CNBC Transcript: Kynikos Associates Founder and President Jim Chanos Speaks With CNBC's Kelly Evans

Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Kynikos Associates Founder and President Jim Chanos and CNBC's Kelly Evans on CNBC's "Closing Bell" (M-F 3PM-5PM) today, Thursday, December 14, 2017.

BILL GRIFFETH: KELLY.

KELLY EVANS: THANK YOU GUYS, AND JOINING ME NOW IN AN EXCLUSIVE INTERVIEW IS MR. JAMES CHANOS. HE'S THE KYNIKOS ASSOCIATES FOUNDER AND PRESIDENT. JOINING ME FROM THE YALE CEO SUMMIT HERE IN MIDTOWN, MANHATTAN. THANK YOU FOR YOUR TIME.

JAMES CHANOS: HI, KELLY, HOW ARE YOU?

EVANS: WE'RE VERY GOOD. THERE'S A LOT OF STUFF WE WANT TO GET TO. BUT JUST BECAUSE DAVID HAS TALKED IN LENGTH ABOUT IT, IS THERE ANYTHING ABOUT THE DISNEY/FOX DEAL THAT HAS YOU THINKING ABOUT INVESTING IN IT, AGAINST IT, OR IN THE MEDIA LANDSCAPE, SHIFTING MEDIA LANDSCAPE IN GENERAL?

CHANOS: WELL, THE BIG NEWS THAT DAVID HAS BEEN HAS BEEN THAT MERGER AND ALSO THE CHANGE IN THE NET NEUTRALITY RULES TODAY. SO WE HAD A SESSION EARLIER TODAY HERE AT THE YALE SUMMIT, WE HAD A PRETTY SPIRITED DISCUSSION ABOUT WHAT THIS MEANS FOR THE BIG FOUR" GOOGLE, AMAZON, FACEBOOK AND NETFLIX, AND I THINK THAT THE NET NEUTRALITY RULE COUPLED WITH A BIGGER COMPETITOR IN THE CONTENT AREA IS GOING TO PUT PRESSURE PARTICULARLY ON THE CONTENT BUYERS, WHICH IS AMAZON, GOOGLE, AND NETFLIX. EVERYONE FORGETS THEY LOOK AT NETFLIX, BUT EVERYONE FORGETS THAT NETFLIX'S BIGGEST TWO COMPETITORS ARE ACTUALLY GOOGLE AND AMAZON.

EVANS: BUT YOU'RE NOT WILLING TO BET AGAINST ANY OF THESE COMPANIES, ARE YOU?

CHANOS: WELL WE'RE LOOKING AT ALL OF THEM. LET'S JUST SAY THAT. BUT ONE OR TWO MORE THAN OTHERS. I JUST THINK IT WILL BE INTERESTING TO SEE NETFLIX, FOR EXAMPLE, Netflix CAME OUT THIS AFTERNOON AND SAID, SORT OF BLASTED THE CHANGE IN THE NET NEUTRALITY RULES AND YET FOR YEARS NOW, THEY HAVE SAID WHEN ASKED THAT A CHANGE IN NET NEUTRALITY WOULD NOT HAVE A MATERIAL IMPACT ON THEIR BUSINESS. WELL, WHICH IS IT? YOU KNOW, IS IT NOT GOING TO IMPACT YOUR BUSINESS, OR IS IT REALLY SOMETHING THAT YOU'RE GOING TO GO OUT AND HAVE A BIG LEGAL PROTRACTED FIGHT ON? SO IT'S GOING TO BE INTERESTING TO SEE HOW THIS ALL SORTS OUT.

EVANS: YOU DO YOU THINK THEY'RE MORE VULNERABLE BECAUSE THAT'S EFFECTIVELY THEIR ONLY BUSINESS MODEL, WHERE AS OTHER TECH PLATFORMS HAVE OATHER LEVERS TO PULL AND BECAUSE DISNEY IS TRYING TO GEAR UP TO COMPETE WITH NETFLIX.

CHANOS: RIGHT, SO DISNEY/FOX COMBINATION IS GOING TO ACTUALLY NOW GEAR UP AND TRY TO HAVE THEIR OWN STREAMING SYSTEM. AND Netflix RAISED PRICES RECENTLY AND ANALYSTS, OF COURSE, ALWAYS JUST AUTOMATICALLY ASSUME THAT MOST OF THAT FALLS TO THE BOTTOM, BUT WHAT IF THESE PRICE HIKES REALLY ARE TO OFFSET INCREASING COSTS? AND I DON'T THINK PEOPLE HAVE PUT THAT IN THEIR MODELS. AND THE FACT OF THE MATTER IS THAT Netflix IS A MIDDLEMAN. THEY'RE BANKING AND PRODUCING AND FINANCING MORE OF THEIR OWN CONTENT, BUT AT THE END OF THE DAY SO IS EVERYBODY ELSE NOW. AND IT'S FUNNY THAT THE ONE COMPANY THAT'S NEVER BEEN AFFECTED BY AMAZON AS A COMPETITOR HAS BEEN NETFLIX.

