Muddy Waters’ Carson Block on How AI Could Unwind the S&P 500 | #640

Synex always sounds smarter, optimists live in bigger houses. The dirty secret of the activist's short-selling model is that it's not scalable. We're not as humans going to be able to keep up with the pace of change. (upbeat music) Welcome to the Metfavor Show, where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing, and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here. Metfavor is the co-founder and chief investment officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria's funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit Cambriainvestments.com. Welcome back everybody, happy summertime. Today we have an awesome episode. Today's guest is Carson Block, founder of Muddy Waters Research and Muddy Waters Capital, Carson's well known for being the last short seller left in the world. Carson, welcome to the show. - Yeah, thanks for having me, Metf. - Do you know any others? I mean, I feel like they've all retired, gone the way the dodo and makes me sad. Are there a few left? - I mean, there are a few, but yes, I mean, there've been number of retirements. The voluntary retirements were right after the GFC, the involuntary retirements are in more recent years, but it's not an easy profession that those of us still in it have chosen. - Well, I joke that all my short seller friends, they definitely have like a little screw loose. Usually in a good way, I'm a long time defender of short sellers as much as I got into it with Elon on Twitter years ago. Anytime these CEOs are fighting with the short sellers and say, look, just take care of your business. You don't have to worry about them. You know, they're buyers of your stock at some point. So just execute and I call the short sellers, the immune system of financial markets, right? Nobody's gonna work out this fraud. Certainly not the general regulators and governments. So you need people like yourself. You're doing God's work. Anyways, that why you're in a bunker in Sonoma? (laughs) - That's right, hiding out from all the bad guys, but no, no, I mean, look, you know, there's a lot you said that I could react to. I mean, it's in politics as well as in the markets, it's a much less civil time. So if you go back, say, 15 plus years ago, think a lot of investors on the long side had that same attitude of, well, I don't want my management to spend too much time and energy dealing with short sellers. Like, it's probably a red flag if they do. At best, it's a personality defect. But, you know, now, in these times, like, a lot of the investor-based cheers on these management as they just, you know, engage in law fair against their critics and constantly try to make aggressive moves against them, whether it's in real life by sending investigators after them or just on social media. So it's a different time. And I noticed this, I mean, acutely, we shorted so-fi a few months ago. And that's a stock where the management has really focused on cultivating a retail base. I mean, almost to the exclusion of institutional and even sell side. And I mean, those guys are rabbit, man. Like, there were some pretty nasty death threats out there. And nobody even, you know, on Twitter and nobody even said, you know, hey, that's too far. So as far as how most longs, especially retail, longs feel about companies going after their critics these days, I think it's just sport. They like it. - Well, nothing cleans out a lot of this, like a big fat bear market, which, you know, we haven't had any while. Is there a situation of trust decay, like as far as enforcement? Is there a situation where channels used to call this the gold-nade of fraud? You gotta say gold-nade of drift. I think on politicians and both sides of aisle too. How do you think about that in the world of being someone who's traditionally, you know, biased to the downside, to the short side? - So as a short seller, you do depend on institutions like the SEC and the DOJ to actually have substance. But the problem is, so, you know, if you look at it politically, when the Democrats are in charge, you know, like we have the Biden and Gary Kensler, SEC, it's just all about this paperwork and burying everybody under like little rules and people at the SEC would wake up every morning and like ask which dialect can turn into which I could flip and it was not substantive enforcement, wasn't holding anybody to account. I mean, you're in the asset management industry. I'm in the asset management industry. It was just more compliance costs and time wasted basically. Then historically, the Republicans have taken the view that, hey, you know, we want to light, not on them for, like they're very opposed to that sort of enforcement, but they kind of tend to just gut the agencies anyway and I get the idea and I'm sympathetic to the, you know, get rid of all the tick-e-tack rules, but you have to enforce the remaining rules. And so I like to have faith that these institutions are still capable of doing that, but I was on the receiving end for a while, the SEC and DOJ investigation into short sellers. And I mean, it was just like, you know, an awful experience on the number of levels. I'd made so many cases, you know, help them make so many cases over the years. I kind of am, some of me is sympathetic to the idea that you can't really fix the agencies right now. They do have to be torn down. Obviously, the administration that's in place now, I mean, they're in the tear-down business, not so much the rebuilding business. Maybe this is what has to happen, but at the end of the day, I still have to do what I have to do, right, like, I've got my job and I can't change my