Carson Block: ‘Maybe the dumb money is the smart money’

{"text":[[{"start":null,"text":""}],[{"start":5.85,"text":"Good morning. The macroeconomic risk you did not realise you needed to worry about in 2026 is barnacles, which are snarling up ships stranded in the Strait of Hormuz. The maritime critters are probably not the main reason why oil prices picked up again yesterday, but hopes for a breakthrough remain, at best, fragile. "}],[{"start":25.950000000000003,"text":"We have a long weekend coming up in the UK and US, so this will be the last newsletter from us until Tuesday. Enjoy the long weekend, if you get one. As always, your thoughts: unhedged@ft.com"}],[{"start":39.25,"text":"Friday interview: Carson Block"}],[{"start":42,"text":"Carson Block, of investment firm Muddy Waters, is one of the world’s best-known short sellers. He spoke to Unhedged this week about moral hazard, dumb money, his rethink on AI and his dad. The text is lightly edited for length and clarity."}],[{"start":56.65,"text":"Unhedged: I keep hearing that the biggest risk you can possibly take in markets today is that you’re not long enough, you’re not bullish enough. How do you rationalise that level of exuberance when you hear it in the wild?"}],[{"start":70.05,"text":"Carson: The S&P 500 is not the market. And even within the S&P 500, the dispersion between winners and losers has been tremendous in recent years. So the mean of the index goes up because it’s been powered by a small number of companies whose share prices have just gone parabolic. I don’t see, in the near term, a reason for that to change."}],[{"start":93.15,"text":"It doesn’t matter what gas prices do. So long as you have high employment levels, especially in industries in which knowledge workers work and they have a portion of their paychecks automatically debited [and put in an index fund]."}],[{"start":106.10000000000001,"text":"On the way up, it’s great. The amount of money that’s pegged to this system now is so large that when this goes in reverse it will be systemic."}],[{"start":114.35000000000001,"text":"But for the time being, nobody wants to hear that. "}],[{"start":118.2,"text":"Unhedged: What is the environment like for short sellers? The meme stock thing can make life very difficult, obviously, but I guess the new risk now is: What if Trump just decides one day to amp up a company or to buy a stock? How do you deal with that risk?"}],[{"start":134.85,"text":"We certainly consider whether we think companies are candidates to be meme stocks. When we first look at a name, whether it’s something that Trump will tout . . . there’s no way to handicap his policy pronouncements. You have to get up every day and do your job right."}],[{"start":145.9,"text":"Unhedged: How do you feel about this move to semi-annual reporting? It’s not obvious to me that it’s ever done America any harm to report on a quarterly basis. If anything, it might have the opposite effect for a lot of asset managers that you get the information every quarter come hell or high water. Does it potentially open up opportunities for you? "}],[{"start":167,"text":"The potential benefit for us is as activist short sellers, we look for information asymmetries. So if we can, by virtue of using our standard methods, see that there are problems in the business that have not yet shown up in the financial statements, then maybe there are times when that’ll be a benefit to us but there’ll be times when we want more of that crunchy information. "}],[{"start":186.45,"text":"But at the end of the day, this is giving the people what they want. I think it’s a reflection of the extent to which investors are inured to risk. It’s a reflection of our age. "}],[{"start":195.04999999999998,"text":"Unhedged: As you say, people are inured to risk, they don’t want to listen to the downside argument. There is a certain amount of moral hazard that’s set in, particularly since ’08. There’ll always be a fiscal response. There’ll always be a monetary response. But how does this end? "}],[{"start":213.39999999999998,"text":"If you’d asked me before February, I’d tell you that I don’t see the end of the cycle anytime soon. Since February, though, I do feel differently. I’ve done a 180 on AI. I think AI is going to displace a significant number of knowledge worker jobs. "}],[{"start":229.14999999999998,"text":"It’s going to happen. And these workers are not going to find jobs that pay nearly as much, and they are the ones who have 401k accounts and make those contributions."