EVANS: WELL, STILL, THEY'RE THE WIDOW MAKER. ANYONE WHO IS TRIED TO BET AGAINST NETFLIX, THAT'S BEEN A DIFFICULT TRADE.

CHANOS: WELL, THAT'S WHY WE INVEST THROUGH THE WINDSHIELD, NOT THE REARVIEW MIRROR.

EVANS: BUT YOU'RE NOT DOING ANYTHING RIGHT NOW TO REPORT ON THAT FRONT?

CHANOS: WELL, I'LL SAY WE'RE LOOKING AT ALL OF THEM WITH INTEREST, LEAVE IT AT THAT.

EVANS: UNDERSTOOD. THE OTHER BIG ISSUE OF THE DAY EMANATING OUT OF WASHINGTON IS TAX REFORM. NOW IT MAY HAVE HIT A LITTLE BIT OF A HURDLE. MARCO RUBIO SAYS HE WON'T VOTE FOR IT -

CHANOS: SUPPOSEDLY.

EVANS: -- UNLESS THEY EXPAND THE CHILD TAX CREDIT. AND OF COURSE NOW A DEMOCRATIC SENATOR COMING IN FROM ALABAMA. WHATS THE EFFECT FOR YOU, WHAT NAMES ARE YOU WATCHING AS THIS MOVES THROUGH THE PROCESS?

CHANOS: SO WE SORT OF MADE OUR CHOPS IN THE LATE '80s INADVERTENTLY ON THE LAST TAX OVERHAUL WHICH WAS REAGANS 86 BILL. AND THE 86 BILL WAS INTERESTING BECAUSE IT INTENDED TO DO A LOT OF THINGS, BUT WHAT HAPPENED IS ACTUALLY A HUGE UNINTENDED CONSEQUENCE. IF YOU RECALL, THEY MADE PASSIVE LOSSES IN REAL ESTATE NONDEDUCTIBLE AGAINST ORDINARY INCOME AND IT SEEMED LIKE SORT OF A TECHNICAL THING, NO ONE PAID A LOT OF ATTENTION TO IT OTHER THAN THE REAL ESTATE INDUSTRY AT THE TIME, BUT WHAT IT DID WAS TOOK AN ALREADY SHAKY COMMERCIAL REAL ESTATE MARKET AND SHOVED IT OVER THE EDGE. JUST AS THE S&LS WERE HAVING THEIR OWN ISSUES AND IT PUT US INTO A BANKING CRISIS. AND THIS IS A PROBLEM WITH THESE KINDS OF BILLS PARTICULARLY WHEN THEY'RE RUSHED -- THAT BILL WAS NOT RUSHED THAT BILL TOOK A COUPLE YEARS.

EVANS: YEARS, AS I UNDERSTAND, YEAH.

CHANOS: AND SO THIS BILL HAS BEEN RUSHED AND THE QUESTION IS, WHAT ARE THE UNINTENDED CONSEQUENCES? ONE OF THE AREAS THAT WE THINK, IF IT GOES THROUGH, IT'S GOING TO IMPACT THE HEALTH CARE ECONOMY A LOT MORE THAN PEOPLE THINK.

EVANS: HEALTH CARE?

CHANOS: HEALTH CARE.

EVANS: IS THAT BECAUSE THEY'RE REPEALING THE INDIVIDUAL MANDATE?

CHANOS: THE MANDATE, THE BASIC NONDEDUCTIBILITY OF MEDICAL EXPENSES.

EVANS: RIGHT.

CHANOS: AND REALLY, I THINK IT WILL BE, AS PAUL RYAN, I THINK, HAS HINTED AT, IT WILL BE THE OPENING SALVOS THEN IN 18 AND 19 FOR CUTTING ENTITLEMENTS, WHICH IS MEDICARE AND MEDICAID, AGAIN. AND SO THEY'RE GOING AFTER OBAMACARE IN THIS SORT OF BACKDOOR SNEAKY WAY AND WE ACTUALLY HAVE THIS SAYING WITH THE HEALTH CARE STATS, WE THINK WINTER IS COMING. WE THINK WE'RE ABOUT TO SEE DEFLATION.

EVANS: YOU JUST QUOTED NETFLIX, BY THE WAY. OH - NO, THAT WAS HBO "GAME OF THRONES."

CHANOS: NO HBO!

EVANS: I STAND CORRECTED.

CHANOS: COME ON, GET YOUR STREAMING SERVICES RIGHT.

EVANS: YOU KNOW I'M NOT A TRUE VIEWER.

CHANOS: BUT WE THINK THAT WINTER IS COMING IS THE REALITY FOR THE U.S. HEALTH CARE SECTOR. THAT DEFLATION, NOT INFLATION, IS COMING.

EVANS: AND YOU'VE BET AGAINST NAMES LIKE McKESSON, THEN DRUG DISTRIBUTORS.

CHANOS: MALLINCKRODT.

