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Famed short-seller Jim Chanos explains how Silicon Valley unicorns have pushed prices lower - and why central banks are to blame

Business Insider | Jun 11, 2019, 12.00AM IST

jim chanos

Reuters

  • The billionaire short-seller Jim Chanos says deflation in the US economy is being distorted by Silicon Valley unicorns.
  • Chanos says that through low interest rates and easy access to capital, the Federal Reserve is helping businesses stay afloat that would've sunk otherwise.
  • The founder of Kynikos Associates delivered the comments to roughly 60 attendees at a recent event at the Indian Harbor Yacht Club in Greenwich, Connecticut.
  • Visit Business Insider's homepage for more stories

When the Federal Reserve rolled out quantitative easing to lift the US economy out of the depths of the financial crisis, many feared that inflation would rise uncontrollably.

The opposite has happened, and not everyone knows what to make of it.

Jim Chanos, one of Wall Street's most famed short-sellers, has a theory: So-called unicorns - or companies that have achieved valuations of $1 billion or more in the private market - are to blame for suppressing prices.

"Unicorns are amazingly deflationary vehicles," Chanos told the crowd at a small event recently attended by Business Insider. "They're deflating rents, they're deflating driver salaries, they're deflating all kinds of things."

He's referring to Silicon Valley companies like Robinhood, DoorDash, Airbnb, and WeWork. Through the widespread use of advanced technology, these types of firms undercut competition through aggressive pricing strategies, convenience, and revolutionary appeal.

Now, industries that once had high barriers to entry - and were thereby insulated from external pricing pressures - are susceptible to nimbler, more agile participants who differentiate themselves through superior tech. Stalwart firms that have a foothold in these industries are forced to reduce prices to compete, which exacerbates deflationary pressures in the economy.

"It enables bad businesses, who probably wouldn't get more capital in a higher rate environment, to continue to bump along," said Chanos, the founder and managing partner of Kynikos Associates.

Read more: A Wall Street firm calculated exactly how deep losses will be if the swelling debt bubble bursts - and its findings paint a grim picture for the market's future

So who's to blame for this situation? Chanos says to look no further than the Fed itself - and its long-standing low-interest-rate policy.

By giving firms access to cheap capital, the Fed created a situation where companies have loaded up on debt in order to keep the lights on. With corporate debt-to-GDP levels approaching all time highs, it's easy to see why there's cause for concern.

"It almost seems to me that the very low interest rate policies that Japan has had for almost forever - Europe's had even more than we've had - is actually deflationary, not inflationary, just because it enables all kinds of deflationary businesses to flourish," Chanos stated.

Chanos further explained that the influx of capital to the financial system, coupled with artificially low interest rates, is getting in the way of the market's ability to efficiently weed out non-performers. That's problematic, because that survival-of-the-fittest dynamic has historically been crucial for the well-being of the US economy.

Without it, the invisible hand that Adam Smith once talked so endearingly about is unable to do its job. A sharp turnaround may be in order if the Fed doesn't adhere to the market's predetermined course.

"Personal opinion - I think the central banks have gotten far too beholden of the financial markets, and not the real economy," Chanos said.

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