business plan just based on what the political and regulatory currents are, you know. It's just, I know one thing and, you know, just get out and do it and hope it works. - We had submitted two whistle-blowing on companies in my world, whereas like 98% sure were fraudulent. And one of them got digested, bought by an ETF company, and I joked with my friends who bought it. I'm like, I don't know if you guys did enough due diligence on this one. And the other one, they clearly just totally reached out to the company and wiped everything clean. Like, the people that were involved, the historical reference and track records one day is just all gone. But we see a ton on the murky private world, like Instagram and private, it's a lot of private real estate. I feel like a lot of bad behavior in this cycle. But a lot of the big ones that we've looked at over the years, eventually, these aren't public equities, but, you know, kind of asset managers. They eventually just collapse under their own weight, at some point. But some of these frauds in the public world, they're not even frauds, but companies that are doing pretty questionable stuff, they can last a long time. I mean, how long did Wirecard last? That lasted like decades, right? - Well, it blew up in 2020. The earliest critics were out there in 2008. They were Germans. And they had broken the law in Germany, because they didn't disclose their short position, but they went to jail in like '09. And then, yeah, you had some activist short sellers beginning in 2016, culminating with the FT in 2019. And the German prosecutors actually investigated the financial times journalists for manipulation and corruption, 'cause Wirecard did something really smart there. I mean, these guys were evil geniuses. And I don't know what extent you followed what's come out after it's collapsed, but it's definitely strange for them fiction. But the former COO, Jan Marseilleck, when he got these pointed questions from the FT reporters in 2019, I mean, basically he knew they were going in the fraud direction, knew that he didn't have good answers. So he ended up speaking with a few hedge fund managers in London, and it's just kind of, yeah, the FTs about to publish these articles, saying that we're fraud and this and that. So of course, the hedge fund managers hang up, go and short the stock, then the FT publishes, and Wirecard ran to buff in the regulator in Germany and said, hey, look at the increase in short positions, just ahead of the publication of the articles, obviously this leaked. And you know, our investigators, former head of Libyan intelligence, just post the fall of Kadafi. Our investigator in London says that apparently, these hedge funds paid the FT reporters in million euros to publish the story. So, often intervened and suspended short selling on Wirecard stock, which was the first time, since that framework had been created in Europe, post-GFC, first time it had been used to protect a single share from short selling. So, and then I guess just in the stranger than fiction, it came out afterward that in all seriousness, this guy, Jan Marcelik, had been a GRU asset or agent and he was working with Russia to try to control the flow of refugees from Africa into Europe. I mean, it's just so next level. So yeah, that's my world. - Not just a short show or any more. Talk us a little bit about how you're thinking about the world and what you guys are doing in muddy waters as well. - First thing that, you know, and you mentioned earlier on, you said that the number of short sellers that you've known have had to screw loose And you know, you said it's largely positive. I would take the other side. that in the sense that it's not entirely positive. I think you're right and it was actually Jim Chino's I think that said to me several years ago that it's been shown that there's a higher rate of depression and mental illness among short sellers than among other professional investors. And I think that's both cause and effect of being a short seller. Do you think a lot of people who've been short sellers, I mean some of them have descended into I think really serious mental illness and depression. So how that's relevant to answering your question is you have to on my side of the of the market, I had this conversation with myself several years ago where it was like it's really easy to hammer everything looks like a nail, right? So am I looking at everything through a filter that's overly negative, overly cynical? And I think the answer I get myself is that's probably the case. And you know, just take a step back and look at in the market who has been rewarded since the GFC has it been the short sellers, the skeptics, or has it been people on the long side? The answer is obvious. And look, some years ago I also heard an expression and I think that seldom have true words been spoken about investing, which is when you speak with them skeptics or cynics always sound smarter, optimists than optimists, optimists live in bigger houses. So I'm in business, do I want to be one of these guys who's dying a really awful messy angry death on Twitter, you know, like yelling about stocks and, you know, and people in, you know, in the investment business? No, I don't. I want to remain in business, I want to provide for my family. So with that, I need to constantly remind myself, maybe there's another side here, maybe I need to calibrate my filter better and treat this more like a business. It's kind of funny because if you go back to 2021, there was an institutional investor article published on me. It was pretty in depth called The Rage of Carson Block. Ironically quoted Andrew left. And Andrew, you know, recently