The Deal: Chanos Bemoans Easy Credit

NEW YORK (TheStreet) ¿¿ Jim Chanos, the hedge fund manager famed for shorting Enron, has warned of a speculative market where strong analysis risks being compromised and described the backdrop as "one of the most difficult" he can remember as a short-seller.

Chanos also sounded a warning bell over China, an economic model he described as "flawed," where debt is now more than 200% of GDP, yet government authorities react to any weakening in economic growth by unleashing further investment stimulus.

"China is highly dependent on investment and been driven by excess bank credit and the shadow banking system," the founder and managing partner of Kynikos Associates told the The Wall Street Journal's Heard on the Street Live conference at New York City's The Pierre hotel on Monday. "They need to find a way to downshift without crashing the economy; it's been a very difficult place for Western investors to make money."

Despite China's strong GDP growth, the Shanghai Composite is still viewed as a casino, with many investors preferring the Hang Seng or listed Western companies that sell into Asia as a proxy. The Shanghai Composite has gained just 4.83% over the past year and 0.10% over the past five years against the S&P 500's 15% rise and 85% gain over the same periods respectively.

Separately, Chanos said a prolonged period of easy money ¿ central bank stimulus ¿ in the West, had encouraged speculative activity such as the rise of companies on the back of one product or a charismatic leader. He referred to this as a "celebrity stock market," noting: "It is increasingly about who is buying the stock, not why. You did not see that [behavior] in March 2009 [after the crash] but you see it after people have made money and take more chances."

As an example, Chanos suggested Tesla Motors (TSLA) was a stock priced beyond its product innovation to become a "cult stock" with a rising level of risk. More broadly, he said many investors were simply chasing momentum in stocks, as it had worked for them so far amid the current market backdrop.

Halcyon Asset Management chairman and CEO John Bader agreed with Chanos that it was a difficult environment to invest in.

"I see a lot of risks right now," he said. "Maybe the money [via Federal Reserve System stimulus] is easy but the investing isn't. High yield is priced to perfection and [the question is] how do you make money and stay defensive in this environment?" On the flipside, Bader suggested there were investment opportunities around companies that stood to benefit from the rise of shale gas.

Traders say the U.S. debt ceiling remains the decisive short-term issue for markets, with any default to have widespread economic ramifications.

--Written by Jane Searle in New York