Category: Stock

I remember it clearly. Every gold investor’s dream came true at the beginning of 2022. If you’d made a checklist of things that are good for the gold price, every box would’ve been ticked back then. And yet, the gold price fell this year…

Today, we look into one possible explanation for why. And it’s quite simple, really.

Inflation got so far out of hand that even blind central bankers could no longer ignore it. Indeed, double-digit inflation forced them to take action. And that rapid tightening was bad for gold.

My point is that there is a ‘Goldilocks Zone’ for the gold price. High inflation, but not high enough to make central bankers panic.

Low interest rates and loose monetary policy, but not low and loose enough that monetary policy has to be tightened by an order of magnitude just to get back to a neutral stance, let alone slay inflation that’s out of the box.

Structural government deficits, but not enough to trigger a debt crisis.

There are several other factors, which must be ‘just right’, but I’m sure you get the idea. If gold is an antidote to irresponsible monetary policy, then macroeconomic conditions, which are so bad that they force central bankers to get their act together, is not good for the gold price. The porridge can be too cold and too hot.

In early 2020 and the beginning of 2022, we were in this Goldilocks Zone, although for completely different reasons.

During the onset of the pandemic, central banks and governments went mad on interventions, setting the scene for a rally in the gold price.

Into 2022, inflation hit, and monetary policymakers simply pretended it was transitory, setting the scene for a rally in the gold price because they weren’t going to tighten policy despite the inflation.

But since early 2022, things have changed radically. There has been a panic from central bankers around the world to get inflation under control after all.

They were so embarrassed by their negligent ‘transitory’ episode that they tried to make up for it with rapid tightening. That is why gold fell, despite the seemingly good conditions for it continuing (inflation and low interest rates).

The question now is whether we’re headed back to the Goldilocks Zone for gold. Will inflation fall, but not all the way below 2%, and will central banks slow their tightening to end up with interest rates still on the low side?

I think that’s the likely outcome. But I want to point out some very awkward inflation maths that I think will cause your stomach to drop more than a ride at Dreamworld…

Imagine the world economy is suddenly hit with a pandemic’s worth of supply chain disruption due to lockdowns, a green energy escapade, sanctions on Russia, huge quantitative easing from central banks, and vast government spending programs, all at the same time.

Unlikely, I know, but bear with me.

In other words, we get supply chain delays, shortages, cost spikes, and a wall of money that swamps the economy.

The result is a spike in prices, which shows up in statistics as double-digit inflation.

Fine. But what happens next?

Do prices continue to go up?

Let’s say they do rise to even less affordable levels. But not as fast as over the past year and a half.

What do inflation statistics look like in that scenario?

Inflation would fall but remain positive. Because prices would be rising slower than they were before.

This is an important point. Prices would still be getting less and less affordable. From awfully high prices to terribly high prices — the problem of high prices would be getting even worse.

But inflation statistics would go down as the pace of price increases slows, cheering the stock market and encouraging central bankers to pat each other on the back. All while unaffordable prices continue to go up and up…

But are prices really going to continue to go up?

Consider what happens to inflation data if the answer is ‘no’. If prices soared in 2021 and 2022 because of all the forces mentioned earlier, and then they remain very high, but stop going up. What would inflation statistics look like in 2023?

They’d be 0% inflation. Because prices would’ve stopped rising.

But prices would still be high. Painfully high, in some cases. Enough to cause European factories to shut down, to keep homes uncomfortably cold, and to make a great deal of economic activity unviable.

But inflation would be zero. Because prices stopped going up.

Ironically, in such a scenario, central bankers would not be congratulating themselves for having solved the problem of inflation. No, they’d panic about a lack of inflation. Their mandate, after all, is to keep inflation at around 2%, not 0%.

So, to central bankers, painfully high prices would not be high enough if they stopped rising.

Can’t pay your energy bill? Well, the central bank still needs to generate 2% inflation somehow…

Is food unaffordable today? Well, food prices need to keep going up, but only by 2%…

Are your wages falling behind prices after 2021 and 2022? Well, prices must keep rising, but only by 2% a year…

My point is that high prices are not inflation. Only rising prices are. And, for the inflation problem to persist, prices must continue to rise.

If prices stop going up, inflation falls below the central banks’ target. Even if those prices remain unaffordable.

But I’m not convinced that rising or stable high prices are plausible given the effect on the economy of high prices so far.

It’s far more likely that many prices will come back down again as a recession hit because of high prices. This means negative inflation or deflation.

Now, you might think that falling prices are just what we need, given people can’t afford things after a year of double-digit inflation in the US and Europe.

But the irony is that central banks fear deflation above all else. That’s because it makes debt harder to repay. And central bankers encourage economic growth via borrowing.

But never mind that. Follow my line of thinking on inflation to its logical conclusion.

If prices are high and are threatening to come back down to affordable levels, meaning deflation, what are central bankers going to do about it?

Their mandate is 2% inflation, not affordable prices, and certainly not deflation.

Their mandate is to bring 2% inflation to bear on the dangerously high and unaffordable prices we have today.

This is a bizarre situation where central bankers don’t focus on how expensive something is, but on making it 2% more expensive each year, even if it’s already severely unaffordable due to past inflation.

Allowing prices to fall back down to manageable levels would mean the dreaded deflation takes hold. And that must be avoided at all costs!

The conclusion is simple. Central banks are going to try and cause unaffordable prices to get even less affordable. Just not quite as quickly as during the past two years.

If they succeed, painfully high prices will be even more expensive next year. But, as long as the increase is only around 2%, that’s what success looks like…

In the coming months, I want you to keep several things in mind to avoid being misled by falling inflation statistics…

Firstly, they are not good news. Prices are still rising. Given how high they are, 2% inflation or even 0% inflation is still bad news.

Just because prices are getting unaffordable at a slower pace doesn’t mean they aren’t reaching ever more absurd levels, causing real economic problems.

If you’re waiting for prices to come back down to more affordable levels, you might be waiting for a long time. The central banks’ mandates are 2% inflation, not bringing prices back down to the level you can afford.

And last but not least, don’t confuse high prices with inflation (rising prices). It could be an expensive mistake to make.

Until next time,

Nickolai Hubble,
Editor, The Daily Reckoning Australia Weekend

Episode #456: Marc Cohodes on SBF, Fraud, & The FTX Death Spiral

 

Guest: Marc Cohodes is a famed short seller with 40-years of experience. He’s best known for exposing fraud at mortgage lender Novastar Financial.

Date Recorded: 11/21/2022     |     Run-Time: 1:06:23

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Summary: Earlier this year, famed short-seller Marc Cohodes, who has investigated and brought down some major frauds in the past, set his eyes on crypto darling Sam Bankman-Fried, the founder of FTX. Unless you’ve been living under a rock, you must be aware of the bankruptcy of FTX and other related crypto entities, but the bigger story may be the alleged fraud, which includes accusations of stealing billions of dollars of customer deposits, providing executives with loans up to $1 billion, and much more.

This is a story that almost seems too insane to be true. Hindsight bias comes for us all, and while many people now say the red flags were clear as day, there were very few people criticizing or Sam & FTX before the recent couple of weeks. But on August 1 this year, Marc tweeted, “The Best Short on The Board is this fella…SBF.”

John Ray is the new CEO & Chief Restructuring Officer for FTX and famously oversaw the liquidation of Enron. Given his decades of experience in this role, the statement he made in the recent bankruptcy filing is eye-opening and summarizes the depth of the situation: “never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here [at FTX].”

Since this is a story that seems to change by the day, note that we are recording this on Monday, November 21^st.

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Comments or suggestions? Interested in sponsoring an episode? Email us [email protected]

Links from the Episode:

• 2:10 – Welcome Marc to the show
• 3:02 – What made him interested in SBF & FTX
• 7:59 – A quick description of the Lernout and Hauspie story
• 17:11 – Marc suing the FBI over raid papers in response to MiMedx
• 18:44 – The next clues that led him to believe that FTX was a scam
• 27:34 – The inflection point where the public sentiment on FTX started to shift
• 30:53 – FTX’s pitch deck should have been the canary in the coal mine
• 36:13 – What he thinks was so seductive to people about FTX
• 41:45 – Not wanting to seem like a hater in the face of blatant fraud
• 44:40 – The failures of the mainstream media leading people astray
• 49:16 – Explaining what SilverGate is and why he’s short
• 53:33 – Resources for investors who want to learn more about short selling
• 1:00:20 – His most memorable investment
• 1:05:43 – Learn more about Marc; Twitter

 

Transcript:

Welcome Message: Welcome to “The Meb Faber 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.

 

Disclaimer: Meb Faber 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.

 

Meb: Welcome, podcast friends. We have a special podcast today with famed short seller Marc Cohodes. Marc has investigated and brought down some of the major frauds in history. And earlier this year, he set his eyes on crypto darling FTX. Unless you’ve been living under a rock, you must be aware of the bankruptcy of FTX and other related entities. But the bigger story here may be the alleged fraud, which includes accusations of stealing billions of dollars in customer deposits, providing execs with billion-dollar loans, and more.

