At the Nasdaq Market Site, Business Insider Senior Finance Correspondent Linette Lopez spoke with famed short seller Jim Chanos about the reintroduction of inflation to the market for the first time since the financial crisis. It is causing volatility unseen in years.
That’s not what worries Chanos most about the US economy, though. He’s more concerned about what he calls the “rent seeking behaviour” of corporations.
“In a highly competitive economy, if interest rates are so low, returns should be dropping,” said Chanos. “Instead, returns and corporate assets are remaining high. And some of that might be technology. Some of it might be just simple lobbying – rent-seeking.”
Following is an edited transcript of the video.
Linette Lopez: We just had the highest CPI print in 13 years. It looks like inflation is sort of back. The market is changing. Legendary trader Paul Tudor Jones just said it’s making him feel like he’s in his 20s again, all this volatility. How do you feel about this market, and do you feel like you’re in your 20s again?
Jim Chanos: Well, I want to take whatever he’s taking to feel like he’s in his 20s again.
There’s more volatility. But compared to historical – when Paul was in his 20s and I was in my 20s – I mean it’s kind of nothing. Back then the 30-year bond, which is what we used to look at, would trade in a 30-basis-point band in a day. Now it moves three basis points and people get terrified.
Lopez: It’s crazy because there are so many young Wall Streeters who have never seen a market like this. They have never been chained to their chairs. They have never been, you know, glued to their screens in the way they have to when the market is volatile. Do you have any advice for those kids?
Chanos: Well, back in my day … I mean no one wants to hear that. What Wall Street has benefited from, among many things, is basically a probably once-in-a-lifetime move in rates from 14% to basically 2% or zero per cent, depending on whether you’re looking at short-term rates. And we’re not going to repeat that, I’m pretty safe in saying. So what Wall Street hasn’t seen – with the exception of a few graybeards like Paul and myself – is high interest rates or rising interest rates for any sustainable period of time. And the big change will come when that changes. So I don’t know if that’s what’s happening now. We’ll see. But, you know, when you see things like Greece borrowing at rates lower than the US for two-year notes –
Lopez: It’s a little wonky.
Chanos: It’s a little crazy. And so things are happening in the credit markets that are making people a little uncomfortable. We’ve moved to almost 3% on the 10-year. But based on where nominal growth is right now – I mean with or without a rising CPI – the 10-year should be north of 4%. So we’re still in a very accommodative environment.
Lopez: We seem to have a stew going here. We have this tax cut. We have this massive budget agreement between the Democrats and Republicans that’s going to add to the deficit. And it seems like corporations are really winning out. And it seems like labour – you have regular people like me who are kind of losing in this equation. This has been going on for years. How do you stop it?
Chanos: Yeah, the rent-seeking economy.
Chanos: You know, it really is a puzzle. And I was reading a column in The New York Times this morning talking about that. And why we haven’t seen more competitive forces bringing returns down to where rates are. In a highly competitive economy, if interest rates are so low, returns should be dropping. Instead, returns and corporate assets are remaining high. And some of that might be technology. Some of it might be just simple lobbying – rent-seeking. And I think it’s probably a combination of both. But what it does lead to is stagnating wages, lower capital investment, and a disproportionate amount of the economy going to the corporate sector and shareholders. And that’s great for equity holders; it’s not really great for everybody else.
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