just been convicted of of market manipulation. Andrew said, for Carson, shorting is a G-Hod. And you know, my view as Andrew said is, if you want to make a world better place, there are lots of ways you can do it, but you're not doing it in the markets. And after that investigation washed up on my doorstep, I started thinking, you know, ironically, I have to be a little bit more like Andrew in the sense that I have to be pragmatic. Like I'm running a business here. So where do we have edge as people who are skeptics? And one of the interesting ways that I guess, you know, it philosophically, maybe we have edge if we're being honest about our shortcomings is identifying momentum as a real way to, you know, air quotes invest. So one of our people internally developed of systematic momentum strategy, just within the S&P 500. And we started actually, you know, investing in that in small money initially in October of 24. I mean, it's compounded it over, I think, at over 70% 70 gross, which in a way is depressing as a short seller, but that's the thing. Like are you living in the real world or are you going to die that fiery death on Twitter, you know, complaining about the markets? And when we decided as a firm that we want to be in the real world, it made sense for us to pursue that. So that's something we've done. And we've also been investing in junior miners, some majors as well, but mostly junior miners mostly on the long side. And we've done some activist campaigns there. And we're agnostic on the metals. But the thesis is that there's been a huge under allocation of talent to the mining space, you know, since at least 2000, like smart people generally have not said I want to go work in mining. It's, you know, it's very dirty and it doesn't have the best image. So there's a lot of edge to be had there. In junior mining, you can make venture type returns, but you have a lot more data upon which to base your investing decisions than you do adventure. So we teamed up with somebody who's very talented investors based in Toronto. It's been doing mining as whole careers, you know, youngish guy, late 30s. And so we've gotten into that space as well. And that's been, that's been rewarding for us too. We saw this so in London pitch as junior miners no line, right? That's done well over the last year or so. We'll talk about a couple of themes and we can kind of dart in and out on long and short side, wherever it may be. Some of the broad things you've certainly been talking about that are relevant right now. You've been talking a lot about AI. What are your general thoughts, market implications, macro structure? What do you think? The question I was getting asked a few months ago is, is it a bubble? The answer, you know, go back to when I was in law school is it depends on your timeline. But I think my concern, what I believe is going to happen, but I'm actually a genuinely hoping to be wrong about this. I think that AI will displace a significant proportion of knowledge workers. So we think 15%, you know, roughly 15% of U.S. knowledge workers within three years is possible. I mean, look, if CapEx plans get dialed back, maybe that timeline changes. But I feel that this is coming within the not too too distant future regardless. And when you're taking out basically the highest earning slice of jobs in the economy, and it's not like the GFC where you have green shoots as they used to call it on the other side, something the jobs are gone. And I don't think this human capital gets redeployed in ways where people are earning nearly what they did. I don't think this creates enough new jobs to offset the jobs that have been lost. And jobs that are going to be lost, I think, I mean, lawyers, you know, a lot of junior lawyers, accountants, coders, it runs the gamut. So these are people who earn a decent amount of money, and they're people with 401Ks. And 401K flows have been really important to powering the S&P 500, especially the names that are the largest in the index. And so you also have the demographic component where boomers are going to start taking redemptions as well. So if you get situation where you've gotten, you know, roughly 15% or 10, 20, whatever you want to call it, of knowledge workers having lost their jobs, having been dislocated without the ability to replace that income, then your 401K flows go neutral and then negative. People sell their taxable assets to pay the bills. And then eventually, they have to also redeem their 401K assets in order to pay more bills. So as this happens, the S&P 500 and NASDAQ 100 in particular, the largest stocks, the ones that have been the biggest beneficiaries of these flywheels of flows, those will unwind hard. And you know, we're going to also have a real economy, obviously a real economy problem with aggregate demands. I think AI will end up being like quite deflationary at that point in time. And I think then we go toward this, you know, new social contract slash reordering of society because I don't really know what the alternative is at that point. Well, we can all move to Sonoma and start buying up some wine country. I mean, are you guys getting distressed sales? Nobody drinks none of the young and the drink wine anymore. Is this a good opportunity to be buying some vineyards? Interesting. Well, I'm not here full time anymore. We moved to Texas five years ago, but there are a lot of properties for sale up here. I mean, I've really felt it acutely since I've been back here in the past few weeks, just this place. It just seems to have a real economic melee. I mean, but people don't seem like they want to show up and work. I've been talking with my wife about this, you know, just be