 

This is a story that almost seems too insane to be true. Hindsight bias comes for us all. And while many people now say the red flags were clear as day, there were very few people criticizing Sam, FTX before the recent couple of weeks. But on August 1st of this year, Marc tweeted, “The best short on the board is this fella, SBF.”

 

John Ray is the new CEO and chief restructuring officer for FTX and famously oversaw the liquidation of Enron. Given his decades of experience in the role, the statement he made in the recent bankruptcy filing is eye-opening and summarizes the depth of the situation, “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here at FTX.”

 

Since this is a story that seems to be changing by the day, we recorded this on Monday, November 21st. Please enjoy this episode with famed short seller Marc Cohodes.

 

Meb: Marc, welcome to the show.

 

Marc: Thanks for having me. This is good and something I’ve wanted to do for a while, so we sure have plenty to talk about.

 

Meb: Tell our listeners where we find you today.

 

Marc: I’m in Manhattan, Montana, so I’m about 20 miles west of Bozeman.

 

Meb: You guys got some snow up there yet? What’s the vibe like?

 

Marc: There’s snow here and it’s cold, but it’s warming up. We’ll get to maybe freezing tomorrow, but it’s lovely.

 

Meb: Is this home for you? I know you’re in Cali at one point or Carolina at one point. What’s main home base?

 

Marc: I go back and forth. I’m a Montana resident. My son lives in California. So when it gets too cold and dark here, I go to … go out and about. But Montana is lovely. It’s peaceful. I have some pals here, so all is good.

 

Meb: We spent some time in Livingston when we were hiding from the pandemic in a world-class fishing and awesome country up there.

 

Marc, we’re going to talk about all things fraud, evil doings, and things that would just make listeners blush. I’ve been a long-time follower of your work. You know, we’ve had a handful of short sellers on the podcast over the years. Some of my favorite people in the world are short sellers. There are less of them today than there was maybe 10 years ago. I feel like the short seller during the 2010s became more and more extinct as the crazy times, you know, carried on.

 

So, I’ve been wanting to have you on for a while and then, finally, got a good excuse recently because you have been early and often on a number of frauds, but one in particular that has recently come to light, which you described as “I think Sam Bankman-Fried will make Bernie Madoff look like Jesus Christ.” So, give us a little rewind, give us the origin story of this idea, and we’d love to kind of walk through, and then we can kind of dig into all things FTX as our first chat.

 

Marc: I think I was conservative with the Bernie Madoff quote, actually, as time goes on. So, it’s kind of funny. So, I’m involved in something called tZERO, which is sort of offshoot of Overstock. And they have a… I’m a big believer in time and digital securities and tokenization. I think everything is going to get digital. I think everything can be tokenized, from sports players to assets to art to music libraries to companies to private investments. And all tokenization, for anyone out there, is you basically sell a partial stake or a partial piece of the action, whether it’s a future stream of an individual’s earnings or an asset, what an artist or art could be worth, things like that, that trade, and tZERO has this exchange.

 

So, about a year and change ago, I recruited for tZERO their new CEO. I mean, he’s the CEO as of February, who was a 30-year industry guy from ICE, which runs the New York Stock Exchange. And ICE made a 20% investment in tZERO, and because I think this is great. But at the time, they had all sorts of funky competitors who were willing to spend all sorts of money to compete against the more in the space, and one of which was this FTX.

 

I think little things are important. I don’t focus on the shiny object. I focus on little things that don’t make sense. And the more things I find that don’t make sense, the more intrigued I get because I’m sort of a detail person. And when you’re a criminal or you’re a fraud, you sort of forget the little things. You’re so wound up in your fraud that you have to worry about the big picture. You slip and fall.

 

So, I’ve sort of been watching this SBF character since really about a year ago. And I really, sort of, listened carefully to what he was saying. And every time he talked, he made absolutely no sense. One of his interviews made less sense than the next. And when asked to describe whether it’s his trade or how he made his money or how he does things, I’ve said it a few times, he talks like he’s driving in a figure eight. You know, nothing makes sense. He can put three or four words together that make sense, and everything falls apart.

 

So, I said, “This guy is intriguing because I think he’s a complete fake.” And then I started looking at the LinkedIn of all his employees here and abroad. And they are nothing more than glorified interns of… You know, you wouldn’t hire any of these guys.

 

Then I started looking and trying to figure out who actually could run this exchange. Because running exchanges, it is complex stuff. So, I go to the tZERO guys and say, “What’s everyone saying about this Sam Bankman-Fried?” And the main guy, Goone, said, “You know, most people think this guy is just completely full of shit, but he’s throwing money all over the place. And he’s dangerous.”

 

You know, I started thinking, and I said, “You know, in all my big trades, you know, I’ve done really well, and even in the trades where I’ve done horrible, and there’s plenty of those, I always remember everything. I remember every detail. I remember where I was, who I was talking to. I remember key players. I remember where I put it on. I remember events at the time. I remember every single detail of everything.”

 

So, Lernout & Hauspie, which is where some people know me from, at that time, was the biggest fraud in Europe. To this day, I can tell you exactly who I was talking to when. And that was 23 years ago.

 

Meb: When you mentioned that… I mean, we can’t skip over that because that’s up there. That’s like on the hedge fund Mount Rushmore Hall of Fame of, you know, frauds and trades. Can you give the listeners just a very quick description? For the younger crowd who may not recognize that name, what was the business, and what was the short-selling opportunity with that one?

 

Marc: Well, anyone can also google me because there are some great stories about me and some of these crazy-ass things over time. And, you know, there are a couple of Harvard Business School cases. But this Lernout almost put me in the grave. You know, it’s spelled L-E-R-N-O-U-T & H-A-U-S-P-I-E. So, there are two guys, Jo Learnout and Pol Hauspie.

 

So, I don’t know, this is back when my son was young. He was born in ’87, so this is about ’98-ish. He was born with cerebral palsy. You know, he doesn’t walk, but he’s very smart, talks fine, went to regular school. He’s great. He’s 35 now. So, at the time, I was looking for a speech software for him. You know, at the time, speech software was very starting out. And the hottest thing allegedly on the market was this Lernout & Hauspie speech software.

 

So, I went and did some research on it and figured out very quickly it didn’t work. The stuff that work was Dragon. The Lernout stuff didn’t work. And the stock had sold at a big price and Microsoft was their largest investor at the time.

 

And I started looking at the numbers. The numbers made no sense. They had a lot of inter-party dealings. They were basically selling stuff to themselves. So, it was also touted by … and The Analyst. I always say, “I bet the jockey, not the horse.” The Analyst was always pushing fraud so, I had great intrigue in the stock.

 

So when I started kicking around how this stuff doesn’t work, I then called their competitor, Dragon. At the time, the CEO was a guy named John Shagoury. I said, “This Lernout stuff doesn’t work.” And he said, “You know, we don’t know how they’re getting their numbers. We don’t know how they’re doing anything. We don’t see them anywhere. No one’s buying them.”

 

So, you know, sort of to make a long story short, they announced huge projects in Korea, which I checked, were fake. They announced they would be on the Palm, which, for all those who are probably under 35, was the predecessor to the Apple iPhone. I mean, it was just a huge hype thing. And we short this thing at 35. I think they took the stock to about 110.

 

I had a radio show at the time called “Facts From the Other Side of the Tracks.” I was outlining this Lernout story. I mean, this is when internet was dial-up, folks. I mean, this is before things were really jumping. And we were just getting absolutely fucking destroyed in this thing.

 

And I knew I was right. And, you know, it becomes risk management, if you will, and recovering on the way up so we wouldn’t be put out of business. But I mean, this stock was up four times on me, which taught me the “jaguar out of the tree” axiom, which we’ll get into shortly.

 

So, after one of the shows, you know, and I’m writing letters to the SEC, talking, just I’m doing everything I humanly can on this thing and it’s killing me, I get a call from a guy, Michael Faherty. Again, this is 25 years ago, and I still remember the guy’s name.

 

And he calls me up, and he says, “You’re dead right on Lernout.” I said, “Well, it’s nice for you to say so, but what gives you such confidence?” He says, “I’m the former head of domestic sales there, and everything is completely made up.” I said, “Really?” And he said, “Yeah.” And I said, “Well, do you want to talk to the SEC?” He said, “Totally.”

 

So, I called up the guy who was working on this at the SEC, Rich Sauer, who I ended up hiring years later, and I said, “I found a live one for you. He used to work there. He says the whole thing’s fake.” He says, “Would he talk to us?” I said, “Yeah, he says he’ll talk to us, so I will let it go.”

 

The next morning, Faherty called me, said, “What did you do to me?” I said, “What do you mean?” He goes, “Well, I was just served a subpoena by two U.S. Marshals yesterday on this Lernout & Hauspie.” Then, I knew we were sort of cooking.

 

You know, one thing led to another. Now, we’re working with The Journal. You know, at the time Mark Maremount was the motherfucker, what’s in charge, the best guy going, and a young Jesse Eisinger, and the guy who was the bureau chief in Belgium was John Carreyrou, who did the thing on Elizabeth Holmes and Theranos. But he was a young guy back then.

