Carson Block on Tesla changing the game for electric vehicles

Carson Block, Muddy Waters Research Founder, joins Yahoo Finance to discuss his latest investor letter, outlook on Tesla, the EV space, and meme stocks.

Video transcript

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- Block, the founder of Muddy Waters Research. Carson, great to have you back on the program and especially on the heels of that fascinating investor letter. I think your first one ever since running Muddy Waters Research. A really interesting point you made about your views of Tesla and Elon Musk following a dream you had involving Chamath Palihapitiya, and also a realization about the Federal Reserve and interest rates. So, let's kind of frame it up for the viewers what your overall thesis is, as it relates to Tesla, but also with that backdrop of your view of the Federal Reserve's monetary policy going forward.

CARSON BLOCK: Sure. So, the Chamath part was just weird. I mean, this is a true story, but I had a dream that guy I had stuck with the name, SPAC Jesus-- it's Chamath. But I tried to set up a meeting with him. And he was going to meet me, but then he backed out of the meeting. And right after that happened in my dream, I woke up.

But it was weird, like, I had this I was kind of panicked because as a short seller, these emergency monetary policies that we've had in place since the financial crisis of near-zero real rates have not made my life easy. And just the first thing that I thought when I woke up was, oh my God, we're going to keep these rates at or near-- well, at or below 0 on a real basis for a long time, a generation maybe, in order to subsidize, effectively, the decarbonization of the economy.

And I don't know why that popped into my head. But you know, as I sat back and started thinking about that, and wondering whether that was actually a cogent thought, I did think about Tesla and Elon Musk. And you know, really, he's obviously played the low rates hand quite well. But what occurred to me-- and this is a stock that we had, in a way, been short in the past.

We were long the bonds. And we used bond coupon payments to buy long-dated out of the money puts. So, we actually never lost money on the trade, but it was effectively an equity short, because we did think that, at some point, Tesla could hit the wall. And we had bought into this view that a lot of other short sellers have had, that Tesla is not economic because it does not have the scale of other auto manufacturers.

Now, there are people who are Tesla fans who will try to pick me apart on that non-economic statement. The reality is, Tesla's accounts use a lot of wizardry. So, if you stripped that out, if you stripped out the subsidies and carbon credits, it's not really an economic business.

But what I came to realize the shorts had missed is that the scale that matters for Tesla is not the manufacturing base scale, it's not how many units they're selling. It's the scale of the capital base. And Tesla's capital base is almost double that of Toyota, if you look at the enterprise value, and that's what matters.

And so, when I relate that back to this realization that real rates have to be at or below zero in order to transition away from such a carbon-based economy, I look at Tesla, and it's, you know, somewhat of a success story in that realm. But there's a dark side to it, and that is, look, all the things I've said in the past about Elon Musk and the way he's gotten here are true.

There's been a lot of lying. There has actually been law breaking. I mean, he agreed to a settlement with the SEC over that. And I'm not sure that we're safer on the roads when people think that full self-driving is actually full self-driving.

But that's basically where this took me, and it's a bizarre template for the future. But you know, the bottom line as short sellers, most of the people who do this and who are promotional, like Elon, and try to take advantage of these rates going forward are not going to be able to build the car or build a rocket. And as a short seller, those are the people on whom I have to focus going forward.

- Got it. Like you point out, they'll still be people who are being [INAUDIBLE] out there. You mentioned the scale of the capital base and that seems to be what kind of makes targeting Tesla an unsuccessful short, if you will. What have you heard from your fellow short sellers when you came out with this investor letter? I imagine you probably got some push back.

CARSON BLOCK: Well, I like this question because when you take, at least my view, and this is maybe me telling myself what I want to here, but when you take a highly polarizing issue, like Tesla, or you know, say our politics, if you can offend both poles, I think you've done something right. And maybe you've done something wrong, but with my comments on Tesla, I've offended both poles.

So, short sellers, I've had some pushback from short sellers. You know, number one, they think that I've given Tesla too much credit for changing the game, in terms of electric vehicles. I mean, my view is that Tesla, by building in 2013 that Model S that won the Motor Trend Car of the Year and making electric vehicles sexy. I mean, before that, they were phone booths on wheels basically. And I don't think people who really liked cars and aspired to drive nice cars thought about EVs in any way, shape, or form.

