce skeptical pieces, it's also knowing when the model is kind of bull-shitting you, right? Because that happens too. I mean, these things are sycophantic. Like, wow, that's brilliant. Of course, it's a fraud, Carson. You know, no. To say nothing of double checking for hallucinations and a bunch of lawyers who have been using AI, keep getting into trouble, because it's citing cases that don't really exist. And the judge's clerk also using AI discovers these cases don't exist. But you mentioned a word that's really fascinating. You mentioned edge. If all the participants in the markets, long and short, are using the same tools, is there any edge to be had there? Or is it really about how you're applying these tools where the edge comes from? That's an interesting question. I mean, look, on the short side, you only make money if people care, right? And so I think that's been the problem that most, so since the GFC, almost everybody who was running money principally focused on short strategies has gone out of business. I mean, some, you know, they rode off into the sunset, made a bunch of money, most carried out. I think the problem that a lot of the short sellers have had, and I had this too, and I have to actively correct for it, is you tend to view the world the way it should be, not the way it is. And so that's the problem. Like when people short Tesla because Elon Musk this and that, nobody cares, right? And that's a thing. So I think you, to be good on the short side, you have to understand why people are buying the stock, and you have to have a view that goes directly against that, or that undermines that thesis. And I think so much of the time that doesn't happen. So I don't know. I think the, I don't know that this erodes the edge of just, of judgment when it comes to the long side, or short side. And then on the long side, I mean, kind of buy what the smart money is buying seems to have worked. Like I hate to say it, but, you know, again, technicals versus fundamental value. The technical value of something, you know, like I don't know that AI helps a ton with that right now, but it certainly can. Let's talk about AI pretenders, and I'm pulling something else you had written a while ago, and there's a little bit of a rhyme with late 90s, every company editor dot com and their stock would see a pop. What are you noticing amongst the fake AI stories, the fake pivots, the companies that really have nothing whatsoever to use to do with AI other than two or three people who work for the company have a perplexity app on their phone? Tell us about the narrative of AI pretenders. Look, I think if all of a sudden a company has started talking, so I first did this shortly after I started on the short side, cloud became the thing, right? And so then saw some companies that had just done a global find and replace, like, you know, find this, replace it with cloud. And so if you see that with AI in a company's filings, like, and in their statements, then, yeah, I mean, they're probably a pretender. I mean, I think it's pretty clear, you know, AI, real AI requires scale. I mean, whether you're on the hardware side, or you're actually producing the AI models. So I don't know, everybody who's like AI-enabled, and look, I'm out over my skis here because I don't really understand the technology, but everybody who's AI-enabled, it's like, well, what's the foundation? You know, if you are an AI-enabled this, what are you running? Are you running perplexity, cloud, chat, GPT? And if you're like, well, I made it myself, like, no, man, like, I'm not gonna buy that, you know, like, these things have cost way too many billions of dollars to develop for you to be able to vibe code your AI. Short sellers are always looking for a downside catalyst. When you start thinking about the mega caps, the hyperscalers, or anybody else that's really blown up in value and in price, that's created a little bit of an air pocket, has that catalyst come in yet, or is there something off in the future that's gonna lead people to say, hey, this has gone too far, we need to take something off the table? Well, if you take my view that a lot of these names have traded based on their technical values, as opposed to fundamental, then you need to get into, okay, like, what are the underlying technicals here? So I'm a fan of a guy named Mike Green, so I think Mike is gonna prove to be really prophetic. And so what he's been saying since maybe 18 or 19 is that, so passive is broken the market, you know, don't disagree, but that when the flows, especially the buying from the target date funds, tapers off, and then you get net outflows, that's when you get, as he calls it, or was calling it, 1929 magnitude crash at, you know, fill in the year, fill in the blank with the year speed. And that's what scares me about AI, because, you know, like