 

So, one story led to another. It turned out that every single thing at Lernout was completely made up. Everything was made up, from Korea to the U.S., to… Guys then got arrested. Then they went bankrupt, and it was a mess. I mean, the stock went basically 35 to 120 to 0. I mean, it went to zero. It was worthless.

 

But the thing almost put me in the grave, and at the time, and this is back when a billion dollars was a lot of money, this thing was capped at $12 billion. It was the largest fraud in Europe. And there was a lot written about it. And there were a lot of exploits. But, fuck, it was hard. I mean, I look back at it now, I’m just wondering why I still do it, but I’m kind of like a moth to a flame or like why race car drivers do what they do.

 

So, I have a nose for this shit. And it’s the small stuff that you figure out where, if a product are hyping, it just doesn’t flat out work, you start digging in. But it takes a lot because there’s a lot of money being pushed around to try to get things and to perpetrate these deals. And people do not want you showing up to break up their party. They do not want you involved at all.

 

Meb: You know, it’s funny, we’ve gotten into a lot of arguments on Twitter over the years, and my role is usually defending short sellers. And I was like, “Look, short sellers are national treasures. If you think the longs or the government or other people are going to ever uncover fraud, like you’re out of your mind.”

 

And so, people are always saying, “Short selling should be banned or whatever.” And I say, “Look, I know, a lot of short sellers, and particularly the older ones usually go into two camps. They’re like, ‘This is too much work. I can’t deal with this anymore.’ Or they’re driven often by purpose.” You know, and it feels like you’re sort of in that camp.

 

There’s a great quote from the first Avengers, where they were talking to Bruce Banner, and Black Widow says, “You know, I need you to be angry.” He says, “That’s my secret power.” He said, “I’m always angry.”

 

And so, there’s a certain purpose of uncovering, you know, people that are doing something, you know, unfair, illegal. We’ve talked a lot about in the investing world. So, anyway, we often get into with people on Twitter, but if you think that the journalists or even the institutional investors will uncover these, they won’t. Often, it’s the people who are doing the real deep dives.

 

And in many cases, it’s a thankless task because you’re hated. The companies hate you. And in many cases, you’ve experienced this more than anyone, they come after you. But it’s a good feeling in the end when you get it right, for sure.

 

Marc: I mean, I know what it’s like or I think I have a really good handle what it’s like if you’re Reggie Jackson and wherever you go, they blew the living shit out of you. And then you hit a three-run home run to win the game. And you know, you’re what you are.

 

I mean, I am what I am. I mean, I have uncovered more of this stuff than everyone put together times three, everyone who’s out there. And I’m the short, I can’t stand it, the smash and grab guys who come with a store and the stock goes down. They cover it, never to be heard from again.

 

I mean, I just I go at these things to the end. I mean, I start the game, I plan on finishing the game. I don’t need a reliever in the second, third, or seventh inning. I mean, I think I go the mile. And I’m 62, and I’m more active, or vibrant, or uncover more than guys half my age, you know, times five.

 

So, I mean, I take pride in my work. I take pride in what I do. I don’t make shit up. I may have been sued. I’ve been threatened. I’ve been investigated. I mean, it’s just all over the place. But at the end of the day, I got plenty of money. So, it’s not really for the money. It’s more, as you would say, for purpose.

 

And, you know, when they put me in the ground and people are there, I mean, I think I’ve moved the needle. I think I’ve made the world better. I think it made people’s lives better. I’ve put a lot of really horrible people out of business and in prison.

 

So, there is huge, you know, purpose to giving it back. You know, some people want to work at church. I’d rather expose guys and help out the small guy who gets fucked by these people. And I must have, you know, 700, 800 DMS now from people who got out FTX on my thing after watching Hedgeye. I mean, there’s been 5 million views of that Hedgeye thing now, but it’s a shame people didn’t see it, you know, 5 million times before the thing happened.

 

But, you know, I don’t have a fund. I don’t have a business. I’m not trying to sell anyone anything. I don’t have a financial PR firm. It’s just me. So, you know, some stuff gets traction, some stuff doesn’t. But, you know, I have my Twitter, and that’s kind of it.

 

Meb: I remember following in real time with you a lot of the travails of the MiMedx. Is that how you’re saying it?

 

Marc: Yeah.

 

Meb: That one, which we don’t have to get into, we’ll post the show note, listeners. Otherwise, this is going to be a five-hour podcast. But that story alone, like it used to cause me sweaty palms just reading parts of that story where it seemed like…

 

Marc: You know, MiMedx and I are still going. I mean, you know, for those who don’t know it, you can google me, FBI paid me a visit. The CEO of MiMedx, who’s a crook, who ended up going to prison on my work, bribed a senator. A senator got the FBI to visit. The FBI wouldn’t turn over documents, had to sue the DOJ and FBI in federal court on a FOIA. I’ve since…I mean, the funny, not funny, part of the story is the FBI said there were four pages on me, you know, and they’ll give them to me in four…they said between four months and four years when we did the FOIA request, so four pages.

 

So, my lawyer says, “That’s bullshit.” So we sued him for it. And after we sued them, the FBI came back and said, “We made a mistake. There are not four pages. There’s 1168. So the FBI has 1168 pages on me. So, I now have those…

 

Meb: It should be fun when you live tweet them all over your Rum Punch recipe and …

 

Marc: There’s going to be some hell of a pay at some point in time, but, well, you know, my lawyers are working on some stuff, so that’ll be interesting. But it doesn’t stop. It just doesn’t stop.

 

Meb: So, you’re talking, so you’re funny because you’re like, “You know, I remember all these events from years ago.” I have the opposite brain. I go to bed at night. It’s like the computer unplugging and rebooting it every day. It’s like you ask me what I had for lunch yesterday, I’m like, “I don’t know, man.”

 

But the SBF, so you saw something, you heard about this guy, you’re like, “All right, something about what he’s talking about doesn’t compute.” And then, you know, the thing about the whole short-selling world, it’s like a forensic, not just accounting, investigation where it’s just like you start peeling onions or there’s just layers. What was sort of like the next clue or the next hint that you came across that something is amiss?

 

Marc: So, his story didn’t make sense. And his story about how he made his money in Korea didn’t make sense. It just made no sense because the people who I know know that crypto. And again, I haven’t, I’ve never traded a stick of crypto. I’ve never been long a dime. I’ve never been short a dime. I just don’t touch the stuff.

 

But the people who knew that trade, that Korean arbitrage, said it’s very difficult. You need money deposited locally. You need to bring cash to the exchange to do this trade. And this is some 20-year-old guy with Asperger’s, or on the spectrum, or God knows what’s wrong with him. You know it’s not easy to raise money. It’s not easy to raise money if you’re legit, not easy to raise money if you’re a track record.

 

You look like this guy, to me, it would be impossible. So he had no mentor. He didn’t say that Warren Buffett gave him the money, or George Soros gave him the money, or Meb gave him the money. There was no specifics, no mentor, or no anything behind this. And when you make no sense, and you can’t explain the trade, and you can’t explain where you got your money, and you can’t…and you have no exchange thing, I’m starting to think that this whole thing is entirely made up because I can’t grasp anything that’s true.

 

Normally, you can find seven things that are true. “Yeah, the guy’s a PhD.” “Yeah, he did graduate work where he said.” “Yeah, there’s some science behind the…” “Yeah, the thing works in some aspects.” You know, normally it’s a shade of grey. But this is getting very black and white.

 

And then you start seeing anecdotes out there where, you know, these fraudulent crypto guys, whether it’s Celsius or Voyager or Scaramucci and his failed firm, he’s putting real money in these things, you know, in front of the bankruptcy wall, not behind it. It sounds like he’s buying these things at three cents on the dollar. He’s buying them, you know, front end, and getting wiped out, you know, as these things go bankrupt.

 

So, you say, “Not only that, the guy is stupid.” Then he has a partner named Gary Wang. And Gary Wang, if you go try to look into him, all you can find is maybe one picture and the picture with him at Sequoia with his back where he’s facing a computer. And you can’t find anything on this guy.

 

Then I found something that indicates to me he is a CCP party member, same thing with chief operating officer. So, I’m starting to get everything where it lines up. And again, interest rates are higher, crypto volume is significantly lower, crypto has crashed, and this guy claims he is doing outstandingly well.

 

Meb: The weird part about that, too, is like the first law of investing is when you have an arbitrage situation, a) you publicize them, but b) they go away, right, particularly when they use the finance textbooks 101, description of arbitrage is like, “Gold trades in New York at 1000, in London at 1200.” And it’s an arbitrage. We’re like, “Okay, well, that makes sense.” But then everyone does it, and it goes away. It’s like, eventually, maybe in the early days, you might have even had something, but …

 

Marc: It just none of it made sense. And then, on top of that, finally, the chief regulatory officer… I don’t play poker at all, but I know some professional poker players, real guys. One of them calls me up and says, “You know, by the way, the chief regulatory officer at FTX, a guy named Dan Friedberg, was the subject of this poker cheating scandal a few years back at Ultimate Bets.”