keep having these encounters with businesses that just seem not to really care. So yeah, look, I think to your question there, it's probably really early because there is a problem with wine consumption, even at the high end. Rob report that not I don't normally read it, but somebody sent me this article last summer. They had an article about how a lot of the collectors of high ends, Napa cabs are saying enough because, you know, they're looking at their wine sellers, which are full of wines and they're they're not going to be able to drink in their lifetimes. And these wine producers have just kept jacking the prices year after year, which, you know, something that really irritates me because I am a wine fan. And so a lot of them have thrown the flag and said, I'm not buying anymore. So you're maybe getting it at the top of the market, you're definitely getting it at and demographically at the bottom of the market, decreased alcohol, especially wine consumption. You know, but I guess what keeps me from buying, we have a very, very small vineyard here, but, you know, I thought, you know, years passed about buying like sizeable vineyard. There are a lot that are for sale now, but what really keeps me from doing that is I just can't stand the idea of having like more business interest in California. The past five years in Texas, it's been so much easier running my business in Texas than California. I mean, despite the fact that your man hadn't beach. I mean, that's that's beautiful. I mean, this whole state is just gorgeous. This speaks very near and dear to my heart in a painful way. So one of the things about AI that I heard an interesting comment the other day, they're like a lot of the disruptions historically that happen with technology tend to displace jobs that were kind of on the way out anyway. The interesting thing about AI, until now, know, most of the jobs in spaces, this is coming for our careers in industries that were on the upswing or doing well, and I heard a kind of ironic, but, you know, kind of accurate quote the other day where someone was talking there like for a long time, there was this very dismissive comment where people would say to some of the blue collar workers where, you know, the factory jobs might have been going to China or some other stuff and they say, well, you need to learn to code. And then this might have even been from you. I don't know who this was from. No, it wasn't, but I know, but I mean, I know exactly what you're talking about. Yeah. Now the plumbers are going to have a, their moment where they're going to look at all the coders and be like, learn to plum. This is going to be your new career. But look, disruption has always been part of this, but this is somewhat unique in that it's been industries that were, were not on the kind of secular decline. Rather, these are ones that up till very soon have been growing. So, all right. So what do you do with this? Do you just, you know, short the market, do you find specific names or you're finding opportunity long elsewhere? How do you deal with this? Yeah, I will get to that. I'm just a second, but I want to add to what you were saying. I think what also makes this a different dynamic is that because AI models are now coding their successors. I mean, we're going to start getting this exponential increase in the capability. Like, before a new machine was invented and it was invented by a human and displace some labor, but there were no more jobs created. But you get this new technology, and then you get kind of a leveling off and then maybe another leap. I mean, we're not as humans going to be able to keep up with the pace of change that's going to come, but because these things are coding and testing their successors. Like, that's, I think that's the fundamental difference between what's coming and what has been. But I think in terms of how you play it, I mean, we don't want to take any directionally short risk where our risk isn't capped. So we do have an AI disruption basket of trades. We are in equities and credit, but in equities, it's put spreads. And look, the thing is there's still this structural bid that keep that depresses vol. And that's great on the credit side as well, shorting credits. So I mean, we think, you know, spreads, when this starts to hit home, especially as you have the aggregate demand issues, spreads blow out. So we're long spreads via swapsions. That's not something that the average person can do here, but the big question is, how long does this take to materialize? I've suspected in February that the market was going to price this in at a much faster rate than the GFC was priced in, right? Because like GFC, I mean, people in '06 definitely '07 knew that something horrible is going to happen, but it really took a couple of years for them to actually realize money. I mean, I've some of them realized it far earlier than, you know, than that even. The thing that's interesting and I'll get back to answering that question, but I do want to address the time frame. When I had my epiphany, it was February and talked to various people who I think are extremely sharp in the market and everybody was talking about that, right? They're like, yeah, we just had a call to partners and we're trying to figure this out. One guy said, yeah, we're going long, like the Australian, you know, long government bond or which whatever. Then the Iran war happened and everybody got distracted. So the whole faster burn than GFC so far hasn't borne out, but I think when we stop being distracted by something, people will focus on this. So I do think it'll be on a faster burn in terms of repricing spreads blowing out, etc. So I think some