EVANS: I'M SORRY, MALLINCKRODT. NAMES IN THE KIDNEY IT DIALYSIS SPACE, FOR EXAMPLE. ARE THERE ANY OTHERS YOU WOULD EXPAND -

CHANOS: WE'VE BEEN LOOKING AT THE RENT-SEEKING COMPANIES, COMPANIES THAT WE THINK HAVE EXISTED ON THE PERIPHERY OF THE HEALTH CARE ECONOMY THAT BASICALLY HAVE WENT AFTER THESE PRICING SORT OF GAMESMANSHIP MODELS. AND WE THINK THAT THAT'S OVER. WE THINK AS THE PIE SHRINKS, IT'S GOING TO BE TOUGHER AND TOUGHER TO JUSTIFY THE ABILITY OF COMPANIES TO HIKE DRUG PRICES 1,000% OR CHARGE COMMERCIAL INSURERS FIVE TIMES WHAT YOU CHARGE MEDICARE AND MEDICAID IN THE CASE OF DIALYSIS. AND WE THINK THAT THERE'S A NUMBER OF THOSE COMPANIES, SOME HAVE ALREADY DROPPED, SOME HAVEN'T. WE'RE STILL VERY NEGATIVE ON THE PBM SPACE, EXPRESS SCRIPTS CAME OUT AND REAFFIRMED GUIDANCE, RAISED IT THIS MORNING. THERE'S NO REASON FOR INDEPENDENT PBMs TO EXIST, FOR EXAMPLE.

EVANS: DOES THE CVS/AETNA DEAL MAKE SENSE TO YOU?

CHANOS: I THINK THAT'S - EVERYONE'S LOOKING AT IT THE REVERSE WAY THROUGH THE TELESCOPE. WE THINK IT'S THE PBM, CVS CAREMARK THAT IS BUYING THE INSURER BECAUSE THEY'RE WORRIED ABOUT THE PBM MODEL, AND NOT THE OTHER WAY AROUND. NOT AN INSURER GETTING MORE VERTICALLY INTEGRATED. AND SO, I THINK, ONE OF THE THINGS WE'VE TOLD CLIENTS IS THAT AS HEALTH CARE COMPANIES FOUND MORE AND MORE INNOVATIVE WAYS IN WHICH TO GET PAID OVER THE PAST TEN YEARS, WE THINK GOING FORWARD, THE PAYER IS GOING TO FIND MORE AND MORE INNOVATIVE WAYS NOT TO PAY.

EVANS: SO, THAT'S ONE CONSEQUENCE FROM THE TAX REFORM BILL. WHAT ABOUT SOMETHING ELSE THAT ACTUALLY THIS WEEK WE HEARD QUITE A LOT OF ANGER ABOUT, STANLEY DRUCKENMILLER SAID IT'S OUTRAGEOUS THAT THEY'RE NOT CHANGING THE TAX ON CARRIED INTEREST.

CHANOS: YEAH, IT'S JUST RIDICULOUS.

EVANS: JAMIE DIMON SAID IT'S NOT PROPER. JEFF GUNLOCK SAID THAT, YOU KNOW, THAT IT'S UNBELIEVABLE IT'S GOING TO SURVIVE GIVEN EVERYTHING ELSE -

CHANOS: IT'S A FEE, WE SAID THAT PUBLICLY.

EVANS: IS THAT HOW YOU'RE COMPENSATED?

CHANOS: WE BASICALLY GET CARRIEDINTEREST BUT SINCE EVERYTHING IS SHORT-TERM GAINS FOR HEDGE FUNDS, BY IN LARGE, IT DOESN'T APPLY. THIS REALLY AFFECTS THE GUYS THAT HOLD ASSETS LONGER. BUT CARRIED INTEREST IS THE PERFORMANCE FEE PAID ON YOUR CLIENTS CAPITAL, IT'S NOT ON YOUR CAPITAL, AND THAT'S THE BIG DIFFERENCE. I THINK STAN DRUCKENMILLER MADE THAT POINT, AND SO IF YOU'RE EARNING IT ON YOUR CLIENT'S CAPITAL, IT'S A FEE. IF YOU'RE EARNING A RETURN ON YOUR CAPITAL ON YOUR PART OF THE PARTNERSHIP OR FUND, THEN THAT'S A CAPITAL GAIN. AND THAT'S JUST CLEAR. AND I THINK ANYBODY THAT LOOKS AT THE TAX CODE IN A REASONABLE WAY WOULD SAY THAT. SO WHY THIS WAS KEPT IN POLITICALLY, I'M SCRATCHING MY HEAD BECAUSE IT DOESN'T REALLY -- HE'S NOT GETTING ANY EXTRA VOTES FROM THE PRIVATE EQUITY OR VENTURE COMMUNITY ON THIS. AND IT SEEMS POLITICALLY TO BE REALLY BAD OPTICS.

EVANS: LET ME ASK YOU JUST AS WE'RE LOOKING BACK ON THE YEAR AS WELL, ONE OF THE OTHER THINGS THAT MR. DRUCKENMILLER MENTIONED IS THAT THIS HAS NOT BEEN A GREAT YEAR FOR HIM, DESPITE HIS PORTFOLIO HAVING SOME OF THE BEST-PERFORMING NAMES IN THE MARKET. WHAT KIND OF YEAR HAS IT BEEN FOR YOU ESPECIALLY IN A BULL MARKET THAT YOU TYPICALLY THINK FOR A SHORT SELLER WOULD MAKE IT QUITE DIFFICULT? AND HOW LOW ARE YOU POSITIONING FOR 2018?

