Lynn Parramore: You’ve pointed out that surveys asking how people feel about economy show optimism, while actual hard numbers look disappointing. What do you make of this gap?
Jim Chanos: Intriguing that people are reporting they’re feeling better, particularly in the corporate sector, but even among consumers. People say they feel good and yet they apparently don’t have any money to keep spending. We’re seeing weak consumer spending in both auto and housing. With unemployment so low and the expansion where it is, these figures should be better than they are. There are even portents of worse things when you look at state and federal tax receipts, which are down, and other leading indicators. We’re 8 years into an economic expansion, and economists say that modern US economy has never gone more than 10 years without a recession.
LP: What about health care industry? What impact would the GOP plans have on the economy?
Jim Chanos: The Senate bill is onerous on the backs of consumers and patients. Americans are getting unexpectedly higher copay and deductible expenses. They’re shouldering more and more of the health care obligation themselves which they haven’t budgeted for. Winter is coming for the US health care industry – so many businesses have been structured for ongoing usage and inflation that they’ve just gotten fat. People tend to extrapolate from the near-term past but it catches you flatfooted when there’s a real tectonic shift. I think the advent of the consumer paying more out of pocket is changing the politics of US health care.
LP: In terms of the energy business, how is it changing and how do those changes impact the economic road ahead?
Jim Chanos: Energy business will be more troubled going forward as much of it is uneconomical. Exxon used to have returns on capital in the high 20s, now they’re in the single digits. Because of shale revolution, America has lots of cheap natural gas. Whatever President Trump might think, coal is not coming back. I keep pointing to the fact that Saudi Arabia seems to be rushing to sell the public part of its oil patrimony via the Aramco IPO and I think there’s a reason for that. When Saudis began to put pressure on oil prices intentionally, it was to pressure the frackers and hasten their demise – but the business brought costs down just as fast as oil prices. Frackers were able to stay in business and capital markets opened back up in six months. They keep drilling but they will have to figure out a way to turn a profit.
LP: What’s your view of tech companies (“disrupters”), the Facebooks and Ubers and Netflixes?
Jim Chanos: With the exception of Facebook, the disrupters – Netflix, Uber, etc – don’t seem to be scaling. Unlike dotcom 1.0 when Amazon and Facebook were inventing whole new markets and were relatively cash-flow positive right away, companies like Uber and Tesla are more personal fiefdoms of their CEOs. We’ve heard a lot about how Uber has manipulated workers and consumers and the governance disasters – lost in the story of corporate governance is the story of an unprofitable model.
LP: What about Trump’s infrastructure proposals? Could they help the economy?
Jim Chanos: Just another sort of fake fiscal news, if you will. It’s going to be public-private partnerships. Macquarie started the idea of infrastructure as an asset class idea but it always revolved around things like parking structures and toll roads – anything where you can have clearly definable cash flow and where you can get immediate cash payment for use. Because private investors need high rates of return, these deals generally haven’t been good deals for anybody. They haven’t generated cash investors anticipated, consumers end up avoiding the toll roads or using different parking facilities if you raise rates too much. In reality, municipal finance exists where municipalities and states can set up funding vehicles and sell bonds to finance the projects. We’re now told that private sector will be able to do this better – they might be able to do it better and faster but only for a small number of projects. Real projects that we need – repairing, refurbishing – are tougher and you’re not going to get private investors to sign up for those without definable cash flows.
LP: Who is actually going to benefit from such projects?
Jim Chanos: These public-private projects are not what core supporters thought they were getting with Trump. It’s going to be great for Wall Street investment banks but skeptical as to whether people are going to get excited about economic growth coming from them. Rural people won’t benefit from them – this is for parking garages at JFK, reconstruction of NYC’s Tappan Zee Bridge, etc. In the US, an attitude of hostility toward government involvement in the economy has developed over the last several decades – this shows up in our infrastructure.
LP: How serious do you view the weakness in the economy we’ve discussed?
Jim Chanos: US economy doesn’t look so great. The big 3 drivers are still housing, autos, and health care – they disproportionately count for a huge amount of activity. What we see is that housing has stalled, autos have turned down, and health care is possibly about to turn down. Retail is also turning down. Nike is laying off 2% of its workforce. Again, this could simply be cyclical, and as we reach the end of the expansion it gets harder and harder to generate new sales as peoples’ leverage has gone up. It could be that, but the problem is that we’re not well equipped to handle anything other than a downturn that’s mild because the Fed is already at near-zero interest rates. Deficit is starting to go back up because of lower tax receipts – that’s the wrong way for the deficit to go up. New spending, like government spending on infrastructure, would be the right way.
James Chanos is the founder and President of Kynikos Associates, a hedge fund specializing in short selling.