Michael Burry of "The Big Short" Warns of Impending Market Crash
Burry says this will be the mother of all crashes. He's right, but when?
Famed investor Michael Burry warned his twitter followers this week that "the “mother of all crashes is coming.” Mr. Burry stated on his twitter that the rampant hype and speculation occurring in the housing, stock, and cryptocurrency markets is drawing in retail investors before the crash. Mr. Burry warned that the losses for “Main Street” will “approach the size of countries.”
Although this warning was scoffed at by media pundits as alarmist and not likely, we have to remember that this is the investor who became famous for shorting the housing market in 2007 -2008, netting almost a 500% return in one year for the clients of his fund, Scion Asset Management. Mr. Burry is now joining an ever growing chorus of investors who are warning of a severe market crash, myself included. The problem with predicting a severe market crash is always the timing. Markets are like snow on the side of a mountain, one can predict that an avalanche is likely to occur sometime in the future, but no-one can predict which individual snowflake will land on the mountain and become the catalyst for the avalanche.
This difficulty was highlighted in the movie “The Big Short”, when Michael Burry and other investors discovered the housing bubble was likely to collapse. Mr. Burry began shorting housing bonds in early 2006, but the housing market did not fully collapse until late 2008. Mr. Burry suffered losses each month in his fund leading up to the crash. His fund suffered significant losses because he had to pay the monthly premium on his short positions, waiting for the crash to finally occur. Michael Burry was even forced to sell some of his short positions in early 2007 because investors were becoming agitated with the funds losses. This is a perfect example of why making money on the short side is so difficult, not only does the market direction have to be correct, the timing also has to be correct.
Michael Burry, myself and others will ultimately be proven correct as the speculative bubble collapses on the weight of itself, but no-one can say when it will happen. It could start this week or it could take two more years, but a severe market crash WILL happen. Almost every metric of stock valuation and speculation is at record levels. The metrics that should be most concerning to investors is the amount of leverage in the system, the speculative mania in overvalued stocks like AMC and GameStop, market cap to GDP ratio, and the number of amateur retail investors in the market.
Although most experienced investors believe a severe market crash is likely, it is still nearly impossible to make money shorting. The way to make money in a stock market crash is to avoid it and buy assets at a huge discount afterwards. Those who had cash to purchase assets such as stocks and real estate in 2009 at huge discounts made a killing. Market timing is always difficult and you may have to be patient, but there will be a market crash that provides an amazing buying opportunity for the savvy investor.
Savvy investors purchased bonds in the 1980’s, tech stocks in 2001, housing in 2008, and oil when it went negative in May 2020. When a commodity that is used everyday is being priced in negative numbers, it is a clear a signal to deploy cash into oil companies, as I did, and advised others to do on this newsletter. The key here is having the cash on hand to be able to buy assets when they go on sale. If you have every dollar invested at all times, this is not possible. I will be decreasing my stock allocation and increasing my cash position while I wait patiently for my opportunity to invest after this epic bubble finally bursts. The worst thing an investor can do here is chase stocks at record high valuations by giving in to the mania.
Happy Trading!
** This is not financial advice. For financial advice, please consult a licensed financial advisor.**