CHANOS: SO WE HAVE THREE POOLS, WE HAVE SHORT ONLY, WE HAVE MARKET NEUTRAL, AND WE HAVE OUR BASICALLY 190-90, WHICH IS 100% NET LONG, BUT HAS SHORT COMPONENT IN IT. AND SO YOU CAN IMAGINE, SHORT ONLY IS DOWN, MARKET NEUTRAL UP SLIGHTLY, 190-90 BEATING THE MARKET. SO WE LET THE CLIENTS MAKE THE MARKET CALL. WE HAVE THE SAME SHORT PORTFOLIOS IN ALL. AND SO WE HAD LITTLE BIT OF OUTFLOW THIS YEAR. THE BEST WAY TO SAY IT IS MID SINGLE DIGITS OUTFLOW. WHICH IS OKAY, NOT GREAT.

EVANS: IT'S BEEN AN AVERAGE YEAR FOR YOU THEN, YOU'D SAY?

CHANOS: YEAH - WE'D LIKE TO - HISTORICALLY WE'VE DONE MID-TEENS OUTFLOW, ALTHOUGH THAT'S BEEN TOUGH FOR THE LAST SORT OF TEN YEARS, SO FOR US, IT'S OKAY, NOT GREAT.

EVANS: LET ME ASK YOU ABOUT ONE MORE THING BEFORE WELL TAKE A SHORT BREAK. BUT YOU JUST CALLED BITCOIN BEANIE BABIES. GIVEN THAT THEY ACTUALLY - THERE'S CRYPTOKITTIES BEING CREATED IN THE ETHEREUM MARKET IS PROBABLY AN APT COMPARISON. DOES THAT TO YOU INDICATE BROADER EXCESSES - DO YOU BLAME THE FEDERAL RESERVE FOR OR SEE IN THE STOCK MARKET?

CHANOS: WELL JEFF SONNENFELD ASKED ME THIS MORNING IN THE SESSION, WHY WE WERE SHORT BITCOIN. I SAID I'M HAVING A HARD ENOUGH TIME BEING SHORT THE STUFF I UNDERSTAND, SO WE'RE NOT SHORT BITCOIN. BUT, I MEAN, I THINK THE SPECULATION OF BITCOIN, WHATEVER YOU MIGHT THINK ABOUT THE VALUATION, I THINK IS INDICATIVE OF THE SPECULATION BEGINNING TO INCREASE IN THIS CYCLE, RIGHT. WE'VE ALWAYS SAID, WHERE'S RETAIL. THERE'S NO SPECULATION. WELL, THERE IS NOW CLEARLY. AND SO WHETHER YOU UNDERSTAND WHAT BLOCKCHAIN IS, AND YOU UNDERSTAND WHAT BITCOIN -- ERETHEUM IS, OR YOU UNDERSTAND WHAT ICOs ARE, WHICH ARE ALL SORT OF DIFFERENT CONCEPTS, YOU KNOW, I JUST HEARD IN THIS ROOM, A FEW HOURS AGO, REALLY, REALLY SMART PEOPLE INCLUDING COMPUTER SCIENTISTS, FINANCIAL SECURITY EXPERTS, CEOs OF BANKS, AND EVERYBODY HAD A DIFFERENT ANSWER AS TO WHETHER THIS WAS GOING TO BE A BIG THING, WHETHER IT WAS NOT, WHETHER IT WAS GOING TO BE IMPLEMENTED AND REGULATED. QUITE LITERALLY, LEADERS OF BUSINESS AND FINANCE HAD DIAMETRICALLY OPPOSED VIEWPOINTS AND NOT ANYBODY COULD HAVE HAD THE SAME EXPLANATION OF WHAT THEY WERE TALKING ABOUT SO IT'S SORT OF A HEAD SCRATCHER A LITTLE BIT.

EVANS: WE'LL LEAVE IT THERE. WHEN WE COME BACK, WE'LL TALK A LOT MORE ABOUT OTHER INVESTMENTS. WE'LL ASK YOU ABOUT TESLA AND A FEW OTHER THINGS IF YOU'LL BE SO KIND. WE'RE GOING TO TAKE A QUICK BREAK AND WE' LL HAVE MUCH MORE WITH MR. CHANOS WHEN WE COME RIGHT BACK

