Carson Block: Famed Short-Seller Explains Why The Market Is "Broken"

**Carson Block** (0:00)
Part of why I do what I do is because I believe that the US markets in particular are broken.

**Adam Taggart** (0:14)
Welcome to Thoughtful Money. I'm its founder and your host, Adam Taggart. As mentioned many times on this program, stocks start of the year trading at or near record high valuation extremes. When stocks look potentially overbought like this, short sellers smell opportunity. Today, we've got the good fortune of speaking with one of the best known short sellers in the business, Carson Block, founder of Muddy Waters Research. Carson, thanks so much for joining us today.

**Carson Block** (0:41)
Yeah, thanks for having me, Adam.

**Adam Taggart** (0:43)
Hey, it's a real pleasure to have you on the program. It's your first time. It's very nice to meet you virtually here through the Inner Tubes. Look, it's got to be a really interesting time for somebody in your line of work. And I've got a lot of questions for you sort of about the role of short selling and what you see in terms of this market that we have. A lot of people out there, a lot of the guests in this program have been saying that it's a overbought market. And so you might assume that might be a target rich environment for somebody with your expertise. Now obviously, you look at companies where you think the stock price might go down, not necessarily because of just valuations. Oftentimes your firm does a great job of sussing out companies that are conducting fraud or vulnerable for other sorts of ways. So again, in all that, I also know too that you've got strong thoughts on things like China, other parts of the world, and parts of the markets where you see opportunity right now. I think Asia is one of those. There's a lot going on obviously with the new administration that I'm guessing you probably have some thoughts on that and the implications of some of the new policies that have been released. So we're going to get through all of that. But if we can kick this off with the general question I like to ask people, especially when they're new to the channel, what's your current assessment of the global economy and financial markets?

**Carson Block** (2:08)
Well, okay, they're not necessarily the same things, right? The economy could be going one direction, markets in another. So I'll start off talking about the US markets. Part of why I do what I do is because I believe that the US markets, in particular, are broken. There are various reasons they're broken. I mean, one reason that's maybe among the more obvious, is that ever since the financial crisis, we've had emergency monetary policy in place for well over a decade, whether we are right now still at... I mean, the Fed seems to believe we're above our star, the rate at which stimulus ceases causing asset values to grow. But I'm not so sure when you look at highly speculative assets like crypto, etc.
But that's one issue. So risk is underpriced perpetually. And that was what policymakers wanted to do coming out of the GFC. They just really didn't take their foot off the gas until 2022 Now, one of the other ways in which the US markets are broken is passive, and how passive investing has warped the markets, especially with respect to stocks that are in indices.
So that's something else that is problematic. Now, it's been great if you've been long, the S&P 500 in general, and on a short-term basis. So I think because of the impact that passive has on indices, especially the S&P 500, I think it's anachronistic to try to talk about whether those are overvalued, the S&P 500 is overvalued or not, because effectively what happens, and this is maybe going a little bit too far down the rabbit hole here, so I'll try to nutshell it. But when passive buys a share of a stock, it buys it from an active holder, okay? So now passive owns it, and that share is essentially removed from the float. That share will never be sold unless and until passive has outflows that it has to meet. So until we get to that situation, you're just perpetually shrinking the floats of these public companies, but guess what? Passive comes back the next day and buys. And it buys at an even higher price because passive does not care. And the buying of names that are more heavily weighted begets more buying of those names because the market, the indices, or generally, especially the S&P 500, are market cap weighted. So that dollar that flows into passive, more and more of it is allocated to the largest names in the S&P 500, and that makes the stocks go higher, all other things being equal. So that means tomorrow, even more of that dollar gets allocated to the largest weightings in the indices. So I don't think you can have a real conversation. I mean, you can converse, but I don't think it really means anything to try to figure out, well, is the market overvalued? Because at the end of the day, what I see driving the market so much, these technicals and these flows of funds, the robo bids that do not care about the fundamentals. So, that's the state of the US market.