I said, if this thesis is correct, that then three years or a few years, 15% of knowledge workers have lost their jobs, it's not like they're gonna find new jobs, it's not like fiscal or monetary stimulus creates new knowledge work jobs, they are going to, and they all have college debt, mortgages, car leases, eventually, they're going to start hitting up their 401ks. And so first, they stop contributing as they're laid off, then they need that money, and they start taking early redemptions. And so if Mike Green is correct, that when that happens, there's nobody there to catch the falling knife, and the technicals have basically for, you know, better since the GFC just created this tremendous amount of air, that's when it's really time to panic, because that's what, I think that's what's going to make his thesis, that's what's gonna test his thesis. And if you asked me five weeks ago, you know, did I think that we're in any danger, anything on the horizon in terms of seeing, you know, reversal of 401k flows and significant rise in unemployment, I would have said no. I was completely sanguine five weeks ago, and I've, like I said, I've 180. So I can't leave on that much of a downbeat note. So for the last question, you run along short funds, if that's the downside of AI, if that's the negative we're seeing in the world of white collar work, what's the long side of the portfolio, what looks attractive through and on the other side of whatever happens with either the AI thesis or Green's thesis? Well, okay, the tough thing is, there obviously are going to be companies that benefit from AI, right? And so they're the hyperscalers, but if you have, but if they're in the index, which they all are, and they're major parts of the index, and you have index fund flows, well the bull cases that over the long term, they're gonna be, you know, there's gonna be a great buying opportunity. So I'm not sure that's where you hide out. I mean, what we've been doing for the past month is creating a set of what I think are highly convex trades in the book, especially basically shorting credit. So it's not like the lead up to the GFC, there's not, you know, deep CDS market, but I think, I mean, credit spreads are stupidly tight, and credit vol is stupidly low. So to me, you want convexity, and there are lots of ways to pay it, where you're capping your potential loss, that's how we're approaching it. So like, and look, I hope this doesn't play out. I mean, because I don't have like a plan B or C after AI takes, you know, like my job, but you know, at least as it does play out, we're positioning for it. That was my conversation live at Future Proof Citywide Miami with Muddy Waters, Carson Block. If you enjoy this conversation, well, check out any of the 600 we've done over the past, almost 14 years, you can find those at iTunes, YouTube, Spotify, Bloomberg, wherever you get your favorite podcast from. I would be remiss if I didn't thank the Crack Team that helps put these conversations together each week. Alexis Noriega is my video producer, Anna Luke is my regular producer, Sean Russo is my head of research, and I'm Barry Ritholtz, you've been listening to Masters in Business on Bloomberg Radio. Perhaps when I traveled traveled traveled traveled traveled traveled traveled traveled traveled traveled traveled traveled traveled traveled traveled traveled traveled traveled traveled traveled traveled traveled traveled traveled traveled traveled traveled traveled traveled traveled traveled traveled traveled traveled traveled traveled traveled traveled traveled traveled traveled traveled traveled traveled traveled traveled traveled traveled traveled traveled traveled traveled traveled traveled shaping our world. And that's what I'm doing here on this podcast. Speaking to people from Nigel Farage, Listen, love you trying ever so hard. Russian needs to be taught to listen. Listen, love you trying ever so hard. To tech journalist Kara Swisher. And the tech industry is running wild. You know, they've gotten what they wanted and they've seen a huge run up in their stock prices. This will be a place where every weekend you can count on one essential conversation to help make sense of the world. So please join me, listen and subscribe to the Michelle Hussein show from Bloomberg Weekend. Wherever you get your podcasts. You certainly ask interesting questions. The all new, all electric Toyota CHR Plus. Sleek, stylish and quietly reliable. Available with 0% APR representative, with 1500 pound deposit contribution and save 1500 pounds with the electric car grant. Get that Toyota electric feeling. Visit your nearest Toyota center, Jemka Bromley. Price from 34495 available on tow to PCP1 Finance through Toyota Financial Services by 30th of June 2026. Optional final payment and damages may be required. See website, season C supply.
