John Hempton on Greensill, Archegos and What It's Like To Short Right Now

Tracy Alloway (0:11)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:15)

And I'm Joe Weisenthal.

Tracy Alloway (0:18)

Joe, I feel like it's been a pretty bumper year for financial frauds and scandal. And maybe bumper year isn't the right way to put it, but I feel like a bunch of them have sort of been coming to light over the past 12 months or so.

Joe Weisenthal (0:33)

Yeah, it's kind of a weird time because the stock indices as of right now, they're all basically right at all time highs. But we've had like a lot of, I don't know if they're like per se frauds, but things going badly, blowups, companies collapsing, hedge funds, losing a ton of money.

It's kind of been a slightly weird time because things that you don't necessarily expect at the top or maybe you do, basically a lot of things going south, generally speaking.

Tracy Alloway (1:06)

Yeah, I mean, normally it's like that Warren Buffett quote where when the tide goes out, that's when you see people swimming naked, but the tide by no means has been going out lately. As you mentioned, we have stocks pretty close to all time highs. We have ample liquidity. It's a weird time for stresses in the financial system like this to be coming to light.

And yet we've had quite a few. So most recently we had Archegos losing billions of dollars.

Before that, we had Greensill blowing up. And then earlier we of course had Wirecard as well. So the rule of three, we have three things happening. So we're gonna talk about that today with really a fraud or scandal spotting extraordinaire.

Joe Weisenthal (1:55)

Yeah, I'm super excited about this. It's kind of like, the funny thing is we do seem to be at the verge of what people think are, people are feeling optimistic.

Growth expectations in the United States are running sky high. People aren't negative. But what does seem to be clear is that after this incredible bull run, and whether you want to define it by the last year or the last several years, there's just a lot of sloppy behavior that's sort of coming up to the surface right now. And so yes, I'm very excited about this conversation.

Tracy Alloway (2:30)

Yeah, well, as I mentioned, we have a sloppy behavior expert coming on. So we're gonna be talking to John Hempton. He's the co-founder and chief investment officer over at Bronte Capital Management, also a previous Odd Lots guest, and a man who was also early on a bunch of things, but top of mind is probably Wirecard, Valiant, and gosh, I remember Ponta Negra way back in 2009 That was an interesting one. So John, welcome to the show. Thanks so much for coming back on.

John Hempton (3:02)

Glad to be here. I was going to correct Tracy's Warren Buffett quote.

Tracy Alloway (3:07)

Oh, please.

John Hempton (3:08)

Warren said, it's only when the tide goes out that you see who's swimming naked. And he was wrong. The tide isn't out at all. I mean, market's at all time highs, and we're already seeing people that are swimming naked. It's kind of a bizarre market. As a sort of very big picture, it's been an expensive bull market for a long time.

But the period from sort of the middle of November to the middle of February was a bizarre retail media where the most retailing stocks possible, tech stocks that have no technology, just flat broads, penny stocks, et cetera, all went vertical. We discovered in the middle of that that some very big money was also playing in them. So Archegos, GSX is a company that several people have alleged the fraud. I have not done the work myself, but the arguments put out by both Carson Block at Muddy Waters and Anne Stephenson Yang at J Capital, alleging that GSX is a fraud looked very, very convincing to me. And despite that, the stock sort of doubled immediately. The good short case came out. And we now know that there was retail money, just retail money on a different scale and a different style at Archegos chasing that up. That pressure has eased off lately. We're starting to see the nonsense stocks falling and often quite falling quite far. And if you go look at the Reddit chat boards now, you see that they're full of other Warren Buffett quotes, GZ quotes about buying when there's blood in the streets.

And it's almost comical at the moment that retail investors could be talking about blood in the streets at exactly the same time as the market is literally hitting new highs on a daily basis. Well, that change has changed my life because I short nonsense stocks and shorting nonsense stocks gave me the worst three or four months of my career in the lead up over the Christmas period. And it has suddenly become exceedingly nice. We're making money on both sides. Look at the moment, we're making money on longs because we're long ordinary stocks and the market's making new highs and we're making money on shorts because the nonsense stocks are deep lading.