 

So, I looked into it, and this guy, Friedberg, is a complete criminal. I mean, the “New York Post” over the weekend wrote about them, and they quoted me as saying I was raising hell about Dan Friedberg. And, you know, everyone just blew it off.

 

But this Dan Friedberg is a poker crook. And so, I said, and I publicized it enough on Twitter, you know, back in May, June, July, “What kind of company, a legitimate company, would have a crook as your chief regulatory officer?” And it wasn’t on his LinkedIn, and he scrubbed his CV. And it’s kind of like, you know, if someone worked for me and they covered up their resume with something bad, I mean, they’d be fired in a minute. Or you give them two minutes to explain why they did it, then you’d fire them on the third minute.

 

So you take everything, and then you have Friedberg, who’s the chief regulatory officer who’s a crook that’s still there, where they made claims where they’re FDIC insured, where in fact they weren’t. And the FDIC writes him a letter. You put it all together, you have something that’s really bad. So, I packaged all this up.

 

Meb: The crazy part about the Friedberg situation is, you know, there’s a phrase when looking at companies like “success leaves traces.” You look at good CEOs, good managers, you know, people follow. But the converse corollary is true. Like, if you look at particularly these pump and dump frauds or these like penny stocks, where you have these CEOs that you see ones that like, half the time, they’re in Salt Lake City or Vancouver, right, but you see them continually to perpetuate.

 

And if you’re an honest company, there is, I don’t know, 10,000 lawyers or chief regulatory officers you could hire that do not have a shady background. And if you’re a company that is supposed to be, you know, particularly growing and making a ton of money, you can afford to hire the top law firms in the country. Like, you don’t have to hire the one that helped to cheat scandal. Like, what?

 

Marc: That’s just it. So, at this point in time, you know, it’s not one thing. It’s everything. And again, you know, I went to Babson College. I’m not some Harvard or Yale guy, and I’m not a crypto guy. And I’m not saying the algorithm is wrong. But every rock I turn, it’s something bad.

 

So, I packaged this all up, right, and I go to the Bloomberg Crypto team in London. There are five of them there. This is in early July. This is July 2nd. And I said, “FTX is a total fraud, and here it is. Here are all the issues. And you guys should sit down with Sam, and sit down, tell them you need Gary Wang there, and start asking them these questions.”

 

So the head lady says, “This is too much work, you know. It takes too much time. If we do that, they’ll never talk to us again. We’ll lose all access. It’s bad for business. You know, all you have all these unsubstantiated, you know, stories.”

 

I said, “They’re substantiated. Dan Friedberg is a fucking crook. He is putting money in front of these failed frauds, in front of bankruptcy. No one can explain this trade. No one can explain his mentor. No one can explain where he got his money. No one can explain these interns running a complex exchange, you know, with top financial professionals. Everyone can explain how he’s paying for access. It’s a great story if you can lock these guys in.”

 

And they came back, and they just said, “Pass, you know, it’s too much work.” And they don’t want to piss them off. And it’s my word against his word. And it really fucking pissed me off. I just kept tweeting about it. I call them as fake as a three-dollar bill. I mean, I was just going after them, was going after them as can be, and I didn’t care if I got sued. I mean, I’ve been sued plenty, and I’ve never lost. And it was just crazy.

 

And then, you know, McCullough, the Hedgeye guy, you know, he follows me on Twitter, and he says, “Like, what’s going on?” I said, “Well, I’m speaking at your conference or whatever in early October. I mean, I’ll talk about it then.” And I just laid it out. And I said, “This is just absolute garbage.” I mean, I think I made it very clear, I could have gone on for a couple hours on all this shit. And then, sooner or later, this this thing hit the fan shortly, you know, a month later. And you know, it’s kind of like, “Here we are.”

 

Meb: What was sort of the inflection point because you were talking about this, you know, spring/summer? And then, I mean, he was on covers of magazines, very recently.

 

Marc: He’s on covers a magazine. He’s on NBC News. He’s on all these news programs. He’s on Cartoon Network, which I call CNBC. He’s on all these things. And the inflection was, you know, one of these crypto-rads just got a hold of some documents and basically said that FTX is illiquid or insolvent because, of course, they were using these tokens to pay people and the tokens were illiquid. It was basically a huge Ponzi. So they started pointing it out.

 

And then CZ guy of Binance fame, who owned a bunch of these tokens, kind of realized that this guy is, you know, kind of ratfucked, and sort of the jig is up. And then, now that this token caper, if you will, this token scheme is slightly uncovered, you know, he might as well put pressure on it. And he said he’s selling his tokens. And that Caroline lady, you know, Bankman’s girlfriend, who went to MIT, said she doesn’t even use math to trade, you know, the head of Alameda.

 

Again, she was one of the imbeciles who I scouted out on LinkedIn. And I said for the CEO of Alameda, which is this crypto trading hedge fund, this lady, you wouldn’t trust her to walk your dog. I mean, she’s so incompetent. So, she tweeted out that, “You know, FTX will buy all these tokens at 22.” And CZ said, “No, sorry.” And these tokens are now at a penny or less than a penny, or whatever. And that’s sort of unwound the whole thing.

 

And my peers in this business, my fellow skeptics, you know, all three of them were out there. I talked to some really sharp guys, you know, not household-name guys, but I think they’re really good. They said like, “Why are you doing this? You don’t stand to make any money. You know, there’s no trade in this thing.”

 

You know, there’s no trade in it because I could have been short these FTT tokens. I could have been… And they did go from 35 to a penny, but I would have lost all my collateral if I would have been at FTX. I could have made 5 million bucks, but if I lose 5 million bucks in collateral, I’m down 5 million, it never would be profitable from the trade, and I trust none of these foreign exchanges. So, there’s no trade to be had because, you know, in the Goldman fiasco I was involved in, I lost my collateral at Lehman. And, you know, it gives me PTSD. So there’s no trade to be had.

 

And my peers said, “Why are you doing this?” I said, “Well, I just can’t stand this fuck. I can’t stand how he’s buying access politically. I can’t stand how he’s duping people. I can’t stand what goes on. And I can’t stand that I’m being ignored. I can’t stand that I have something to say.” And, you know, Bloomberg knows me. I’m on a fucking Bloomberg…they did a huge piece on me a couple of years back in Bloomberg magazine, you know, some 10,000-word thing. Bloomberg knows me really well.”

 

And it’s kind of a little bit of that Michael Jordan kind of stuff to me, you know, that there’s no greater motivator than disrespect. And I had something to say, and the fact that people wouldn’t listen to me, I figured, then I got to speak a little louder.

 

Meb: This is what’s so great about Twitter and social media these days. Obviously, there are a lot of downsides to that town square. But let me give you an example. It’s like we had uncovered, and these aren’t as bad as the FTXs of the world, which are total frauds, but there were two companies in the investment space, billion-dollar money managers, where I said, “Look, they’re not stealing your money, but what they’re claiming, and their track record is 99.9% fictitious. I’m not 100% sure, but 99.9%.”

 

But the whole whistleblower process is so hard to go through. You’ve got to get a lawyer, you got to submit it. In both cases, they’re like, “We decline to pursue this.” But then the company was completely whitewashed. So, the people involved, they changed the track record. They deleted everything. So, clearly, like they call them up, it’s like, “Yo, you got to stop doing this or something.” So, at least, but, like, they raised a billion dollars on an imaginary track record.

 

Now, so then I was like, “You know what? Forget dealing with this, whatever, I’m just going to start tweeting it out.” And then we came across one, and this is what reminds me of FTX, we came across one that was advertising on Instagram, and they said, you know, “12% guaranteed returns,” essentially. And I was like, “Well, we all know, like, of the one… there’s certain phrases you can use in different parts of the world. That if you use it, everything else that follows doesn’t matter. And saying 12% guaranteed returns is just like already like the biggest red flag.”

 

And we tweeted out and a bunch of people talked about it. And I kind of forgot about it. A year later, it turned out to be a $250 million fraud based out of Texas. It was called Prestige, I think. But it was like 10,000 investors got suckered into it. And the part of that hurts so much is that it just gives our industry a bad name because there are some good, you know, actors out there. Long-winded story.

 

The thing about FTX, and we’ll get into due diligence in a minute, that, again, should have been the immediate disqualifier is in their pitch deck. They had the phrase literally, “high returns with no risk.” And everything about the investing world is there’s one thing you cannot say, that’s impossible, and it says it has no downside. I mean, it’s like how do anyone pass that single sentence is like, “Okay. Good idea. We’ll just go with this” is beyond me.

 

Marc: Well, the auditor, whose address is in the metaverse. Again, we can get into due diligence in a minute. But, I mean, the thing is that, as I told, you know, a couple of things that have been publicized, you know, I did this for society. I didn’t do this for me. I did this to try to make the world better, to get rid of a hugely bad guy, and to expose something that’s horrifically bad.

 

And in that time, I’ve saved a lot of people a lot of money, but a ton of people lost a ton of money. I mean, I saved a fraction of a fraction. But the whole thing that’s really wrong here is that this is a huge failure of the mainstream media, huge, huge failure of the regulators. It’s a huge failure of the institutions who buoyed this guy. It’s a huge failure of politics. I mean, this is this is a huge failure across the board.