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EVANS: WELCOME BACK CAN TO "CLOSING BELL." TODAY WE'RE LIVE AT THE YALE CEO SUMMIT IN MANHATTAN, SITTING DOWN WITH KYNIKOS ASSOCIATES, FOUNDER AND PRESIDENT JIM CHANOS. THANK YOU FOR REJOINING US. A LOT OF INDIVIDUAL NATES WE WANT TO TALK ABOUT, COMPANIES YOU DISCUSSED IN THE PAST. I ACTUALLY WANTED TO START BY ASKING ABOUT SHALE. WHEN YOU TALK ABOUT THE PROSPECTS, YOU KNOW, BACK IN SEPTEMBER WHEN WE HAD OUR DELIVERING ALPHA CONFERNECE SAYING, LOOK, IT DOESN'T LOOK VERY GOOD. THEY'VE GOTTA BE PROFITABLE. THE STOCKS HAVE BEEN ON A TEAR SINCE THEN. SO-

CHANOS: SOME HAVE, SOME HAVEN'T. I MEAN, THE CHESAPEAKES OF THE WORLD HAVE STAYED ON THEIR LOWS. THE CONTINENTAL IS UP. IT SORT OF DEPENDS ON THEIR DEBT STRUCTURE AND PERCENTAGE OF GAS VERSUS OIL. AND THERE'S A NEW BELIEF, KELLY, THAT THEY FOUND RELIGION, RIGHT, THAT THEY'RE GOING TO CUT BACK NOW ON THE GROWTH AT ANY COST.

EVANS: YES.

CHANOS: AND LIVE WITHIN THEIR MEANS.

EVANS: PROFIT OVER PRODUCTION.

CHANOS: YEAH, AND WE'VE TOLD PEOPLE BE CAREFUL WHAT YOU WISH FOR. BECAUSE THAT'S NOT GOING TO BE VERY ATTRACTIVE, EITHER.

EVANS: WHY NOT?

CHANOS: AT LEAST WHEN THEY WERE GROWING CAP-X THEY COULD ALWAYS SAY, WELL, THE NEGATIVE CASH FLOW IS DUE TO GROWTH - WE'RE GONNA INCREASE OUR PRODUCTION. THE FACT OF THE MATTER IS FOR MOST OF THESE COMPANIES, NOT ALL, BUT MOST, IF THEY SPENT CAPITAL SPENDING ENOUGH TO KEEP THEIR PRODUCTION CONSTANT, SO MAINTENANCE CAP-X WE CALL IT, CASH FLOW, EBITDA, MINUS THAT FIGURE, IS USUALLY CLOSE TO ZERO. WHICH MEANS YOU DON'T COVER YOUR INTEREST. AND SO THAT'S A PROBLEMATIC PROBLEM AND THAT'S WHAT WE'VE BEEN SAYING FOR YEARS NOW. THIS IS AN UNECONOMIC BUSINESS. IT WAS UNECONOMIC AT $100 OIL AND $4 GAS, IT WAS UNECONOMIC AT $26 OIL AND $2 GAS. AND IT'S UNECONOMIC AT $55 OIL AND $2.70 GAS.

EVANS: SO HOW DOES IT END?

CHANOS: WHEN THEY CAN'T RAISE CAPITAL. BECAUSE THIS IS REALLY MORE FINANCING SCHEME THAN A BUSINESS.

EVANS: SO AT THE SAME TIME THERE'S SO MUCH TALK ABOUT ELECTRIFICATION.

CHANOS: YEP.

EVANS: AND MOVING SORT OF THE ENTIRE FUEL INFRASTRUCTURE IN THAT DIRECTION.

CHANOS: RIGHT.

EVANS: IS THAT ALL OVER DONE BECAUSE WE'RE FOCUSING -- LOOK, EVEN TOYOTA THIS MORNING SAID HALF THE FLEET IS GOING TO BE ELECTRIC OR HYBRID WITHIN -

CHANOS: RIGHT, WHICH IS TERRIBLE FOR PETROLEUM, THEORETICALLY SHOULD BE BETTER FOR NATURAL GAS BECAUSE YOU NEED ELECTRIC POWER, VERY FEW PLACES IN AMERICA BURN OIL FOR ELECTRIC POWER.IT'S NOT GAS OR COAL. BUT INCREASINGLY, IT'S ALSO SOLAR AND WIND. AND SO AS WE MOVE AWAY FROM PETROLEUM TOWARD ELECTRICITY, THAT'S GOOD FOR NAT GAS, WHICH IS IN ABUNDANCE, BY THE WAY, BUT THEN WE'RE ALSO ON THE MARGIN GOING TO START LOSING IT TO SOLAR AND WIND.

EVANS: SOUNDS LIKE A GOOD SETUP FOR SOLAR CITY.

CHANOS: AND SO -- WELL, NOT REALLY, BUT THAT'S A WHOLE SEPARATE CONVERSATION. SO I THINK THAT THE WHOLE MOVE TOWARD RENEWABLES IS JUST NOT GOOD FOR CARBON AT THE END OF THE DAY. AND I THINK THAT'S WHY ARAMCO IS GOING PUBLIC.

EVANS: YOU WOULDN'T BUY THAT IPO, I WOULD ASSUME.

CHANOS: I HAVEN'T SEEN ANY NUMBERS YET. BUT I THINK- WE'LL WAIT AND SEE WHEN THEY COME PUBLIC.

