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Carson Block: Markets are broken 'because fundamentals matter less and less'

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Carson Block, Muddy Waters Research Founder joins Yahoo Finance's Julia La Roche to discuss the short-squeeze saga, and the impact short selling has had on markets.

Video Transcript

KRISTIN MYERS: I want to turn things over now to Yahoo Finance's Julia La Roche to continue this conversation on that speculative trading. Hey, Julia.

JULIA LA ROCHE: Hey, thanks so much, Kristin. And I'm delighted to bring into the stream Carson Block, noted activist short-seller and founder of Muddy Waters Research, for more on this. Carson, thank you so much for joining us. And I guess, the first question I have for you is, are the markets broken? And why or why not?

CARSON BLOCK: Well, the markets are broken. They were broken before GameStop. But GameStop and these meme stocks just show how broken they are. Now, the reason they're broken is because fundamentals matter less and less every day. It's a combination of things that got us here, but so much of the institutional world and now retail world is dedicated to understanding technical factors.

What are the-- what's the float? What are flows into this stock from passive going to be? What is the gamma embedded in the options that are outstanding? This is not asking the question the markets are designed to answer, which is, which companies are going to take capital and create value? And when we're past that tipping point, it's kind of fair to ask, what's the point of these markets?

JULIA LA ROCHE: And to that point, how do you adapt, then? If you're asking the question, what's the point of the markets, how does one adapt?

CARSON BLOCK: Well, I mean, one has to really take into consideration the flows. I mean, you know, you might hate the game, but if you're going to be in the game, you have to play it. So, for us last year, it was clear in Q3, as we were getting squeezed in another stock that we were short, which is a total fraud or near total fraud from China, that this was much more of a trading market than it had ever been, much more driven by technicals.

And so, we basically said, OK, we have to be very nimble as traders. Normally, that's not what we do. Previously, we didn't have anybody who would stare at the screen all day and see how things are moving tick by tick. But we had to hire a full-time trader and just be ready to move our positions around. And, you know, it's unfortunate that fundamental views are not as important as they used to be. But yeah, that's how you adapt. You have to trade and be smart to the technicals.

JULIA LA ROCHE: Carson, I do want to just talk about short-selling. You were mentioning earlier around one of your recent targets, you really cut your teeth coming after Chinese frauds, I guess just over a decade ago, it seems at this point. So what is it that folks are getting wrong about short-selling and short-sellers? It just seems like there's a lot of dialogue around this and a lot of folks who are coming after short-sellers.

CARSON BLOCK: Historically, it was company managements or the managements of failing companies that propagated the myth about short-sellers, right? Where it's, oh, these guys are just trying to drive the stock into the ground. And it's this cabal. But now it's kind of spread retail, but it's actually gone kind of crazy. I was asked for a quote this morning on short ladder attacks, and my response was, what is that?

And then, I was sent the definition of that. And to me, that seems right up there with space lasers causing wildfires in California. So basically, what people need to understand is that literally, there are probably a few billion dollars globally of assets that are dedicated to selling equities short. There are tens of trillions of dollars that are dedicated globally to going long equities.

So this constant narrative that a few billion dollars is somehow able to manipulate markets that are propped up by trillions of dollars in long assets, it's on its face, it's ridiculous. But unfortunately, especially in the time that we live in when the more nefarious sounding conspiracy theories spread easily, it seems like this is kind of taking hold a little bit. But the reality is that short-sellers have been a gift to long buyers because if you're long a stock and you lend it out, you get some interest expense.

And if you're right about the stock, which, you know, most stocks have gone up a lot in the past blah years since the financial crisis, not only are you collecting rent for lending out your shares, but as the stock goes up, eventually, you're getting a pop from short-sellers who capitulate and say, you know what? I have to cover.