 

I mean, at least Madoff dealt in U.S. stocks, was a U.S. guy, was under the watch of the SEC. People knew what was going on. And he’d been doing it for a long time, and he was older. I mean, this guy was 30. And I think I said in the “New York Magazine” piece that they did, “You know, most people who are 30 who are worth billions, I look for something special in them. You know, there’s certain people who are special.”

 

Same thing with ballplayers, you know, certainly, I saw a young Ken Griffey, Junior, I mean, that guy at 19 was special. You knew the guy was special, right? I mean, he was special. You knew Bo Jackson was special. I mean, there are certain special guys.

 

So, someone’s worth reportedly $10 million under the age of 30, I think they’re special. There’s nothing about this guy who was special, especially he couldn’t articulate how he made his money or who trained him. I mean, there’s mentorship in this business. If you’re good, you learn the tricks of the trade from someone who’s legit. Or someone who would back you up, or someone say, “Yeah, I knew that guy.”

 

I mean, my greatest mentor is, you know, Al Jackson. He was the tremendous food analyst, and he’s on Twitter now. And we go back, and tells me how proud he is of me, and brings tears to my eyes. And I told him, “Well, I wouldn’t be me if weren’t for you. And I appreciate it.” But, you know, if someone says, “What’s with this Cohodes guy?” I mean, “Go talk to Al Jackson. He’ll tell you about me and you, and others in the same thing.

 

So, it’s not the sad part or the failure part and why I continue to speak out, and I’ll speak it out louder, and more is, you know, maybe if there’s enough tragedy here or enough of a crisis, people can learn from it. Or maybe there will eventually be changes so this shit just doesn’t happen again. Or if it happens again, it happens in a much lower decibel level. There’s less bang to the Big Bang.

 

Meb: Oh, there’s like 20 creditors, I think that are claiming 9-figure-plus of damages. So, there are certainly some people that have been impacted. We’ll see who it is. But the curious thing about this story, what do you think with the media and people not looking into this, what do you think the seduction was there? Do they just want to believe a narrative that was pre-packaged and they just kind of get blindsided?

 

Because I’ve been tweeting a lot about the strangeness of the story to me, about the laundry list of “world-class investors and VCs” that put a bunch of money into these companies, and I look at all the red flags. It’s a football field of red flags. It’s not one or two. I mean, there are hundreds of them that, in my mind, any MBA, junior analyst, if you gave him a checklist and said, “Okay, look at this investment.” It would have been no, no, no, no, no. Right? Like, there would have been so many disqualifiers. What do you think happened?

 

Marc: I think I kind of know what happened. I mean, I think that we’ll get into one of my pet peeves shortly. But I think Sequoia and some of these name guys stand behind it. And people have done such little work on this thing that they just said, “We’ll follow Sequoia,” because I think the early funding round on this thing was very, very low. And it’s kind of like a scheme. You know, you put a lot of money in low, very low valuation because these guys aren’t for primetime. And if you had tell the story…

 

I mean, a lot of a pal of mine, Russell, put a lot of money in Coinbase at a very low valuation on a hope and a prayer. And he made a shit ton full of money. He’s lost a bunch on other stuff. But you know, there are guys very early in the early-stage rounds of Coinbase made life-changing money. I mean, generationally changing money.

 

So they say, “If it worked there, it could work here. And yeah, the guy’s a little funky. And yeah, the guy’s a little weird, but Sequoia isn’t on this, and they do their work. And they’re smart, guys. And this guy’s in on it.” And, you know, it’s always, you know, if you invest with smart guys, you should be all right. And no one bothers to look at the auditor, and no one bothers to look at anything. I mean, these things are coming so fast.

 

And, you know, they’re not big funding rounds, and you’re not talking about a lot until you get into this $32 billion valuation. But the first round was not that much money at all. So, if someone says, “I invested in Series A in FTX, and look at what it’s worth,” And Tom Brady’s endorsing it. And if you have Tom Brady and Steph Curry, and you got Giselle, and you got all these people, and the guy’s such a big donor, and he’s on stage with Bill Clinton, and he’s on stage with this guy, people get lulled into the wrapper and the sex appeal of it and doing the due diligence part doesn’t work.

 

I mean, I’ve been in the hedge fund business, and I asked for an awful lot of money. And when people come in, you know, they did due diligence on me. They had private investigators checking out. I mean, they had people up my ass, and everyone who worked for me up my ass like you wouldn’t even believe, asking me questions and shit like that. I mean, just crazy shit. They were all after me.

 

But none of it happened here. And none of it happened because he sold the story. He sold the narrative, and he sold the narrative that Sequoia, you know, and others and all these smart guys, you know, who are up 50 times on this investment, you know, it could grow to the sky. And shit, you know, Bitcoin was at what, six bucks? I mean, someone used once a Bitcoin to buy a piece of pizza. So, 6 to call it 50,000, you know, that’s tradeable. You know, when people are told something went from 6 to 60,000, they’d say, “Yeah, I’d like to make 10,000 times my money. You know, that would work.”

 

And if someone told you the Bitcoin story at 6, you’d laugh at them. You know, or most people would laugh at them, but the people who believe won. So, I think there’s a lot of that. I think there’s a lot of fear of missing out. And I think the money that obviously this guy stole, and who, financially, he paid his financial PR firm, I’ll bet you the media is co-opted. I mean, “The New York Times” all they do is write positive shit and the same thing with Bloomberg, and the same thing with CNBC and the Cartoon Network.

 

And, hey, he pulls the same folks that were in the Warren Buffett shit. You know, and I’m not a fan of Warren Buffett, “I drive a Toyota Corolla.” Yeah, but you live in a $40 million penthouse taking all sorts of drugs. So, the signs are there if you want to be a guy like me, or the signs are there if you want to be a guy like you.

 

But guys like me say, “You know, there’s no stock in this. You know, the market is fucked up. Interest rates are going on. Marc, why don’t you focus your time where you can make some money? Why don’t you focus your time where you can do some bet? This is a private company. You know, the guy’s weird, you know, blah, blah, blah. You know, you don’t need to opine here. This is a big fish, what do you hope to achieve?”

 

I heard it all, right? And I said, “If I think this guy is a fake and I think he’s going to take the system into the dirt and then some, I owe it in my mind to do what I can to speak out here. Otherwise, I just wouldn’t be me. I wouldn’t be able to live with myself because the shit would like haunt me.”

 

Meb: Part of it for me is, like, you know, I look at some of these things that come across my plate. And sometimes, I’m like, “Man, you know, I don’t want to seem like a hater. I don’t want to be a negative person about this.” But it’s often so egregious.

 

There was a Tai Lopez, who I don’t really follow, but he was running a ton of ads on Instagram. And I posted it to Twitter, and the ad says, “$300,000 invested in our preferred dividends, we’ll send you $60,000 a year in monthly payments.” Like, again, you can’t guarantee these 20% returns, and then you call…

 

So, I signed up, of course, as one would do. And I call in, and the guy that you’re talking to would not have passed a freshman-level investing class. I’m listening to him. Like, “Is this a joke? Is this just like a call center person?” Like, “No, it’s the person that’s the head of it.”

 

And then he’s like, actually… I’m like, “So send me the docs.” And he’s like, “What docs?” I’m like, “Well, what am I actually sending you money for?” He’s like, “Oh, we do it on a deal-by-deal basis.” I’m like, “Okay, well send me your track record for, you know, the prior deals or your GIPS, you know, investing record. Anything, send me anything.”

 

He goes, “We require an NDA.” I’m like, “An NDA?” I was like, “I reviewed like 10,000 company decks. I was like, I haven’t signed an NDA yet. And I’m like, I’m not going to sign an NDA.” And they’re like, “We can’t send you anything.” And it just like, you know, flag, flag, flag. But they continue to do the ads. I keep tagging SEC enforcement. I’m like, “Look, this guy is like scamming people left and right.”

 

Marc: Therein lies the problem. The problem is when you had easy money, which we had, past tense, and you have no regulation, which we’ve had and continue to have, and there is no SEC. I mean, there used to be a time, I mean, let’s say you’re in your mid- to late 40s, maybe in your early 50s, there was a time where you’d actually be scared of the SEC. If the SEC sent you a subpoena or a letter or an information requests, you’d be halted. You would think twice, you would say this isn’t good.

 

But now, the SEC is so damn toothless, and no one cares. Anything goes. And if anything goes, anything goes. And people say, you know, it’s sort of like, “Catch Me If You Can.” I mean, I go out on things, and people will come back with, “Hey, I mean, I have 17,000 people blocked on Twitter.” No, that’s a fact. I mean, because I just won’t put up with it because the quality of my Twitter feed is important. And if guys are sitting on there with a bunch of bullshit, I’ll just block you because that’s all I have.