EVANS: SO LET'S TALK ABOUT TESLA FOR A MOMENT. THERE ARE REPORTS THAT THEY'RE ACTUALLY INCREASING PRODUCTION BACK UP TOWARD 5,000 A WEEK NOW, HAVING HAD IT SOUNDS LIKE SOME PRETTY BIG STRUGGLES AT FIRST IN THEIR FACTORIES THERE. ACTUALLY, CHAMATH PALIHAPITIYA, I DON'T KNOW IF YOU SAW THIS, ON OUR NETWORK EARLIER THIS WEEK, IT WAS SAID "I DON'T UNDERSTAND WHEN PEOPLE LIKE YOU SAY THE COMPANY IS A FRAUD, I DON'T UNDERSTAND WHAT HE'S TALKING ABOUT, THERE'S NOTHING FRAUDULENT ABOUT THIS GUY, MEANING MUSK, THERE'S NOTHING FRAUDULENT ABOUT THE TECHNOLOGY.

CHANOS: I THINK, LET'S JUST SAY WE THINK MR. MUSK AND TESLA HAS A BROAD, BROAD INTERPRETATION OF THE TRUTH. YOU KNOW, THERE HAVE BEEN ALL KINDS OF ANNOUNCEMENTS THAT THIS COMPANY HAS MADE, JUST IN FLIPPANT COMMENTS THAT ARE PUBLIC STATEMENTS, THAT TURNED OUT NOT TO BE TRUE. FOR EXAMPLE, MOST RECENTLY, HE UNVEILED THE SEMI, THE TESLA SEMI, AND THE ROADSTER. AND HE SAID THE SEMI WILL BE AVAILABLE IN 2019. THE ROADSTER IN 2020. WHERE'S HE PRODUCING THOSE? THOSE PRODUCTION LINES HAVE TO BE UP AND APPROVED NOW YEARS BEFORE WE GET FINAL PRODUCTION.

EVANS: BUT THERE ARE COMPANIES LIKE PEPSI WHO ARE HAPPY TO GIVE THEM THE MONEY NOW TO RESERVE THAT. WHAT DO YOU THINK THOSE ANNOUNCEMENTS ARE ALL ABOUT?

CHANOS: THOSE ARE ALL ABOUT BEING GREEN AND SHOWING THEIR CUSTOMERS. YOU KNOW, MERCEDES-BENZ HAS ELECTRIC SEMIS ON THE ROADS RIGHT NOW TESTING. YOU DON'T HEAR THEM CROWING ABOUT THIS EVERY DAY. YOU DON'T SEE THE CEO, YOU KNOW, COMING OUT, "THEY'RE ON THE ROADS TESTING" AND SO IT'S NOT AS IF ELECTRIC SEMICABS ARE NEW. THEY'VE BEEN OUT. AND SO ITS - IT'S REMARKABLE THAT THIS COMPANY KEEPS HYPING THINGS THAT ARE ALREADY OUT - I WAS IN DETROIT YESTERDAY AND SPENT THE DAY, THE EVENING, BEFORE SOME AUTO EXECS AND TALKING ABOUT THIS AND, YOU KNOW, THEY'RE SORT OF SHAKING THEIR HEADS BECAUSE ALREADY DETROIT HAS LEAPFROGGED TESLA IN AUTONOMY. JIM IS CERTAINLY AT OR PAST THEIR LEVEL. THE GERMANS ARE PAST THEIR LEVEL. WAYMO, WHICH IS AT LEVEL FOUR, GOOGLE'S OPERATION, IS AT LEVEL FOUR. TESLAS AT TWO. AUDIS AT THREE. SO YOU ALREADY HAVE A COMPANY THAT IS SUPPOSEDLY A TECHNOLOGICAL LEADER THAT IS BEHIND IN THE MOST EXCITING PART IN THE TECHNOLOGY. AUTONOMY. AND SO WE'RE PUZZLED, BUT DON'T ASK US. JUST ASK THE SCORES OF EXECUTIVES WHO HAVE LEFT IN THE LAST TWO YEARS.

EVANS: YEAH, THERE HAS BEEN A --

CHANOS: WE HAVE A SPREADSHEET. I HAVE TO KEEP EXPANDING THE SPREADSHEET BECAUSE IT KEEPS GROWING. SO -

EVANS: BUT BY THE WAY, THE SHARES -

CHANOS: WHAT DO THEY SEE?

EVANS: ARE UP 50% - PROBABLY STILL SOMETHING LIKE 50% THIS YEAR. HOW LONG CAN YOU AFFORD TO KEEP STAYING SHORT THE COMPANY?

CHANOS: THE STOCK UNDERPERFORMED THE MARKET FOR THE LAST FEW YEARS, KELLY. THE STOCK WAS AT 280 IN 2014. THE MARKET IS UP ABOUT 40%, 50% SINCE THEN. SO IT DEPENDS ON WHERE YOU WANT TO START YOUR ANALYSIS. AND, AGAIN, I KIND OF, TO ME, WHERE THE STOCK IS NOW IS NOT THE STORY. I.E., WHERE IT'S BEEN. IT'S THE OPPORTUNITY. IS IT A BUY HERE OR IS IT A SELL HERE? I DON'T REALLY CARE THAT IT CAME FROM 30 OR 200 OR 300.

