Jim Chanos says the market is entering risky phase and retail investors may be left holding the bag

Short seller Jim Chanos warned retail investors could keep their pockets late in the game as more red flags surfaced in a speculative stock market.

“The problem with getting more people into retail is that it always seems to happen towards the end of every cycle. Retail wasn’t there in ’09. They were certainly there in ’99,” said Chanos on Tuesday in the ” Squawk Box “from CNBC. “So the problem with the last couple of cycles, as I see it, is that we get promoters and insiders and people who have done very well while the retail is buying.”

The historic recovery rally from the pandemic has attracted a record number of new private investors to participate in the stock market. Many of them gravitated towards the most volatile and risky areas of the market for oversized short-term returns, including stocks of companies with failing companies like AMC and GameStop.

Meanwhile, a flurry of companies rushed into the public markets this year to raise capital to take advantage of sky-high prices and wild animal spirits. In addition to a booming traditional IPO market, SPACs – special purpose vehicles created as corporate hulls to bring an unidentified company public – enjoyed unprecedented growth as investors piled in hopes of scoring a home run.

“In addition to the Fed, Wall Street also has a printing plant. If the prices are high enough, you will see many, many stock issues not just from companies that may need good, but from all kinds of questionable business plans and overt scams, “said Chanos.” So here we are somehow. We get money raised for all sorts of things that may not be productive at the end of the day, but could set up the pockets of the promoters who do it. “

The wild ride in cryptocurrencies and other digital coins this year also speaks to the trading frenzy in this bull market and the excessive risk investors are taking, Chanos said.

“If we start speculating on the stock market with very different cryptos, questionable coins, the six SPACs some guy is putting out, the 48 different EV charging companies, I think things will get tricky,” said Chanos. “We’re well advanced on this part of the cycle. I just think the final batch of retailers will likely learn their hard lesson.”

Chanos is a famous Wall Street short seller with a long history of fraud identification. In 2000, he made his name by betting against energy trading company Enron after discovering fraudulent accounting practices.

His most recent short bet against Chinese coffee chain Luckin turned out to be spot on, as it turned out that the company’s chief operating officer was fabricating sales.

As a longtime Tesla Bear, however, Chanos had a painful 2020 as the electric car company grew more than 700% in a pandemic-ravaged year. The investor previously said it closed its Tesla short position earlier this year.

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