 

And, you know, this Bloomberg thing is a real setback, and it’s a real tragedy they passed on it. And it’s a shame on it. And the Times keeps the puff shit going and talking to a guy at Times on the Silvergate, this bank that I’m sure, which I think is a total bag of shit. And he said people won’t talk to me because I work at the Times, and they don’t like the Times’ coverage of FTX.

 

Meb: That’s part of the great thing about the citizen journalism nowadays is like we’ve consistently seen this failure of the mainstream media and a couple of those Times pieces, you’re reading them and they’re just like the most laudatory… Like, I retweeted it jokingly and I was like did a long compliments about Madoff, and I was like, “He was a great financier, chairman of the NASDAQ, had great had hair, a tennis player (you know committed a massive fraud like da, da, da.)”

 

And you know, it’s like the Times’ piece was basically that for this situation. It was so bizarre to read. It almost feels like there’s more going on in the story after that. Like you have the base case weird situation, but then you start to get money involved in politics and charities and, you know, senators and all sorts of stuff. And it just gets weirder after that.

 

Marc: I think one of the issues is people are just unwilling in this day and age to admit they make mistakes and admit they fucked up. And it’s always now blame others, or you try to whitewash history. And if I make mistakes, I make a lot of them, because I’ve been doing it so damn long and I try to learn from them, you just say, “I fucked up, you know, I made a mistake here. I was wrong.” I took huge loss. And it sucks. And I hate to lose, but you’ve got to sort of own your narrative and on your label.

 

And I think part of what’s been going on is these mainstream media companies just don’t admit they’ve made mistakes, and people don’t take pride in their work. And they don’t take this shit seriously. And they don’t realize the ramifications of this stuff. And that, you know, it’s the same thing with Cartoon Network, aka CNBC. I mean, I refuse to watch that shit. I just won’t watch it because the stuff on there has cost people, you know, fortunes.

 

Meb: And here’s the funny thing about, like, failing is that, you know, if you fail with dignity, honor, and honesty, people are okay with that. Like, they give you a second pass. I mean, in America, half the great founders, you know, if you’re a VC investor, like investors that have failed and with dignity and honor, like they get funded again.

 

And the thing that really kind of grated my nerves about this story on the institutional investors is to a tee, they all, and I’ve been retweeting them… Sequoia, had, you know, and they said…Okay, talked about what happened. They said, “No, we did careful due diligence.” And then they pivot into this weird story about way we have to invest in dreams. And if we don’t invest in dreams, it’s not our business.

 

And then Ontario said, “It went through a tougher than usual gauntlet for an investment of that size with multiple investment committees.” And then you had the whole Tiger mess, who’s apparently been outsourcing their due diligence to Bain.

 

And you’re like, just one of you guys just say, “You know what? You’re right. We had FOMO. We made this mistake. It was a dumb decision.” But saying you did due diligence and missed it is like a huge disqualify. I would redeem tomorrow, I’d be like, “Oh, my God, you guys. What are you talking about?”

 

Marc: Well, Reuters called me in Ontario. They said, “What do you think?” I said, “I think everyone involved in the process should be fired on the spot. And bringing in new people same with these other things.” I mean, why can’t you at least admit you did not? Because, again, you know, I’m not a Harvard guy. I’m not a Yale guy. Anyone could have called me and said, “What do you think?” And I said, “You buy me a couple dozen oysters and a few beers, I’ll tell you exactly what I think I wouldn’t touch this guy with a 10-foot pole. And here’s why.”

 

And therein, I think, lies the huge trap here. And the huge trap is just because, you know, I used to say people spend more time reviewing a restaurant that they want to go out for dinner at night than they do on their investments. It’s always a word of mouth, or I’m missing out, or this guy’s doing this, or he’s just smart guy, or, you know, there’s a whole underbelly to this. And I think we’ve sort of lost the ability for people to seriously and independently think. I mean, people just don’t take the time just to be slow and think. And I think that’s just kind of sort of really bad. And I think it’s a shame.

 

Meb: And people were defending a lot of these big investors by saying, “Look, they make lots of small bets.” I go, “That’s table stakes.” That’s called diversification. We understand that. But if you’re paying them 2 and 20, and that 2% on 10 billion, or whatever it may be on some of these very large funds, that covers a large amount of junior analysts that should be thoroughly reviewing every deal. Like, we’re not paying you to FOMO into deals that do not… Like, that’s table stakes. You have to do this. So, anyway, into my preaching stool.

 

You mentioned Silvergate. What’s that? Did I say it right, Silvergate?

 

Marc: Yes, Silvergate, it’s SI. You know, Keith, at Hedgeye did a follow up last week and I said I’m short Silvergate, again, symbol SI. It’s now 24. We can change it to go at 36. They are the bank. They are the so-called on-and-off ramp into crypto. They brag that they do roughly a trillion dollars, did a trillion dollars of on-and-off investing in these exchanges and the exchanges kicking out the money. And I think it’s a giant scam.

 

I mean, the biggest customer was FTX, and SBF was their so-called spokesman on their website. And I think there’s going to be a huge push back into banking and secrecy laws. But basically, they’re going to make what Silvergate did illegal. I mean, it’s because you don’t know the AML/KYC part of this. You don’t know where the money’s coming from, where the money’s going, how fast it’s changing hands.

 

I’ve talked to some senators lately. And suffice it to say that from a political standpoint, when they asked me what I thought, I said that you can’t regulate crypto because you can’t tell people what to do. If people like it, buy it. If people don’t like it, sell it, don’t be involved in it, and crypto will take care of itself.

 

But what you can regulate is people using the U.S. banking system to on-and-off-ramp shit in foreign exchanges, which are unregulated by the government. You can blow off the on-and-off ramps. You can blow them up. You can make this shit illegal, stuff that you shouldn’t be able to do. In that way, you force domestic people into legitimate exchanges.

 

I mean, I’m not an owner or shorter of Coinbase. But I think Coinbase at least runs a show that’s domestically based, where real guys sort of look at them. Again, whether you buy stuff on Coinbase or don’t buy stuff on Coinbase, it’s a domestic outfit, and it’s regulated by real guys. So, if you own stuff, the Coinbase and may be slow, they may say there’s congestion, but I think you’ll at least get a fair shake here.

 

All these offshore guys, who are now going out of business one after the next, I just think it’s a huge trap. And to use any look of the U.S. banking system to facilitate these, grow these, use these, enable these, is just hideously wrong. And I think it’s a bad business model. But there’s sort of a run on the bank going on.

 

I mean, this company is losing deposits because people are pulling money out of these exchanges. And I think the last track, plus or minus, they have less than 10 billion in deposits. But let’s say 10 billion. But 10 billion through a trillion-dollar network, last I looked, leverage wise, it’s north of 100 to 1. So, a 100 to 1 leverage dealing with these off-exchange guys where there’s no. I’m not going to use the word guarantee, because that’ll piss you off. But I think there’s a high likelihood that when the Feds check for KYC, AML checking in Silvergate and network, I think they’ll find huge deficiencies. And I think the whole thing’s not worth much money at all. I think it’s a disaster.

 

And the other thing is, again, this is anecdotal, but people who watch the CEO on the Cartoon Network, you know, like I’m doing this, I’m sitting on a bed with a with a white background, this guy’s background is Jesus Christ hanging on a cross, I kid you not. So, when you throw in religion in investments, or try to hold yourself out as this religious type, doing shady shit, that’s a big red flag. So, I think Silvergate is very troubled.

 

Meb: One of the things when you have a giant blowup like you do this FTX situation, and we’ve seen it many times over the years, particularly with financial companies, you know, there’s reverberations. And usually, it’s not just one or two firms or companies that get impacted. It’s a lot, right? And, you know, this example, the Silvergate and others, it’s probably not going to just be one or two, it could end up being dozens, if not more, of associated companies.

 

Marc, we’ve certainly kept you for a while, I got to ask one or two more short one before we let you off into the evening. I definitely want to have you back in the future. This has been a blessing to have you.

 

For the young people out there that are curious about short selling or just, you know, who want…Maybe they don’t want to get into, you know, full time short selling, but they want to learn a little more of, like, “I just want to understand that part of the world so I can put these toolkits. I want to be a better analyst. I want to be a more, you know, analytic thinker when it comes to not believing all the BS that people toss at me every day.”

 

What do you tell them? Any good resources like other than listening to all your podcasts and your Twitter feed, definitely got to subscribe to your Twitter feed, but any books that were impactful or anything that you think is a good suggestion?

 

Marc: Hey, you’ve got to follow me on Twitter @AlderLaneEggs. That’s for sure. That’s a hard one because it is such a nasty, hard business. It is so volatile. It is so dangerous. It is so hard that I tell most people don’t even try it or think about it. Right? Don’t even try to think about it.

 

But if you have an active mind and you are interested in racing a car 6 inches apart at 230 miles an hour with 40 guys next to you, right, if you’re interested in something like this, the first thing you do is try to find things that just don’t make sense where you can explain to a 10th grader why this doesn’t add and why the story out there doesn’t go.

 

I use simple things like, you know, jaguar out of the tree. Don’t climb the tree to fight the jaguar. Just because the stock is high and doesn’t make sense, it doesn’t make it a good short. I mean, this year, I’ve made a lifetime, you know, worth of money being short Carvana.

