Muddy Waters’ Carson Block on How AI Could Unwind the S&P 500 | #640
Carson Block, founder of Muddy Waters Research, discusses how AI-driven displacement of knowledge workers could trigger a significant unwinding of the S&P 500 through declining 401k flows and aggregate demand destruction, while also explaining his evolution from pure short-seller activism to a diversified investment approach including long positions in momentum strategies and junior mining.
Summary
Carson Block, one of the last remaining activist short-sellers, reflects on how the short-selling profession has become increasingly difficult post-GFC, with many competitors either retiring voluntarily or being forced out. He discusses his philosophical shift from viewing himself solely as a short-seller toward operating as a more balanced investor, recognizing that cynicism hasn't been rewarded in markets and that staying purely short can lead to mental health issues and financial ruin.
Block's central thesis concerns AI's potential to displace approximately 15% of U.S. knowledge workers within three years—particularly lawyers, accountants, and coders. Unlike previous technological disruptions where new jobs replaced lost ones, he argues AI models coding their successors create exponential capability growth that humans cannot match, fundamentally breaking the historical pattern. This displacement would eliminate high-earning workers who fund 401k flows, the structural bid supporting the S&P 500 and Nasdaq 100, especially the largest constituents.
He outlines a cascading economic scenario: job losses lead to neutral then negative 401k flows, forcing workers to liquidate taxable assets and eventually redeem retirement accounts to pay bills. The resulting equity unwinding combined with massive aggregate demand destruction would be deflationary and require social reordering. He frames his market positioning around this thesis using put spreads on equities, longing credit spreads via swaptions, and shorting bond ETFs (LQD, HYG) and municipal bonds (MUB) to capture second and third-order dislocations.
Block explains why activist short-selling remains viable while passive shorting has failed: activist shorts publish 4-6 times yearly on highly researched targets to educate long investors, whereas undisclosed shorts have been systematically unprofitable post-GFC. He details his diversification into systematic momentum strategies (up 70% gross since October 2024) and junior mining investments to remain viable while his activist short work continues.
Regarding recent shorts, Block discusses SoFi extensively, describing how the company uses fair value accounting on substantially all loans, marking day-one gains of $8-9 per $100 loan using aggressive models and credit assumptions. He alleges SoFi financed 80-90% of loan purchases through undisclosed secured lending programs and executed a suspect $312 million transaction to an SPV with JPMorgan that he characterizes as misleading, with the underlying subsidiary likely remaining consolidated. He argues this linchpin transaction supports over $1 billion in previously reported EBITDA, and that disallowing it would force a restatement.
Block reflects on memorable battles, including Group Casino in France (where the government investigated him but the company eventually collapsed under hidden debt) and NIDAC in Japan (where company investigations later validated his 2016 short thesis). He emphasizes these difficult, protracted battles stick with him more than successful shorts.
On China, Block calls the market uninvestable due to poor information quality, ministry-removed researchers, and policy capriciousness where officials arbitrarily shut down industries. He notes foreign investors often overestimate their connections (guanxi) and trust in information from chairman-controlled entities that typically fail to meet contractual payment obligations despite claiming tax optimization rationales. He argues VIE structures expose investors to material breach risk.
About this episode
My guest today is Carson Block, founder of Muddy Waters Research & Muddy Waters Capital and one of the last short sellers still standing. In today’s episode, Carson Block explains why he thinks AI could displace 15% of knowledge workers and unwind the market’s biggest stocks. He breaks down his short of SoFi’s aggressive loan accounting, why record-tight credit spreads worry him, and how he trades that risk with put spreads. To close, Carson explains why he still calls China uninvestable and recounts his hardest battles. (0:00) Starts (1:02) Carson Block on the evolution of short selling (3:03) The impact of AI on jobs, economy, and markets (9:43) Evolving Muddy Waters' business model beyond short-selling (13:32) Investing in momentum and junior gold miners (17:52) Navigating markets amid AI disruption and labor market impact (25:21) Thoughts on historically low corporate yield spreads (30:25) Carson's short call on SoFi (38:10) Carson's most memorable investment ----- Follow Meb on X, LinkedIn and YouTube For detailed show notes, click here To learn more about our funds and follow us, subscribe to our mailing list or visit us at cambriainvestments.com ----- Follow The Idea Farm: X | LinkedIn | Instagram | TikTok ----- Interested in sponsoring the show? Email us at [email protected] ----- Past guests include Ed Thorp, Richard Thaler, Jeremy Grantham, Joel Greenblatt, Campbell Harvey, Ivy Zelman, Kathryn Kaminski, Jason Calacanis, Whitney Baker, Aswath Damodaran, Howard Marks, Tom Barton, and many more. ----- Meb's invested in some awesome startups that have passed along discounts to our listeners. Check them out here! ----- Editing and post-production work for this episode was provided by The Podcast Consultant (https://thepodcastconsultant.com). Learn more about your ad choices. Visit megaphone.fm/adchoices
Key Insights
- Block argues that AI models coding their successors creates exponential capability growth that humans cannot keep pace with, fundamentally distinguishing current disruption from historical technological changes where humans invented each successive machine.
- Block contends that activist short-selling is not scalable beyond 4-6 high-quality publications annually because brand value depends on special, infrequent commentary rather than daily communication, which commoditizes credibility.
- Block claims SoFi's day-one loan gains of $8-9 per $100 loan depend on supporting loan sales that are largely financed by SoFi itself (80-90% financing) through undisclosed secured lending programs, creating circular validation of aggressive fair value marks.
- Block asserts that the dirty secret of institutional enforcement is that SEC and DOJ attorneys prioritize high-profile cases to build credentials for private practice, making his SoFi case viable despite political headwinds.
- Block argues that two generations of investors entering since the GFC view risk as simply a buying opportunity due to repeated Fed interventions, eliminating institutional demand for risk identification despite historically tight credit spreads at one percentile.
- Block contends that Chinese VIE structures expose investors to material breach risk because chairmen systematically fail to transfer contractual payments from operating companies, citing tax avoidance motivations while claiming this structure is unavoidable.
- Block claims declining wine consumption at both high-end collector level (cellars full of unpurchased inventory) and demographic bottom (decreased alcohol consumption among younger people) creates a demand crisis in Napa that preceded his SoFi involvement.
- Block states that his evolution from pure short-seller to diversified investor represents recognition that cynicism hasn't been systematically rewarded post-GFC and that remaining solvent and in business requires acknowledging long-side opportunities despite philosophical alignment with skepticism.
Topics
Transcript
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