So, my view is that by making an electric vehicle that people actually really wanted to drive for performance reasons, cache, et cetera, that Tesla really helped to accelerate the electric vehicle development programs of the auto majors. Now, again, that's where I've gotten pushback. Some short sellers have said, no, it was all about Europe's new legal regime, and you know, VW had Dieselgate. So, they had to greenwash that.

Yes and yes. But I do think that Tesla changed the game. And I think but for Tesla making that vehicle in 2013, I don't think we're looking at the range of EVs that are available on the market today and the advancement of these platforms that we have right now.

BRIAN SOZZI: Carson, just given your view, and it's Brian here. It's good to see you. Just given your views on Tesla, do you think the real next short here might be some of these Chinese EV makers? Stratospheric valuations, hard to understand. And in many cases, some of these top names, they're not making any money.

CARSON BLOCK: Well, look, for years, I've said, and you know, how I got into this business of short selling was really on the fraud side, fraud shorting, so, I'm fond of saying that China is to stock fraud as Silicon Valley is to technology. So, you know, if you start there, the answer to your question on the surface would seem like it would be, yes.

Now, that said, if we get into actually shorting China-based companies, then there is a lot more complexity. I think a number of these stocks have been subject to manipulation, especially the ones traded in the US, or even in Hong Kong. So, it's not as easy as saying, this is a crappy company, or I think the financials are fraudulent, or what have you when it comes to China-based names.

For me, the template is much more like what Hindenburg Research has done with Lordstown or Nikola or what we did with a company called XL Fleet, which is, you know-- and here's the thing. When it comes to the future of activist short selling or short selling of people in the technology space, especially green tech, I don't think you have to really understand technology to figure this out. I think looking at the technology is playing the ball. I think you have to play the man.

And that's basically what we did with XL, and what Nate at Hindenburg has done with these other companies, where you look at the people behind this and you can ask some high level questions. Like, you know, internally, are they changing the power? Are they telling their salespeople to record-- to book pipelines, pipeline potential sales, that actually aren't really there? Or did they roll a truck down the hill when it should have been actually under propulsion? So, I think that's really how one should approach, not that many people out there should actually consider short selling.

But when you're in our shoes, I think that's how you should approach it is, play the man, not the ball. Don't focus so much on the technology, but really try to figure out, is this the kind of person who can build a car, build a rocket, or not. And the vast majority will not be the kind of person who could build a car, rocket, or whatever it is.

- You know, Carson, I want to bring this up with you, because you mentioned in your letter about GameStop and not raising as much as you had hoped for the domino fund, and kind of saying, Gabe Plotkin owes you a steak dinner and a nice bottle of wine. So, how do you think about the state of short selling, and when you have, I guess, kind of the Reddit armies, if you will, that could kind of gang up on some of your positions, what's your assessment there?

CARSON BLOCK: Well, one of the things that's good about being a small fund manager is that, in general, our positions are not so large that, you know, we can't run away if we see a Reddit mob forming. I mean, if we get to the point where our positions are sized that large, then we've really, I really screwed something up. So, the nice thing, from a risk management perspective, about being worried about a Reddit mob is that to see it coming, just tune in to Reddit. That's one thing.

But in terms of the larger environment, you know, I've long had a debate with people who want to get into activist short selling or are in activist short selling, where sometimes they'll say, hey, you know, I want to do a fundamental short. I want to tell the market, we're short XYZ because I think the business is a melting ice cube that's melting much faster than the market gets. And I've always said that makes for bad activism, because you need to be provably right here and now.

But the counterpoint to that is, and this is an interesting dynamic, so many long short funds have left the market on the short side. I mean, just there's so few short sellers now. So, you see that when some of these fundamental companies are blowing their quarters, I mean, the stocks are just falling from the sky, and that's because, I mean, in large part, there's no short interest to act as a floor under the stock.

So, it's interesting because the short trades are generally not crowded now. And again, there's very little floor once these things fall. So, in a way, there's an old adage in fund management business that the best time to raise money is the worst time to invest and the best time to invest is the worst time to raise money. So, maybe we're at a decent time to invest on the short side, but a horrible time to raise money because of the whole GameStop, [INAUDIBLE], et cetera.

- I like that. Well, Carson Block, founder of Muddy Waters Research, I thank you so much for stopping by Yahoo Finance Live today.