of the trades in this is more on the third order effects, but some of the stuff that could be truly interesting, most second and third order. So bond ETFs, LQD, HYG, I've put in a second order effects. So put spreads there and then third order MUB, the municipal index fund. I mean, like really, like if this comes to fruition, when you think about the finances of state and local governments, especially the ones that have the obviously bad finances right now, like California, New York, Connecticut, New Jersey, Illinois, I mean, those are the largest constituents of municipal bond index. And so there will be a moment in time, right? If you're short the ETFs there where there's this dislocation because the ETFs won't be able to meet the liquidity of the underlying will just be frozen and they won't be able to meet the redemptions. Now we know what the playbook is, right? Obviously the central banks of the world are going to come in and unfreeze the markets. So when this day comes, you have to be prepared, like don't be a pig, take advantage of the dislocation, cover your shorts on the ETFs, on the bond ETFs, you know, and again, I like the put spread concept and you have to roll them as theta kind of burns off your premium, but that's part of how we're playing it. The corporate yield spreads talking to you is maybe not totally anti-consensus. I don't feel like anyone is worried. I try with all my allocator friends. I feel like people are like, yes, docs are expensive, whatever. I can sidestep that when it comes to it. But when you hear, hey, like corporate and junk, these are some of the tightest spreads ever. I mean, it's like 1% tile. Nobody seems bothered by that. Everyone is just like, yeah, whatever, you know, that's okay, which is very strange to me, but here we are. If we know anything about market dislocations and the VIX going to 40, 60, 80, it's usually the spreads blowout, but not today, July 26. We'll see. But I would also say, you know, I think it's, you know, you're talking about how people aren't concerned with it. Think about how long it's been since the GFC, right? I think there are two generations of investors who've entered the market since the GFC. And to them, what is risk? It's a BTFD because you know, right, that the, you know, the Fed's going to come in and save all. So I think that's why it just doesn't seem like people are talking about. Like risk has been so suppressed. I mean, going back to your first comments or questions about how there's so few short sellers left because yeah, like, you know, identifying risk has not been remunerative for the most part. So I think that's why that shortcoming exists. I don't think it's wrong to be concerned about these financial conditions. But of course, people have been concerned about them, you know, since like, you know, 12, 13 or even 11 with the Eurozone, supposedly going to break up and, you know, they've just been like chicken little. That's how everybody views them. So I mean, you know, I don't know. That's has a said in Fight Club on a long enough time scale. We're all dead. So I don't think it's that time scale. How much brain space do you get to dedicate to a number of shorts? Like, do you guys usually end up like the focus on the research ports is like half a dozen? It seems like pretty selected list or do you say no? These ones are writing research ports and focused on we actually end up shorting more like a hundred or two hundred. How do you guys think about it? That's a fantastic question. So why am I among the last short sellers still around? Because the activist short selling is a viable business model. And so, you know, it's only going to be handful of times per year. You find a company that's so broken, but there's such a misunderstanding of that. So usually management team that's worked pretty hard to conceal the issues from investors. So a few times a year, you find something like that. You do a ton of research because you're really trying to speak to the longs. You're not trying to make the case to short it. And then you publish on it. And it's such an intense business that until we got bigger, I mean, we couldn't, you know, you were asking earlier about the diversification of our business until we got bigger in terms of AUM, which enabled us to add more employees. We couldn't, we couldn't really do anything other than short activism. So I think for the vast majority of short activists, that's all you can do. If you're trying to be the passive short guy as well, I think they're meaning non-activist short guy. I think there are two problems with it. Number one, you probably don't have the resources to be tending your activist shorting garden well enough. So you're probably making mistakes or you're going to make a mistake that could be very costly. The number two, it's been a horrible business model to just be short without publishing on it. So the dirty secret of the activist short selling model is that it's not scalable. I mean, we manage a few hundred million in AUM and short activism. And that's you could say, you know, here's a check for a billion or two billion dollars. I couldn't take it like there's no way. It's not a question of the denominator in terms of AUM. It's just a question of how many times a year do we find something that reaches that level and brand is very important in this business. So if you're out there speaking every day, you commoditize your brand. Like as a short activist, when you speak, it needs to be at least like somewhat special. So I think that's probably an average no more than six times a year. So that's the short activist business. But yeah, if you want to be shorting equities without publishing on them, I mean, that's just been a horrific business model post GFC. I mean, I remember reading Howard Schillett's financial shenanigans book back in college. And back then, the only shorting that made sense to me was IPO lockups expiring because there was just a whole bunch of trash that came out in the late 90s. And back then, you didn't have Elon and others messing with a lockup expiration. and it used to just be six months or whatever. was. I can't remember. And then almost everyone in those suckers would go down like 20% every lock up. Now it's more complicated because they have founders get a sell at the beginning and there's rolling and yada yada. There's smart about it. Yeah. They just don't rain stock down on the market. Today's episode is sponsored by Upwork. 