I mean, look at Tesla. Tesla, it's odd that Elon Musk goes after short-sellers so often because when you look at it today in 2021, short-sellers have been fantastic for his investors. Investors have made even more money because of short-sellers. So it's really a false narrative to blame short-sellers on the case of Tesla for anything other than buying to cover.

JULIA LA ROCHE: Well, Carson, are you worried at all about maybe one of your short ideas becoming the target of Wall Street Bets? And what's kind of your thought process on the kind of Reddit-fueled rally in some of these names and how that might change how you're doing your business?

CARSON BLOCK: Well, I mean, certainly, there could be blood lust for short-sellers. And some elements of this crowd might not be the most willing to give our arguments a hearing. But we have to, as I said earlier, be a lot more attuned to the technicals. So if something is already heavily shorted or heavily utilized, that's going to be off the board for right now. We'll probably hedge with-- out of the money call options our positions.

And I mean, we just have to trade a lot more nimbly. And if it looks like there's something on social media getting traction for, let's go get these guys and let's jam the stock up, I mean, we'll cover. I mean, hell, we might even go along for a few minutes, you know, or for a few days, just to say, hey, guys, you know, when you do this, you're actually going to-- you know, we're actually going to try to profit off that and then re-short the stock.

So maybe rather than being emotional about this, everybody should try to be a little bit clearheaded, listen to the arguments we're putting forth. You don't agree with them, you want to stay long the stock, you want to buy the stock-- great. But if you're going to try to target us just because we're saying things that are not nice about a given company, well, then, we're going to protect ourselves and possibly even look to capitalize on that kind of insanity.

JULIA LA ROCHE: Some of the kind of things that have been floating out there is that maybe short-sellers should be required to disclose their positions. I mean, you've also seen kind of rhetoric around even, like, any short-selling. But what would be the consequences of that, Carson, if, you know, shorts had to suddenly disclose their positions?

CARSON BLOCK: So that's not without precedent because in the European Union, shares-- when a short-seller is short over half a percent of a company's outstanding shares, it's disclosed. But first of all, that's misguided. OK, the EU put that in place after the financial crisis because they evidently blamed short-sellers somehow for causing the crisis, rather than mitigating the losses and keeping Deutsche Bank from cratering by virtue of having gone short.

But the problem-- so the reason why it's not the same thing, though, is the required disclosures on the long side exist because of voting rights. So if you're trying to take control of a company, that's why there is disclosure so that investors understand that there's somebody is making a play for it, might try to change the board composition, et cetera. Short-sellers are not doing that. So when you require shorts to disclose, all you're doing is, you're giving the company license to not talk to short-sellers.

Now, for a retail investor who hasn't been in this trading very long, that might sound like a great idea. But the problem is, you'd get less efficient price discovery. And then the other thing is, I mean, we do a lot of short-selling in Europe. And it's-- when we are not given access to the company, I mean, we're making assumptions, in many cases, about why we're not being given-- why the company has not been forthcoming about this. And that doesn't play out well for the company from a narrative perspective when we go public and say, hey, we asked the company XYZ, and they won't talk about this.

So requiring shorts to disclose positions really makes it easier to violate Reg FD. And it's just punishing a class of investors who make markets more efficient, but have not-- are not to blame for this dysfunction that's going on. And, you know, it is kind of strange also when you look at these Reddit stocks and GameStop to say, well, short-sellers did something wrong.

I mean, a lot of retail had real money put in their pockets squeezing the short-sellers. I mean, that opportunity does not exist without a short-seller in there that didn't manage its risk very well. So, I don't really-- you know, it's kind of like saying, you know, if you want to cure COVID, take tiger penis. I mean, it's just not-- like, there's no relationship here, really.

JULIA LA ROCHE: Well, Carson Block, founder of Muddy Waters Research, I thank you for your time, and we'd love to have you back on in the near future. Kristin, I'm going to hand it back over to you.

KRISTIN MYERS: All right, thanks so much, Julia. Absolutely fascinating conversation with you and Carson.