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Michael Burry, the man who foresaw the 2008 housing market crash, has seemingly decided to short the entire stock market once again! Despite his fame, Burry isn't that good at predictions if you follow some of his forecasts in recent years. But he is a very observant investor and makes logical arguments about discrepancies he sees between fundamentals and prices. What signs and signals has he seen this time around that prompted him to take such a daring stance again? And are there reasons to believe him this time and take similar actions to short the market and save our portfolios?
Let's talk about that!
I'm Hoda Mehr, founder, and CEO of Stock Card, and on this blog and its accompanying YouTube channel and Podcast show, I share detailed fundamental analyses and interesting investment stories.
This post is part of a series I started a few weeks ago to fundamentally research companies to manage my real-money portfolio. I've already researched Canopy Growth (CGC), Fastly (FSLY), Snap (SNAP) , Shopify (SHOP), Airbnb (ABNB), Unity (U), JD.com (JD), NVIDIA (NVDA) and several others. I also started sharing interesting investing-related stories. The first one was on what happens when the U.S. hit its 2% inflation target. More interesting stories are in the works.
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Berry shorting the U.S. market is one of those fascinating stock market stories. Whenever he makes such moves, the entire market takes note. But betting against the market isn't anything new for the big short investor. He's a pessimistic investor by nature and has made several bearish predictions since his successful bet against mortgage-backed securities during the great financial crisis.
Michael Burry's Marker Forecast Track Record
In September 2019, Michael told Bloomberg that index fund inflows were distorting stock and bond prices, and when the inflow reversed, the result would be catastrophic. His argument is correct. Over $11 trillion is invested in index funds, up from only $2 trillion a decade ago. The problem with indexes is that the decision is automatic. No one picks stocks, and money, in most cases, automatically flows into large indexes giving the stocks listed in indexes enormous price boosts. However, the prediction hasn't come to reality since 2019. For example, S&P 500 index ETF (SPY) had gone to more than $400 per share, up from $219 per share when Berry predicted the catastrophic consequence of flowing money into indexes.
In December 2020, Burry took it to Twitter (now X.com) to say that Tesla's stock price is ridiculously overpriced. Split-adjusted and despite volatility between 2020 and today, Tesla's stock price is still hovering slightly higher than its December 2020 price.
Burry predicted a stock market crash in February 2021, after which the market went on for a few months of extraordinary rally thanks to the government stimulus and quantitative easing. While he was eventually correct, and we saw the rally ended in 2022, many considered his market crash predictions unreliable.
Michael Burry's attention turned toward Bitcoin in March 2021, predicting a crash that was quite the opposite of Bitcon's rally to above $60,000 per coin price tag immediately after his prediction. Bitcoin price eventually crashed in 2022, but not before many lost faith in Burry's predictions.
A pattern is emerging if we pay closer attention to all these predictions. Burry predicts catastrophic crashes based on logical evidence. But the markets do not necessarily follow his logic immediately. There is a time gap between when he shares his predictions and when they come true.
Even in the case of Burry's bet against mortgage-backed securities, he initially saw the risks in 2005, at least 2 years earlier than the actual price drop.
The secret to Burry's success is that he is patient even if the market takes the opposite direction in the short to mid-terms.
Back to his latest put options, Michael Burry had purchased put contracts with an unknown strike price and exercise date, seemingly betting that the SPY and QQQ (top 100 Nasdaq stocks) would go down in prices at some point in the future. Before his option contracts expire, he has the right to sell his put options at the strike price, presumably higher than the SPY and QQQ price. We don't know anything about these options' dates and exercise prices. He can be quite patient and hold his put contracts for a long time to profit from the eventual crash he predicts is coming. We can simply interpret this move as a way for Burry to protect his hedge fund against an eventual crash.
But Burry isn't the only one predicting a crash.
Other investors seem to agree with Burry and have shared similar bearish sentiments in different ways.
Bill Ackman's Market Forecast
Fellow hedge fund manager Bill Ackman is one of those. A few weeks ago, Ackman took it to Twitter (X.com) to explain his firm's belief that the U.S. treasuries were overbought. The evidence that supports Bill's argument when he made the statement was the $14B money inflow into iShares 20+ Year Treasury Bond ETF (ticker TLT) in 2023 alone. How exactly does Bill's bearish sentiment echo Michael Burry's bearish positions?
Bill is predicting that unlike many investors expecting the Fed to start cutting down interest rates, which in turn will boost the stock market prices, the opposite may be true. Bill believes the government's massive deficit would force it to issue more debt, and for the market to buy such debt, the government has to offer higher yields, which in return may mean lower equity prices. In a way, Bill Ackman and Burry agree on the possibility of lower equity prices and are hedging their risks differently but against similar forces.
Morgan Stanley's Market Forecast
A recent market commentary by Morgan Stanley’s Global Investment Committee agrees with these two assessments. In summary, the committee believes that equity investors are too optimistic about interest rate cuts in the coming months, and the bond market doesn't support such a direction. The committee believes that the effect of the COVID-era stimulus has been lingering. Only now and in the coming months will we see the impact on consumer spending and corporate profits.
Cathie Wood's Market Forecast
That's the point that other investors agree with. In her monthly In the Know Updates, Ark Invest's Chief Investment Officer, Cathie Wood, warned investors of a possible hard landing for the U.S. economy. Cathie explained that companies would face pressure on their profits and profit margins for a few reasons, including hoarding the labor force and broad agreements between employees and employers in manufacturing and airline industries to increase salaries in response to inflation and union negotiations. Cathie Wood also believes the prices will start declining, adding more pressure on the company's profit margins. Those will be the reasons to see lower economic growth in the coming months, leading to negative sentiment in the stock market.
The question we should try to answer now is whether there are economic indicators that support Michael Burry, Bill Ackman, Morgan Stanley, and Cathie Wood's stances.
Recession Economic Indicators
Historically, there are a few recession indicators:
So of the four economic indicators, the yield curve is the only one predicting a recession, and we have seen at least three investors agreeing with the yield curve. It seems most economic indicators do not agree with Michael Burry, Bill Ackman, Morgan Stanley, and Cathie Wood.
What do we do with this contradiction between major economic indicators and prominent investors' stance to protect their portfolios?
How To Crash Proof Our Portfolios
First of all, this is a good sign. The market typically goes to the extreme when everyone agrees on the same conclusion. A healthy market results from differences in opinions and the pull and push between these bearish and bullish sentiments.
Secondly, I know these investors all seem smart. But no one can predict the market. As much as it's hard to accept it, even smart investors such as Michael Burry can be wrong or at least be early in their predictions. Bill Ackman is famous for the wrong call he made about Herbal Life, and Cathie Wood, like any other investor, has lost lots of money in the market after the COVID rally came to an end, even though she has a team of smart analysts and they follow a diligent research process. We can't just follow them blindly, they can make mistakes in their conclusions.
Where does that leave us? It leaves us with the old good wisdom we are all aware of:
Those are simple actions but not easy. If the market continues to rally, you'll regret not going all in. If the market crashes, you will regret some of the investments you've made now. Whatever you do, there will be reasons to regret and feel distressed. So, accept that there is no perfect investment decision. There is always risk in investing! There is no perfect investor. Invest slowly, steadily, in things you have done your research or have confidence in over a long period of time.
I see you next time!