EVANS: BUT IT'S STILL A SELL HERE AS FAR AS YOU'RE CONCERNED.

CHANOS: WE'RE STILL SHORT, YEAH.

EVANS: AND DO YOU HAVE A PRICE TARGET IN MIND?

CHANOS: WELL, WE THINK THE EQUITY IS WORTHLESS, SO HOW'S ZERO?

EVANS: ZERO. THAT'S A PRETTY AGGRESSIVE ONE.

CHANOS: YEAH, WE THINK THE EQUITY IS NOT WORTH ANYTHING.

EVANS: BUT AREN'T THEY LIKE SHALE WHERE THEY CAN KEEP GOING AS LONG AS PEOPLE GIVE THEM CAPITAL INCLUDING DEPOSITS FOR FUTURE VEHICLES?

CHANOS: RIGHT. AND THAT'S GOING TO BE THE PROBLEM, I THINK, THAT, IN FACT, A COMPANY THAT WHOLLY DEPENDENT ON THE CAPITAL MARKETS HAS TO ASSUME THE CAPITAL MARKETS WILL ALWAYS STAY OPEN TO THEM. AND THAT'S A VERY DICEY PROPOSITION IN MY LIFETIME. THE CAPITAL MARKETS CLOSE FROM TIME TO TIME.

EVANS: WELL, LET'S TALK ABOUT BURGERS FOR A MOMENT, IF WE CAN. WHAT SORT -- SO WE JUST HAD A BIG ANNOUNCEMENT THAT ARBY'S IS BUYING BUFFALO WILD WINGS.

CHANOS: SO WE'RE GOING FROM TESLA TO BURGERS.

EVANS: WE'RE GOING FROM TESLA TO BURGERS. JUST COMPLETE, COMPLETE FLIP SIDE OF THE COIN.

CHANOS: ALL RIGHT.

EVANS: BUT I AM JUST CURIOUS A YOU MAKE OF THE ECONOMICS IN THAT SPACE RIGHT NOW?

CHANOS: YEAH. SO, WE'RE SHORT ACTUALLY A NUMBER OF THE FAST FOOD OPERATORS. WE'RE NOT SHORT McDONALDS AND THAT'S ONE OF THE REASONS, BUT ONE OF THE THINGS THAT'S SORT OF INTRIGUING TO US OVER THE PAST TWO YEARS IS HOW WALL STREET HAS EMBRACED THE FRANCHISE MODEL. SO IF YOU LOOK AT THE BUFFALO WILD WINGS DEAL, THERE ARE A NUMBER OF ANNOUNCED DEALS. THE WHOLE IDEA, EVERYTHING THAT RESTAURANT BRANDS, QSR DOES, FOR EXAMPLE, THEY'RE TAKING RESTAURANTS BY IN LARGE THAT WERE OWNED AND THEY'RE SELLING THEM TO FRANCHISEES AND THE FRANCHISER.

EVANS: ASSET LIGHT MODEL.

CHANOS: THE ASSET LIGHT MODEL. AND SO EVERYBODY GIVES A HIGHER MULTIPLE TO THE ASSET LIGHT MODEL. THE PROBLEM IS AT THE END OF THE DAY THE BOX HAS TO WORK. AND ONE OF THE EASIEST WAYS TO LOOK AT THAT, IF YOU LOOK AT QSR, WHICH IS A DARLING STOCK, HIGH MULTIPLE, BURGER KING, POPEYES, TIM HORTONS- THEIR LARGEST NORTH AMERICAN FRANCHISEE IS PUBLIC, COMPANY CALLED CAROLS, SIMPLE TASTE. AND IT'S FASCINATING TO LOOK AT THE FINANCIALS OF QSR AND COMPARE THEM TO THEIR FRANCHISEE. THE FRANCHISEE IS STRUGGLING. THE NUMBERS ARE THERE FOR EVERYBODY TO SEE. SALES ARE GROWING A LITTLE BIT BUT PROFITABILITY IS IMPLODING BECAUSE THEY'RE BEING LOADED WITH MORE AND MORE COSTS. AND THIS IS WHAT SOME OTHER FRANCHISEES IN THAT PARTICULAR COMPANY ARE ALLEGING AT TIM HORTONS. LAWSUITS.

EVANS: AND WHERE ARE THOSE COMING FROM, LABOR COSTS, ARE THOSE --?

CHANOS: WELL, THEY'RE HIKING ROYALTY RATES, THEY'RE PUTTING RESTRICTIONS ON THE FRANCHISEES, YOU KNOW, ALL SORTS OF DIFFERENT WAYS TO DO IT. BECAUSE AT THE END OF THE DAY, A FRANCHISE CAN ONLY GROW IN A FEW WAYS. THEY CAN INCREASE THE NUMBER OF UNITS IN THE SYSTEM, THEY CAN - SAME-STORE SALES CAN INCREASE IN THE SYSTEM, OR THEY CAN RAISE THE ROYALTY RATE. THOSE ARE THE THREE LEVERS, I SUPPOSE THEY CAN SELL THEM MORE THINGS OUT OF THE COMMISSARY == MAYBE FOUR LEVERS. SP EACH OF THOSE WITH THE EXCEPTION OF SAME-STORE SALES PROBABLY ULTIMATELY HURTS THE INDIVIDUAL BOX, BECAUSE YOU PUT MORE UNITS OUT THERE, WELL, IT HURTS SAME-STORE SALES.