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But talk to me about you can go take this either way. You can talk about any themes. You mentioned SoFi. We didn't really get into it. I know you've written about in Signs, Sport Radar, Sport Radar. I've never even heard of Sport Radar. You can pick on two's any of these that are particularly tickling your short funny bone. Well, Sport Radar has done the best. So I won't talk about that, I guess. And they're in the middle of a large buyback. So, you know, wait till they've exhausted their, you know, their firepower there. But yeah, I think SoFi is worth talking about because it's just interesting on so many levels, you know, and you go back to that Jim Chinos theme, the golden age of fraud. I think when Jim was using that word, he's using it expansively. And so the bigger problem the world has than the things that are frauds is the gray zone stuff, right? Where you can massively manipulate your financial statements and probably stay just on the right side of the line. Like this is entirely achievable. And SoFi, what they've done is, it's possibly over that line. But at best, it's really close to the line. It's bleeding edge financial engineering. And until this year, it was the only bank that I could identify that with at least 20 billion in assets that was using a particular type of accounting for its loans and for substantially all of its loans. So that type of accounting is called fair value option, right? So normally, you know, a bank makes a loan and they're going to mark it down a little bit to provision for losses and then they mark it up over time and record income. I can buy that's overly conservative. You know, it's just saying like, well, we're going to mark this down immediately. But the fair value option, you make a loan for $100 and you say, well, you know, net of credit costs, you know, net of losses I take, you know, present value of my interest is going to be X. So I'm going to mark that loan from 100 up to 103, 104. Like, that's fair. So far as day one marks take it up the or look to be about 108, 109. So if you're the auditor, then the test is, okay, can you sell these loans at that price because your your model said, you know, your default rates really low and your discount rates, you know, low, but okay, your model says it's worth 109 on day one. Show me you can sell alone. That's a, you know, like a month old or whatever at 106. And so so far I had been engaging in these sales of its loans at roughly 106 to support these marks. But what so far had not disclosed was that it was financing the purchases. So it looks to be lending 80 to 90% of the purchase consideration. You know, we found this at about 5% and these are on loans that are yielding 13% and what was happening so far had disclosed they had this accounts this receivable on their balance sheet for quote secured loans. So the secured lending program which they told you almost nothing about they said, well, these are investment grade loans that were making the financial institutions. They did not disclose that it was to finance the purchase of their personal loans. So this loan receivable balance got really big. And the SEC sent a comment letter in September of 24 asking for more disclosure. And it looks like so far. And I think it's auditor had this freak out moment where they realized like, oh, you know, because look, our view, Muddy Waters house views that the loans to purchase the personal loans were subsidies and that they were below market terms. So it looks like so far in Deloitte said, okay, you need to demonstrate that you can then sell this quote secured loan the loan that's used to finance the purchase of the loans at par, right? Then that'll show it's market rate. So there was a $312 million what so far characterizes loan sale in that same quarter within a few days within two weeks of receiving the comment letter just before the end of Q3 24. It wasn't a loan sale, man, like they transferred it to a subsidiary, a consolidated subsidiary of SoFi, like they sent the 312 million dollar loan receivable there. And JP Morgan loans money to that subsidiary to send up to SoFi. But SoFi is claiming no, we actually sold the entity to JP Morgan. Now, that does not, that appears to be very misleading because SoFi still shows this entity on their significant subsidiary list, meaning it's probably still consolidated like part of SoFi's financials. And it is part of its corporate tree. I think they did something like that they, you know, too clever by half, like, oh, we'll give JP Morgan the right to appoint the directors of that entity. And oh, therefore, we don't have control of the entity. Therefore, it's a sale of the entity and, you know, not a borrowing. And this supports everything, right? This is a relatively small transaction, but it supports all the marks that they previously made that they continue to make. And our views, if