The Elusive Soft Landing Is Coming Into View; Carson Block, Nate Anderson Become SEC Tipsters for Cash Payouts; Jim Chanos is closing his hedge funds; Our tour of Johannesburg

1) In my last daily e-mail before Thanksgiving, I'll take a step back and share my big-picture views about the investing world...

Overall, it's quite favorable.

As I predicted earlier this year, inflation has come way down. I don't think it's coming back, which would mean we can stop worrying about it – and so can the U.S. Federal Reserve, meaning it would stop raising rates.

Amazingly, this has happened without a big economic slowdown or jump in unemployment, as both the economy and the jobs market have gone from white-hot to strong – which is still pretty good!

I can't think of any investors or economists who thought this was possible... but here we are, as this Wall Street Journal article highlights: The Elusive Soft Landing Is Coming Into View. Excerpt:

The U.S. economy is approaching what most economists had thought either unlikely or impossible: inflation returning to its prepandemic norm without a recession or even much economic weakness, a so-called soft landing.

"What we are expecting now is a soft landing," said Nancy Vanden Houten, lead U.S. economist at Oxford Economics. "We expect the economy to weaken quite a bit, but it does look like we'll avoid an outright contraction" in gross domestic product.

Six months ago, the consensus among economists surveyed by the Wall Street Journal was that the economy would enter a recession over the next 12 months. In October's survey, the average forecast of economists was for no recession. After Tuesday, the probability appears to have dropped further. That, at least, seems to be the verdict of investors who sent stocks up sharply and Treasury bond yields down on news that inflation was surprisingly docile in October.

If they are right, it would be highly unusual. In the past 80 years, the Federal Reserve has never managed to bring inflation down substantially without sparking a recession.

This is great news for investors on a variety of dimensions...

First of all, the "TINA" (there is no alternative [to stocks]) days are gone, as investors can now earn north of 5% risk-free in the world's safest instrument, U.S. Treasurys. I can't think of a better place for your short-term/no-risk money.

And for your longer-term/higher risk money, where you want to earn much more than 5%, I continue to believe stocks are attractive because I think one of two things is likely to happen:

1. The economy will remain strong, in which case the Fed will keep rates where they are – a scenario that would be good for stocks.
2. The economy will continue to slow, in which case the Fed will start easing (cutting rates) – a scenario that would also be good for stocks (barring a significant recession, which I think is unlikely).

So, in summary, while I'm not predicting a melt-up, I remain constructive on the markets.

2) As I've discussed in many prior e-mails (a multipart series ended on December 22), short selling – especially activist short selling – is so fraught with peril that I recommend that the vast majority of investors never do it (and, in fact, almost none do – I would guess fewer than 1%).

But short sellers are critically important and valuable for well-functioning markets – exposing scams, frauds, fads, promotions, and general overvaluation – so I applaud this extra incentive to reward them, as Bloomberg reports: Carson Block, Nate Anderson Become SEC Tipsters for Cash Payouts. Excerpt:

Alongside their public reports, short sellers are quietly sharing their research about sketchy accounting and other misdeeds with the U.S. Securities and Exchange Commission's ("SEC") whistleblower office in hopes of making some extra money...

The whistleblower program is open to all comers – including short sellers, corporate insiders and random internet investors – and the would-be informants can't get enough of it. They've flooded the agency with over 18,000 formal tips in the 2023 fiscal year. For perspective, that 12-month tally is double the total of all SEC enforcement actions over the past 10 years.

Tips based on short-seller research potentially give the SEC a head start on probes, but they also create some tricky optics.

The government, after all, is investigating some practitioners for abuses, and people who try to collapse a stock by spreading negative information carry a stigma among typically bullish investors. Some SEC officials are queasy about using material from short sellers even as they rely on it in major cases, said people familiar with the matter, who weren't authorized to speak publicly.

"The center of gravity in this program is shifting to short sellers," said Alexander Platt, a University of Kansas law professor who has written about the trend. "I think the taxpayers should know when $14 million of our money goes to Carson Block."