}],[{"start":238.95,"text":"Unhedged: So it’s not that AI is a bubble that bursts, it’s that AI works too well, sucks labour out of the system and then you have less money flowing into markets? "}],[{"start":249.14999999999998,"text":"This virtuous cycle that has powered the indices, and in particular, the AI stocks — that gets thrown into reverse hard. So the irony of this will be that, over the medium term, the companies whose stock prices have been the biggest beneficiaries of enthusiasm around AI will get hit among the hardest. "}],[{"start":269.54999999999995,"text":"So that’s when you get ka-boom. And that I believe creates a GFC-type scenario. It will spill over very quickly into credit, commodities etc. "}],[{"start":279.24999999999994,"text":"Unhedged: Some of the heat has come off the debate over private credit. But again, that hasn’t gone away and you can make a mental map of how that leaks into the insurance sector and becomes self-fulfilling. How worried are you about that whole sector?"}],[{"start":294.1499999999999,"text":"The high-level answer is, who knows? There isn’t transparency there. "}],[{"start":298.8999999999999,"text":"Unhedged: Was it a mistake to open this up to retail? "}],[{"start":302.3999999999999,"text":"Retail is at the bottom of the food chain here. This is not a democratisation of wealth creation. This is basically chasing the last new dollars that we can suck. "}],[{"start":311.5499999999999,"text":"If you can’t spot the sucker at the table, it’s you. "}],[{"start":315.3499999999999,"text":"That’s what the financial services industry is. It’s manufacturing of financial product. So if it’s not private credit, it’d be something else. And it could be quite possibly riskier. "}],[{"start":326.7499999999999,"text":"Unhedged: People look at something that’s yielding 10 or 12 per cent and think, well, I can’t lose here. Something’s become disjointed in how investors, whether they’re retail or professional, think about risk and return."}],[{"start":340.6999999999999,"text":"It’s the moral hazard that was created, starting with the response to the GFC. It’s bailing out the depositors of SVB, that was ridiculous. "}],[{"start":349.4499999999999,"text":"A guy I’m friendly with, as Silicon Valley Bank is wobbling, he said, well, I’ve got $40mn on deposit there. I ask, how quickly are you moving it? Oh, [he says,] I don’t want to move it because I want to show these guys that I believe in them."}],[{"start":363.2999999999999,"text":"And he didn’t move it, the bank failed but he didn’t lose the $40mn. Because the government bailed that out. So maybe the dumb money is the smart money. "}],[{"start":372.6499999999999,"text":"Towards the beginning of 2025, I was talking with my father who was about 86 at the time. His career had been in investing, but he was proudly a Luddite. He never allowed them to put a computer on his desk. "}],[{"start":386.8499999999999,"text":"So, beginning of ‘25, he’s telling me about the account that he still manages for himself. He was up about 70 per cent the year before. [So I ask,] what did you own? CrowdStrike, Nvidia . . . he names these companies and I asked: Do you know what they do? He says, ‘something with AI?’"}],[{"start":406.0499999999999,"text":"This epitomises the age perfectly. The less you know, the more you make."}],[{"start":411.4999999999999,"text":"Unhedged: So you think, how am I gonna beat my father’s performance, especially on the short side?"}],[{"start":418.0999999999999,"text":"Short activism. It’s hard. You make money but it’s so much work, it’s so hard. At the end of ‘24, we started running this algorithm, this momentum strategy. It’s been putting up like 70-odd per cent a year. Every now and then somebody would look at what’s in the basket that month and say, ‘what does this company do?’"}],[{"start":435.6499999999999,"text":"I’m like, who cares? It goes up. That’s what it does. What other questions could you possibly have? "}],[{"start":442.5499999999999,"text":"Unhedged: But being that guy who does the homework, when the YOLO crowd are making out like bandits, it’s a funny place to be."}],[{"start":450.4999999999999,"text":"Seriously, that’s the thing. We have two departments. The “care too much department”, which is short selling, and the “doesn’t care at all department”, which is the [momentum strategy]."}],[{"start":461.3499999999999,"text":"But that’s my joke. If our algorithm ever broke down I’d just ask my father what to buy. I’ll time him to try to remember what each company does and the ones that it takes the longest for you to say the fewest words, that’s what we’re going long. I love that, it’s a strategy. It works."}],[{"start":478.3999999999999,"text":"One good read"}],[{"start":479.6499999999999,"text":"Chris Hohn’s forever horizon."}],[{"start":null,"text":"

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