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Outspoken short seller Carson Block, who founded investment firm Muddy Waters Research LLC, has said he believes Tesla demonstrates a fundamental shift in how to read stocks: profits do not matter if a company offers a route toward decarbonisation.
In a wide-ranging interview on the Money Maze podcast released on Thursday, Mr Block was asked to address the “elephant in the room” of Tesla.
Mr Block said he had been “right but wrong” about the electric car-maker. The short seller had previously offered excoriating criticism of the company, and its leader, Elon Musk.
However, this summer he told investors in a letter that he was no longer betting against the firm and had underestimated how much money the company, and its high-profile founder can raise. This effect is so strong, that being profitable “does not matter”, he said.
“It can raise so much money on the way down, that it has all the scale it needs to survive for a long time producing in a non-economic business,” Mr Block said. “Strip away the subsidies, strip away the accounting games, it’s [Tesla’s] not an economic business, but that does not matter.”
Yet, in the modern age, “that does not matter,” Mr Block added. Telsa was an example of how some traditional rules how to value a stock – via a company’s profits – had changed. “It’s really the blueprint, because without those ultra low rates, near zero to negative real rates, Tesla wouldn’t have pulled off what is has.”
The company is not just an outlier, or freak one off, either. It was a sign of things to come, Mr Block said: “I believe that it will eventually become the express policy of the world’s major central banks, maybe the Fed here [US], last, to keep real rates near or below zero in order to effectively subsidize in a quasi-market manner, development of technologies and infrastructure to decarbonise the economy.
“Tesla’s really the blueprint – it’s hard to say it with a straight face but it’s true – this is really the blueprint for success for how to develop businesses that will help us to decarbonise the economy in the decades to come. If we’re going to do it.”
Still, even when betting against the firm, Mr Block had been cautious. He had noted the impact of Mr Musk’s “star power” and had constructed an arbitrage trade to ensure that he avoided a common problem for short sellers: limitless losses if a stock rises in value.
He has described a construction whereby the investment company was long on bonds and bought long dated “deep out of money puts”. A put option means a trader buys the right to sell an asset at a set price. Meanwhile “deep out of money” means the put comes good only if an asset falls well below its market price at the time the bet was made. The trade “almost paid off”, Mr Block said.
In an interview which examined his career from early research into Chinese companies, and his dislike of the Asian superpower’s regime, Mr Block also reflected on his early career. He said his father had mocked him for being fast to exit stocks when he grew nervous back in the early 2000s. But, he’d hit upon something, as being “too quick to close” is still a problem. As a result, his company is using artificial intelligence to determine to close a trading position.
The short seller also suggested a tip for younger people at large. If you do not readily fit in, then finance might have something to offer: “If you are somebody who doesn’t for whatever reason really fit in...if you’re interested in finance there’s probably way for you to come up with a business model or a niche built on that.”
Mr Block is known to be reserved about his personal life, but he said that he’d received frustrating medical advice to limit his alcohol intake.
“I’ve put a lot of miles on my liver at a relatively young age so my doctor keeps telling me, you know, like no more than eight drinks a week, three drinks a sitting which puts me in just over half a bottle of wine, which kind of sucks, because now I can actually afford good wine,” Mr Block said.
The full Money Maze podcast is available here.