this were disallowed pulling that linchpin would force a restatement of like a billion dollars of previously reported EBITDA. So it's really funny. It's like this upside down pyramid here, small transaction that supports all of these model driven, highly aggressive, my view, effectively, fictitious gains. And management's made real money on this. The CEO and CFO combined, you know, SoFi says, oh, they haven't sold any stock. They entered into some forward agreement where they were able to take over $50 million off the table, like, with, you know, technically they still own the stock. So this is the kind of thing that, I mean, this, I think, typifies our age, you know, maybe it ends up being legal, but it's just on the right side of the line. If it is, I can definitely make arguments that it's illegal. I don't have the full picture here. And I really hope that somebody prized this open from the regulatory perspective. And what's your confidence level? That's going to happen. Look, I haven't given up yet. When you look at it from the enforcement attorney perspective, it's high profile, right? So when you're an enforcement, most of these people, mostly attorneys, they want to ultimately go work for large law firms on the other side. So if you have, if you make high profile cases and you get wins, that's how you get there. And so it's obviously a very high profile name. So if you can get a win, and I argue, you can get a win here. Like, there's more stuff there in our reports. I mean, they, it's just so aggressive. And I think at the very least, the problem has been that there's been like no disclosure of what they do, you know, whether it's this issue or some of the other issues we pointed out. And, you know, like Andrew left part of the reason he was convicted is a line of cases called Omnicare, which is about partial disclosures, half truths, right? You disclose this, but you didn't disclose the rest of it. I think the Omnicare standard is improperly applied to a market participant who's not an issuer, you know, a corporate that's selling stocks of the public, but these guys are. So I think very least there'd be a real settlement out of, you know, disclosure and forced additional disclosure. Now, as I said earlier, I have to act as though these things can happen. So I lay it out and I hope they play it out. In your career, what's been your most memorable investment or, you know, you can answer this two ways, both ways, I was curious with like most egregious public security behavior has been like where you just was just jaw dropping where you're like, oh my god, this dangling did this like kind of can't even believe is there a long list or a short list of like some really, really bad ones? Well, I mean, there's a long list. And look, I mean, the early days we were doing these Chinese frauds were literally close to 100% of the revenue was fictitious. On the thing is after a while, you become a little bit inert to that. On the early days, it's like, oh my god, the chairman, he owns the supplier and the customer. And after a while, it's like, yeah, chairman owns the supplier and the customer. You become inert. You lose the thrill, but I would say the stuff that sticks with me are the really hard battles, like the one that we went through in France, which we got investigated there. two for several years on company called Group Casino Guixard Parachand, and it's immediate holding company. These guys, large operator of hypermarkets, you know, like carful, some they compete with car four, which is kind of like Walmart in France, and the French government was very hostile to us. But ultimately, everything that we warned about, too much debt that they'd been hiding through, like largely legal means, company collapsed under its debt load, bought a lot of French people were laid off who'd worked in the stores, which we warned about. And ultimately, the controlling shareholder, not because of the abuses that we expose, but this guy was actually convicted earlier this year of market manipulation. But I mean, this thing took years, and we faced a very hostile state there in France. Another one that's, you know, kind of similar is this, well, didn't have the hostile state, but Japanese company we shorted in 2016 called Nidec. So this company has collapsed. I mean, the stock has collapsed. They had to get rid of this chairman who we identified as this problem. They didn't internal investigation. I mean, ratified pretty much everything that we had said back in 2016. And I did a lot of Japanese media earlier this year, and like several of these conversations started off with, you know, them bowing and apologizing like, oh, you know, when we spoke 10 years ago, I did not believe you. And you know, it turns out you were totally right. So I guess those are the things that stick with me more. It's when it just becomes like this really difficult battle and you know, you're right. And it just takes years to end up if the market took set that. If that were the case in the majority of shorts, this wouldn't be a business. It's fortunately not the case in the majority of shorts, but those are the ones I remember the most, especially where, you know, the government gets involved and tries to put its fist on us. Yeah, I mean, it feels like instead of doge, you just need a whole group that's like open and warm and receptive to good behavior and just be like, look, let's, we want to incentivize this to be as above board as possible. You mentioned China. I know you've lived there a few times. Any thoughts on China in general? I mean, this is a giant equity market, one of the world's biggest economies. It's kind of been through the peaks and booms and valleys