 

Now, most of my buddies were short Carvana from 30 to 360. And they got carried out in a body bag. I waited for Carvana’s numbers to roll over.

 

And there was a guy on Twitter who was really, really good. And he reached out to me, and I said, “This guy’s dead, right?” And I put down a big bet, and it’s worked out great. You know, I’m 62. And I’m damn fucking good at this. And I’ve had huge issues over the years doing this, and I’m really good at it, really good.

 

So, for just the novice players, I try to stay away from it. But for Carvana, when you see rising rates, a slowing economy, used car prices going down, missing numbers, if you can’t make it then, you’re not going to be able to make it. But you wait for things to go bad. You don’t anticipate things to go bad because, when something goes bad, things tend to go bad for a long period of time.

 

And most companies that miss, it’s never a one-quarter phenomenon. And I have friends who run big companies. I have my buddy, Brian Cornell, he runs Target. He used to be the head of stores at Safeway. I’ve known him for very close to 30 years. He is an outstanding man. He is outstanding operator. We never talk about Target’s business, not once, and never say, “How is business?” We never talk about anything Target-related.

 

But what I can tell you is it’s very difficult to run a company. Its business is very hard to do. And when you miss and things aren’t right, it takes an inordinate amount of effort and talent to fix something. And the fixes tend not to be for a quarter.

 

So, a simple thing for those out there who are thinking of doing this, don’t get involved till something misses. Because if it misses, they’re going to probably miss again and again and again. And maybe if they’re leveraged, they won’t be able to fix it. And maybe then something turns into a bigger problem.

 

Don’t short something because you think it’s too high or it’s expensive because people who weigh 340 pounds can easily weigh 440 or 540. And they may not have a heart attack anywhere along the line. Now they may, and then you’ve gotten lucky, but just be patient and see things through.

 

And again, if you’re new to this, get involved in stuff or think about stuff that you can understand. You know, whatever business you’re in, you understand that business better than most. So find things in your business that you think are off, and then just do research and see who knows what. But this is a dangerous game. I mean, the markets have never been this volatile, this dangerous. And I encourage most people not to do it, you know.

 

Books, you know, I’m not a believer in books on shorts. I mean, there’s plenty of books that I’m in that have been about me, through me, about some stories and they’re great, and plenty of podcasts and things like that. But unless you experienced it, you don’t know what life is like. I mean, unless, you know, you’re stepping back in the huddle, in the shotgun and real guys are trying to kill you, you don’t realize what it’s about when you’re playing with real money. But it’s a tempting thing.

 

You know, I enjoy it, but I’m not the most normal guy out there. It’s different. And again, you know, follow me on Twitter. And some of the stuff I say makes sense. I have an open DM, and I respond to all of them. And I just try to help people out, and I just, I try to make people think. I mean, I think if you can think it through and it makes sense, and you can explain it and articulate it, you know, you’ve got a decent shot, a decent shot.

 

Meb: One of the things that I think about with shorting one, listeners, if you’re going to do it, you could always start really small. And so, until you experience the short that rips your face off and doubles or triples, you know, in front of you before the story is over, it’s hard to relate that feeling to someone who hasn’t been through it. So, being smaller is a good way to do it.

 

But you know, the nice thing about thinking in terms of short selling is often it can also inform the longs and vice versa. You know, if you’re looking at longs, you see, “Oh, here’s the weak players,” or, “Here’s the ones that may not make it.” Where you’re looking at a short, you’re like, “Oh, well, here’s actually a great company. I may want to go long this company that’s actually a much better version.”

 

I mean going back to reading, you know, about your pinball analogy in the early days, like that’s a kind of an interesting takeaway of like, “Hey, I found something that may be working or not, and looking at the flip side of it, but I think it makes you a better thinker, no matter what to be skeptical.”

 

Marc: I think the trick is you’ve got to think, or try to think, and try to think clearly so.

 

Meb: So, Marc, looking back, I mean, you’ve been involved in a lot of great stories at investing. You know, we love to ask the investors at the end of the podcast, we say, what’s been your most memorable investment? And so this can be long, it can be short, it can be not even something that even mattered that much. But what’s seared in your brain as the most memorable if someone’s got to hold you to it?

 

Marc: So, my son is now 35. And at/or when he was born, wine cooler was a thing. And we used to be short a company called Canandaigua Wine. And we’re short of it because I thought wine coolers were a fad. And life was easy back then.

 

And all I had to do was find a fad and run out of gas. And people didn’t have the money to squeeze people the way they do. And it was just a much more simple world. So, we short, Canandaigua Wine. I never forget it from 35. We covered it at 7. But I liked the guy who ran it. His son, I thought was an idiot, Richard. But the guy who ran it, Marvin Sands, was a smart old guy.

 

And when the business went bad, wine cooler went bad, I called them up, and he knew we’re short. And I said, “We’re covered.” And I said, “Is there money in here to go along? I mean, can you guys not go out of business?” He goes, “We lost $2 A share last year in wine cooler. I’m going to shut wine cooler down. This is before FD and our base business, you know, we can make a buck and a quarter, and the stocks at six.”

 

I said, “You think you can make a buck and a quarter.” He goes, “Marc,” and their biggest selling product that time was Richard Wild Irish Rose, and he said, “The bottle costs more than the stuff that goes in the bottle.” And he said, “And we sell a bottle for $3.49.” He says it’s highly profitable. He says we can make the money.

 

So, stock at 6, you start buying the stock at 6. And Fidelity, a guy, a money manager named Neal Miller, own this because of wine cooler and Fidelity fired him and their stock trades on the AMEX. And the AMEX used to be the illiquid version of the New York Stock Exchange. I’ll never forget this.

 

So, we got a call from a broker because we owned Canandaigua Wine at the time. And the broker says, “We have 2 million shares of Canandaigua for sale.” And this thing’s trading 10,000 shares a day, I kid you not. And they say, “You own it. Do you want to buy any?”

And I said, “We’re kind of full.” We’re kind of full. Stock is four bucks, you know, we own it at six.

 

And you know, my partner, David Rocker at the time. I said, “They got all this Canandaigua Wine for sale. Jeffries does.” And we say, “Well, let’s call Marvin Sands, you know.” And Marvin Sands owns half the company.

 

And I call Marvin, and Marvin says, “I will buy all of it at three, all of it.” And then, we say, now that we have courage that we know the company wants to buy, we say, “Not so fast, we want some too. We want some too.”

 

So, this all goes on at three. I think we now 13% of the company. We file it 3 or 9, 12. I mean, this is in the late ’80s. I gave my son 10 grand when he was born. And I put everything he had, I mean, I think it was up to 15. I put everything you had in the stock. Every single dime he had in.

 

To make a long story short, this thing then turned into Constellation Brands. They ended up making their buck 20. The guy, Richard Sands turned out to be not so dumb. They bought Barton beer, which was Corona, and the stock went from 3 to 60. And we sold it all there. The same shares right now would be north of 2000. I could have owned the state of Montana, the state of Idaho. Well, we own 13% of the company. And we sold it, and I think we made 20 times our money, and it was a huge win.

 

But we made a bundle short, we made a bundle long, I made lifetime friends with the Sandses, and I’m very happy for them. I mean it is now a huge ass. You know it by its symbol, STZ. But for all of you, as Kramer would say, “home gamers,” go back and look at this thing back in the ’80s, late ’80s, ’90s to see where it was, that’s where I got in. And it was the greatest thing I think I’ve ever done in terms of being short, something cool, and then turn around and making it long.

 

So, Canandaigua was it for me, it will always be it for me. And, you know, my son is worth a plenty now so, all because of that.

 

Meb: That’s a great way to put a bow on this episode. Hopefully, we get to hang out in the real world soon. I’m going to hit you up for your two secret ingredients in your Rum Punch that you haven’t disclosed yet publicly.

 

Marc: I’ll give you a hint. There are four different flavors of bitters that go on the Rum Punch. So the secret ingredients are the bitters and the Meyer lemon juice. But when we meet, I’ll give you what bitters to use.

 

Meb: Deal, I’ll take you up on it. The best place to find you, AlderLaneEggs, on Twitter?

 

Marc: @AlderLaneEggs on Twitter. It works. You won’t be bored if you follow me on that thing, I’ll tell you that. I try to keep it jumpy.

 

Meb: Marc, thanks so much for joining us tonight.

 

Marc: Thanks for having me. It was a lot of fun.

 

Meb: Podcast listeners, we’ll post show notes to today’s conversation at mebfaber.com/podcast. If you love the show, if you hate it, shoot us feedback at the mebfabershow.com. We love to read the reviews. Please review us on iTunes and subscribe to the show anywhere good podcasts are found. Thanks for listening, friends, and good investing.

In response to the lower than expected 4% p.a. yield in the 6 months T-bill auction which happened in the first half of this month in November, I expressed my disappointment.

I also expressed my disgust but maybe that was a bit too much as desperate people are just behaving like desperate people.

See:
4% yield T-bill 3.2x oversubscribed.