EVANS: YEAH.

CHANOS: YOU RAISE ROYALTY RATES, IT HURTS THE FRANCHISEE. SO, IT'S A LITTLE BIT OF THIS ZERO-SUM GAME AND YET WALL STREET GIVES HIGHER AND HIGHER MULTIPLES TO THE FRANCHISORS. NOBODY WANTS TO OWN THE RESTAURANTS ANYMORE. THAT'S KIND OF A PROBLEM AND A PARADOX, AND I SUSPECT WE'RE GOING TO SEE MORE AND MORE DISTRESS IN THE FRANCHISE SYSTEMS AS MORE AND MORE RESTAURANTS SORT OF STRUGGLE BUT YET THE PARENTS ARE DOING WELL.

EVANS: SO WOULD YOU BE SHORT, THEN, THOSE NAMES THAT YOU MENTIONED?

CHANOS: I'D BE SHORT PRETTY MUCH ANYBODY IN THE QUICK SERVICE INDUSTRY BESIDES McDONALDS. McDONALDS STILL CALLS THE TUNE. THEY'RE THE 6 BILLION POUND GORILLA. SO TO SPEAK THEY JUST WENT TO A NEW VALUE MENU A FEW WEEKS AGO, WHICH ALWAYS IMPACTS THE INDUSTRY. IT'S A DOG FIGHT. IT'S A DOG FIGHT DOMESTICALLY. WE AREN'T GROWING. I MEAN, WE'RE PHYSICALLY GROWING PROBABLY, BUT WE'RE NOT GROWING POPULATION THAT FAST. YET UNITS ARE STILL GROWING. EVERYBODY WANTS TO GROW UNITS.

EVANS: WHAT ABOUT FAST CASUAL THEN, WHICH HAS A LITTLE BIT DIFFERENT MODEL?

CHANOS: YEAH, BUT I THINK, YOU KNOW, WHEN YOU START TO SEE THE SHAKE SHACKS OF THE WORLD, THEY BEGIN TO BLUR, RIGHT. PEOPLE, SO ONCE THEY GO TO SHAKE SHACK, MAYBE I'M NOT GOING TO GO TO McDONALDS AS MUCH ANYMORE. SO YOU BEGIN TO BLUR SOME OF THE LINES. PARTICULARLY THE BURGER SPACE.

EVANS: SO YOU FEEL AS -- THAT THE FAST CASUAL IS AS NEGATIVELY POSITIONED AS FAST FOOD?

CHANOS: NOT QUITE AS QUICK SERVE, BUT PROBABLY NOT FAR BEHIND IT. AND, AGAIN, IF YOU JUST LOOK AT THE UNIT ECONOMICS, IT'S A MUCH DIFFERENT STORY THAN THE FRANCHISORS. AND THERE'S A REASON WALL STREET IS EMBRACING THE FRANCHISORS BUT AT A COST. AND I THINK THAT IF IT DOESN'T WORK AT THE BOX LEVEL, ULTIMATELY YOU'RE GOING TO HAVE PROBLEMS.

EVANS: ONE OTHER THING THAT GOES TO THE DEMOGRAPHIC TRENDS YOU'RE TALKING ABOUT AND PART OF PHENOMENON, WHAT HAPPENED IN RETAIL. I'M CURIOUS WHICH NAMES THERE, IF ANY, THAT YOU'RE SHORT, GIVEN A LOT OF THEM HAVE FALLEN A LOT THIS YEAR AND WE'RE SEEING A PICKUP INTO YEAR END.

CHANOS: YEAH. WE HAD SOME OF THE WELL-KNOWN SHORTS. WE COVERED THEM. WE HAVE VERY SMALL EXPOSURE IN RETAIL RIGHT NOW, AND THEY'VE ALL BOUNCED. SO WE'RE KIND OF TAKING ANOTHER LOOK. BUT RIGHT NOW, OUR EXPOSURE IS NOT DRAMATICALLY LARGE IN RETAIL. WE THINK ACTUALLY IT WILL PROBABLY BE A DECENT CHRISTMAS, BUT WE'LL PROBABLY DUST OFF SOME FILES IN 2018.

EVANS: WE'LL LEAVE IT ON THAT SORT OF HOPEFUL NOTE FOR EVERYBODY.

CHANOS: HAPPY HOLIDAYS, RIGHT.

EVANS: EXACTLY. JIM, THANK YOU FOR YOUR TIME.

CHANOS: GOOD TO SEE YOU. HAPPY HOLIDAYS.

EVANS: ALWAYS A PLEASURE. JIM CHANOS FROM KYNIKOS ASSOCIATES. BACK OVER TO YOU, BILL.

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