over the past decade or two. Any general thoughts on that market? Is there still a lot of land lines or do you think it's cleaned up a bit? I still call it uninvestable. And that's not a prediction that the blah, blah, blah index goes down by whatever. It's uninvestable because the quantity and quality of information, the quality of information you can get out of there is, it's awful, right? Like the Ministry of State Security has forcibly removed from the market. Many people, whether they're newspaper reporters or researchers or investigation firms that would give you the actual picture of what's going on. And look, then there's, so you think, well, let me just be long. But then there's the policy caprice, right? And I've said this for years, you know, I'd say, like, look, some guy wakes up one morning and says, you know, I got a problem with this industry. Let's shut it down. And it's funny. I wish I could remember what industry this just happened to. This just happened as like some of these Chinese names that I forget with industry, but just got like effectively bagled because the Ministry of whatever decided that they didn't like their business. So the policy capriciousness, I have to say the better word, the policy capriciousness there also makes it uninvestable. So you get no good information, no good quality information, maximal policy capriciousness, like whatever serves the party's interests. And the mistake that people always may, right, when I lived in China, you know, I spoke the language reasonably well, but I was in the trenches doing business there at ground level. My own wanted it to be big, but it was a small business. And see all of these morons come over like, oh, yes, well, you know, my, you know, my guy here, he, you know, it is not what, you know, in China, it is who you know, and he's really well connected, he has this thing called Guangxi, Guangxi, huh? Guangxi. Oh, yeah, that's it. Yeah, he's got that. And like, no, he doesn't, bro, everybody in China says they do. Like, you're like on page three of the book that I co-authored, you know, doing business in China back in 2007, if you're, you know, if you're talking like that. So nobody has edge, all these foreign investors, you know, so full of themselves because they think they're so smart, they think that when they go over there, they're meeting with people who are telling them the truth and don't have hidden agendas other than, wow, I think you're so bright and smart that I'm actually going to tell you what's going on. Like, they don't, they won't, they use you. And maybe you can make money off that for a while. But at the end of the day, it's just, you know, like the risk doesn't, you know, doesn't equal the reward. And PS technically you own none of these companies because they're all, all the operating assets are owned by the chairman and his buddies, you just own a listed company that owns a company in China that has a series of contracts with them that require the periodic transfers of money from the chairman's company. And every time I've looked at this, I found no Chinese operating company that actually was living up to its contractual obligations to transfer that money. In other words, they've all been in material default of these, what we call VIE packages since day one. Now, the chairman say, well, that's because we'd be double taxed, you know, you get taxed at the operating company level and then at the level of the company that receives the payments because it'd be considered two separate companies, chairman's so and so really doesn't like paying tax. That's why he doesn't make those payments. Oh, wow, that's, gee, that's novel. I don't find people in America who don't like paying tax like, I guess we should give this guy a pass and just allow him to materially breach the, you know, the base level agreements that he's got. Like, the risks, I mean, come on, they're better places to put your money. So that's how I look at China. You didn't even mention the emerging with Taiwan and others in some point. Carson, as you look out to the rest of the year, 26, 27, what are you thinking about? Any previews of Carson 2000 AI bought that can just, you know, suss out the bad behavior or what's on your mind for the rest of the year? Man, you got to believe I'm working on that. You've just hired a few 20 somethings, you know, I'm like, if you can extend my vacation in wine country, I don't have to show up and take this abuse, do it. Listeners know this. We did a custom GPT on all my writing and you can ask it questions about portfolio management, asset allocation. And it's probably 85 to 90% what I would say. This ad part is instead of mentioning like, Cambry funds, it'll suggest the people invest with like, dimensional or Vanguard or Vantis or something. So I got to, I got to edit it, edit the AI a little. That's an easy fix, right? It's getting pretty good. Carson, best place people to find you. Where do they go? Well, the website on which we publish is MuddyWatersResearch.com and I'm on Twitter sometimes at MuddyWatersRERE. Carson, it's been a blessing, hopefully, you know, this isn't like the zombie apocalypse where you're the last short seller standing, hopefully, there's an entire generation that is inspired by this very noble cause. Thank you so much for joining us today. Alright, thank you. Appreciate it. Podcast listeners, we'll post show notes to today's conversation at mebfavor.com/podcast. If you love the show, if you hate it, shoot us feedback at the mebfavor.com. If you love to read the reviews, please review us on iTunes and subscribe to the show. Anywhere a good podcast or found, thanks for listening, friends, and good investing.