In that blog, I also wondered if the subsequent T-bill auction would see a lower yield with massive oversubscription expected once again?

It would be massively disappointing if the yield should be even lower than the promotional fixed deposit interest rates offered by the banks for a 6 or 12 months tenor.

If I am not mistaken, UOB offered 3.85% p.a. for a 6 months tenor fixed deposit while DBS offered 3.8% p.a. for a 5 months tenor fixed deposit recently.

Anyway, I decided to go ahead and give it a go.

Crossing fingers that we won’t get too many low ballers dragging down the yield.

To be honest, I would be quite happy if the cut-off yield is 4% p.a. again.

Setting the bar pretty low given where promotional interest rates on fixed deposits are at.

Not setting high expectations means a lower chance of being disappointed.

So, what’s the result?

Cut-off yield for the latest 6 months T-bill auction:

Only 3.9%!

This is only slightly better than the best fixed deposit promotional interest rates we have seen lately.

As if Mr. Market was expecting the yield to be rather uninteresting this time, this T-bill auction was “only” 2.48x oversubscribed!

Now, do I apply for more T-bills in December or just stick with fixed deposits?

I am leaning towards fixed deposits if the banks’ promotional interest rates remain relatively high.

Greater transparency.

Zero suspense.

Better for my weak heart.

However, if fixed deposit promotional interest rates become less interesting too, then, I could try to get some T-bills again next month.

Related post:
Growing passive income.

It has been my impression that after a scary market decline, people are more risk adverse and first seek out the big name large cap stocks to invest in. Once they profit from these trades they feel more comfortable buying the more risky growth stocks. This may be why the DIA and SPY are looking much stronger than QQQ. See below the daily adapted GMMA charts for each. DIA and SPY have developed RWB up-trends.

Today, I therefore started to slowly reinvest my university retirement funds in mutual funds that track the SPY. The troubling news about inflation and a possible future recession may already be baked into the market. It is very difficult to stay scared of the same issues for a long time. If I am proved wrong about the market’s trend I will simply exit again–I am a nimble chicken.

Related

Using the Shiller PE Ratio and the Dividend Yield of the S&P 500 are effective ways to understand if the stock market is overvalued. Using these indicators in our historical charts, you can decide if the US stock market is overvalued or priced fairly.

Following the article and video examining how interest rates affect the stock market, this article will delve into the important question, “Is the Stock Market Overvalued?”

You will learn about the tools used to assess if a market is overpriced and the complexities of market valuation.

How to measure if the stock market is overvalued.

Using the Shiller PE Ratio, a 10-year Cyclically Adjusted Price Earning Ratio (CAPE Ratio) of the S&P 500 Index, and the S&P 500 Dividend Yield are excellent ways to measure if the stock market is overvalued.

3 signs the stock market is overvalued.

1. When earnings growth is slowing down, but stock prices are increasing rapidly, this is a sign that the market may be overvalued.
2. Another sign of an overvalued market is when shares are trading at high price-to-earnings ratios. A high P/E ratio indicates that investors are willing to pay more for a company’s earnings.
3. The last sign we will discuss is when the dividend yield is low. A low dividend yield means that companies are not paying out much in dividends relative to their share price. This can signify that companies are using their cash to buy back their stock or engage in other activities rather than returning money to shareholders.

The historical context of stock market valuation.

Here is a chart from 1860 to 2021 comparing the U.S. Long Term Interest Rates to the Shiller Price Earnings Ratio of the S&P Composite Index. Interestingly, the correlation of Long Term Interest Rates being at extreme lows and stocks being extremely overpriced.

The Price Earnings Ratio line shows that in relation to earnings, stock prices were too high in 1901, 1929, 1966, and 2000. We know the stock market was overvalued at this point because the market went through a correct/crash after reaching these highs.

Research shows that the 1929 stock market crash and the 2000 DotCom crash were because of poor institutional risk management, which caused equity bubbles, leading to an overvalued stock market.

So what can we learn from this?

If we see the Shiller CAPE PE Ratio of the S&P Composite rise above 35, then stocks may be overpriced. Be very wary of an overpriced market. The Shiller PE Ratio shows us how stocks are priced relative to their actual earnings. So a market PE of 20 would mean, based on the capital invested, it would take those companies 20 years to pay back the investor. Or viewed another way, an investor is willing to pay 20 times the company’s earnings for a stake in the business.

Is the stock market overvalued?

Right now, according to our research, the stock market is certainly not cheap, but neither is it extremely overvalued. The current PE of 28 is above the historic median but way off the peaks over the last 100 years.

Are stocks overvalued? The Shiller PE Ratio.

Currently, the PE Ratio for the S&P 500 is 28, suggesting that the US stock market is neither overvalued nor undervalued.

Using the Shiller PE Ratio, we can see that the stock market was extremely overvalued in 1929, 2000, and 2021, reaching peaks of 32, 42, and 38, respectively. The historical median PE ratio for the S&P 500 is 16.

Live Chart: Shiller PE Ratio (100 Years).

Get TradingView Free

Using this interactive chart from TradingView, you can see the current Shiller PE Ratio for the S&P Composite Index from 1914 to today. Historically stocks look overpriced, but as discussed in this article, a lot has changed economically and capital markets over the last 100 years.

Are stocks overvalued? S&P 500 Dividend Yield.

The Dividend Yield of the S&P 500 is 1.69, near an all-time low suggesting that stocks are overvalued historically.

But the nature of the company’s paying dividends has changed over the last 100 years. Today, only 25% of companies pay a dividend, and the dividend yields are smaller than 50 years ago, largely due to the stock prices being historically high compared to earnings.

Live Chart: S&P 500 Dividend Yield (100 Years).

What happens when the stock market is overvalued?

If a stock market is overvalued, there are two possible outcomes. Initially, governments will try to manage the situation to ensure an orderly return to balance using conservative fiscal and monetary policy. However, a surge in inflation, a financial shock, or governmental attacks on the corporate sector could change the balance and cause a crash in equities.

How to know if a stock is overvalued?

To understand what it means for a stock to be overvalued, we first need to understand what valuation is. Valuation is the process of determining the worth of an asset. Regarding stocks, this usually refers to estimating the future cash flow the stock will generate and then discounting it back to present value.

There are various ways to value a stock, but one of the most common methods is the price-to-earnings (P/E) ratio. This ratio takes the stock’s price and divides it by the earnings per share (EPS). The EPS is determined by dividing the company’s net income by the number of outstanding shares.

So, what does it mean if a stock has a high P/E ratio? That typically means that investors expect high growth from the company in the future and are willing to pay more for each dollar of earnings today. Conversely, a low P/E ratio could indicate that investors expect slower growth or are worried about potential problems with the company.

Now that we know how to value a stock, let’s talk about what it means when it is overvalued. The stock is overvalued if a company’s stock price is higher than its fair value. In other words, investors are paying too much for each dollar of earnings today. This can happen for various reasons, such as investor optimism or hype around a certain company or sector.

Paying too much for a stock can be dangerous because it increases your downside risk. If the company doesn’t live up to expectations or there’s some negative news, you could see significant losses in your investment. That’s why it’s important to be aware of overvalued stocks and to do your research before investing your hard-earned money.

How overvalued stocks affect investors.

Overvalued stocks can have several effects on investors. Perhaps most obviously, overvaluation can lead to losses if stock prices eventually drop back down to their intrinsic value.

Additionally, overvalued stocks may be more volatile than their underlying fundamentals suggest, meaning they may be more susceptible to sharp price movements (up or down) in response to changes in market conditions.

Finally, overvalued stocks may be more prone to “corrections”—meaning a sustained 10% or greater decline from recent highs—than other stocks.

Video: Is the Stock Market Overvalued?

Video From The Liberated Stock Trader Pro Training Course 2022

How to Invest in an Overvalued Stock Market?

Investing in an overvalued stock market involves a decision only you can make. You can continue investing as stock markets can stay overvalued for a long time or diversify into other investments or cash.

1. Continuing to invest in an overvalued stock market.

As the stock market’s default direction is up, if you remain invested, eventually, the market will recover, and you will continue to make money. Suppose you are regularly contributing to your stock investment. In that case, you will be able to take advantage of Dollar-Cost Averaging (DCA) to accumulate more equities at lower prices as the market falls. This option allows you to remain invested without having to time the market.

This solution has drawbacks, especially if you are close to retirement and do not have the time to wait to recoup your losses. This leads us to option two.

2. Diversify your investments into other assets.

Timing the market is not for the faint-hearted, and most people get it wrong. Government bonds have staged a comeback due to increasing interest rates, so they now represent a good option for diversifying your portfolio.

There are technical systems to help you judge whether the time is right to cash in your investments and move to cash. The MOSES System that I have developed is one such system, I think it is good, but no system is fool-proof. I have also developed the Liberated Stock Market Fear & Greed Index to help you decide if the market is in Greed Mode (a Bull Market) or Fear Mode (a Bear Market).

But as the Economist states, “If there were reliable trading signals, everyone would follow them. And then there would be no one to sell to at the top and no one to buy from at the bottom.”

 

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