Whistleblower awards are paid out of the proceeds collected in an enforcement action. Block got $14 million for one of his leads, part of the more than $1.3 billion disbursed in over 300 cases by the SEC since establishing the program last decade.

"Many of the really good external fraud detectives are short sellers," Block said in an interview. "If you want the whistleblower program to be open to external whistleblowers, you have to be open to short sellers and can't discriminate against them"...

The SEC whistleblower program started in 2011 in part to avoid a repeat of one of the regulator's most notorious failures. In the years before the Great Financial Crisis, a then-portfolio manager named Harry Markopolos, among others, warned SEC officials that Bernie Madoff's hedge fund was suspect.

The agency failed to stop it, and the Ponzi scheme's eventual collapse cost investors billions. The 2010 Dodd-Frank Act set up a formal process to organize the agency's tips, so that another similar warning couldn't be overlooked. The program was an immediate success, and the SEC asked Congress for more funding for the whistleblower office...

Shorts like Block, who runs Muddy Waters Capital, began sending tips soon after the program opened. In 2022, he got $14 million for a tip he sent in on Focus Media, a Chinese media firm. In 2015, that company and its chief executive paid $55.6 million to settle an SEC probe into insider deals, without admitting or denying the SEC's findings. The investigation was "opened based in large part" on Block's work, the agency said.

The SEC has its own incentive – a good short report can cut months or years off of an investigation at a time when the agency has been characterized as understaffed and overworked.

3) Speaking of short sellers, the godfather of us all, my old friend Jim Chanos, is closing his funds. The WSJ has the story: Jim Chanos, Short Seller Who Took on Enron and Tesla, to Close Hedge Funds. Excerpt:

Wall Street's best-known bear is going into hibernation.

After nearly four decades, Jim Chanos is shutting down hedge funds he manages that wager against companies he believes are overpriced or fraudulent. His career as a short seller spanned a contrarian bet against Enron that paid off when the energy trader collapsed as well as yearslong, money-losing campaigns against Tesla and AOL.

More recently, Chanos has struggled to turn his pessimistic positions into profits while markets generally moved higher. His firm, Chanos & Co., manages less than $200 million today, down from $6 billion in 2008, and its funds are down 4% so far this year, while the S&P 500 is up 19%, including dividends. Shares of Tesla are up about 90% this year, and the electric-vehicle maker is one of the world's most valuable companies.

"The marketplace for what I do has changed," Chanos, 65, told the Wall Street Journal. He expects to return most of his investors' cash by Dec. 31.

Chanos will continue to operate his firm but will focus on doing advisory and research work for select clients and running certain separately managed accounts. He says he's lately been shorting high-price data-storage companies and real-estate investment trusts, which he says will be hurt as interest rates stay elevated.

He also plans to keep posting on Twitter, the social-media platform now known as X, where his account, @WallStCynic, broadcasts criticisms of what he sees as analysts' and investors' overexuberance to over 133,000 followers.

I hope Chanos continues to speak out, warning investors about the many dangers that lurk in the markets.

4) On Sunday, we flew to Johannesburg and did a tour of the city on Monday – seeing the notorious old prison under apartheid on Constitution Hill and then went into the massive township of Soweto, which had a few nice sections but is mostly desperately poor.

We saw the famous Regina Mundi Catholic Church (the largest in the southern hemisphere, according to our guide), which played a critical role in the anti-apartheid movement. We also saw the house where Nelson and Winnie Mandela lived for many years, which is now a museum. Here are some pictures:

Yesterday, we flew to Botswana for the last five days of our trip before flying home on Sunday, landing at JFK Airport early Monday morning.

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.

P.P.S. Our offices will be closed tomorrow and Friday in observance of Thanksgiving. Look for my next daily e-mail on Monday, November 27, after the Weekly Recap... and have a wonderful Thanksgiving holiday!