Why Burry Bet Against the US Market for SP:SPX by BlackMammoth

Many individuals consider Burry to be an extreme pessimist, contending that he consistently focuses on the negative aspects. However, in the lead-up to the 2008 market crash, people also criticized him for being overly pessimistic and opposed his ideas.

The purpose of this post is to delve into his perspectives and examine some recent information I’ve been investigating in order to determine whether the market situation is indeed in line with his claims

Who is Michael Burry?

Michael Burry is a renowned American investor and former hedge fund manager. He gained widespread recognition for accurately predicting the 2008 financial crisis and profiting from it through his hedge fund, Scion Capital. Burry is also known for his contrarian investment style and is a proponent of value investing. His story is prominently featured in Michael Lewis’s book, “The Big Short.”

Today, we will examine data that reveals the current state of the American market. Through this data, we will learn to understand the reasons behind why the market may be weaker than it appears, despite all the hype and the notion that the American market has “recovered.”

What’s Burry Concerns

Economic Concerns: Despite positive stock market performance and GDP projections, Burry, along with other notable investors like Warren Buffett, sees potential issues in the global economy.
Federal Reserve Actions: Burry and others believe this situation is unsustainable and may lead to economic stagnation next year, characterized by weak growth, rising inflation, and labor shortages.

1. Michael Burry said is

Velocity is nominal GDP/Money Supply (M2 here). QT + higher rates starting to use M2 down. Yet we are seeing a tick up in velocity, emerging from narrative obscurity, In 1978-79, rising velocity trumped failing money supply to drive inflation higher and higher redux would shock

Full Explanation:

“Velocity” is like the speed at which money moves in the economy.

Imagine money as a car. The car’s speed (velocity) is how fast it’s moving.

“Nominal GDP” is the total value of goods and services produced in the economy.

“M2” is a measure of the money supply, including things like cash, checking accounts, and savings accounts.

Now, let’s break it down:

If the economy’s car (money) is moving faster (velocity), it can boost economic growth (Nominal GDP).

“QT” means Quantitative Tightening, which is when the central bank reduces the amount of money in the economy. “Higher rates” means they raise interest rates.

When you reduce the amount of money (QT) and raise interest rates, the car (money) slows down (Velocity decreases).

When you reduce the amount of money (QT) and raise interest rates, the car (money) slows down (Velocity decreases).

Recently, we’ve seen the car (Velocity) speeding up, even though the central bank has been reducing money (QT) and increasing interest rates.

In the late 1970s (1978-79), a similar thing happened. The car’s speed (Velocity) became more important than the amount of money (Money Supply) in driving up prices (inflation).

“Redux” means a repeat of something. So, the statement suggests that if we see a repeat of the 1978-79 situation, it would be surprising and could lead to higher inflation.

In simple terms, it’s like saying that even though the central bank is trying to slow down the economy by reducing money and raising interest rates, we’re still seeing fast economic growth. This reminds us of a situation in the late 1970s when fast economic growth led to higher prices. If this happens again, it would be surprising and could cause inflation.

2.The second thing Burry believes is that there is a bubble in the housing market, similar to the one in 2008.

Instructions chat above

green (rising market)
yellow (small drop market)

Red (absolute bear market)

He believes that housing prices are over inflated and that many homeowners are still carrying significant levels of debt he is warned that a housing market downturn could trigger a wave of default that would Ripple through the banking system and The Wider economy finally bury has expressed concern about the vulnerability of the banking system which he believes is over leveraged and under-capitalized he has warned that a wave of bank failures could trigger a major crisis similar to the 2008 financial crisis overall buries prediction that another major financial crisis is on the horizon.

Explanation for chart above

As you can see from the chart , we are not yet showing strong signs of a collapse like in 2008. However, there is a chain of signs that it is beginning to slow down and approach a potential downturn.

When a higher time frame displays characteristics in yellow between red, there is a chance of an impending collapse.

For now, we must treat this information as neutral and avoid letting our biases guide us.

3.The Third thing is Burry concern about the current state of the stock market.

Instructions chat above

green (rising market)
yellow (small drop market)

Red (absolute bear market)

Bury has expressed concern about the current state of the stock market, the housing market, and the banking system, all of which he believes are overvalued and vulnerable to a major downturn. Burry has also expressed concern about the high levels of debt in the U.S. economy, which he believes are unsustainable and could trigger a major crisis. He has pointed to the rising levels of corporate and government debt, as well as the growing number of (companies that can only service their debt but not pay it down), as evidence of this. Burry has also expressed concern about the current state of the stock market, which he believes is again overvalued and driven by speculation rather than fundamentals.

Explanation for chart above

As you can see in the chart, the market has not yet fully recovered despite the recent increases in the S&P 500 and NASDAQ. It’s evident that the rally is weak compared to previous years. This analysis indicates a temporary market weakening, with no strong signs of a full recovery at the moment

Let’s now take a deeper dive into less visible yet crucial information. We’ll focus on areas that require understanding their unusual aspects and the reasons behind them. What do I mean?

To uncover something unusual, patience and extensive economic research are required. Through this process, we can discover intriguing insights that provide valuable context to the economic situation in the USA.

For example, let’s examine:

a. M2 – MONEY SUPPLY

In the graph, you’ll notice something that hasn’t occurred since 1963. With the help of a tool, we can observe periods of increase (green) and slight decrease (yellow), but no instances of absolute decrease (red).

What does this signify?

What’s the context behind it? After conducting research, I found an explanation. I’m referring to:

Financial Stress and Banking Issues: A sharp decline in M2 may indicate underlying financial stress or problems within the banking and financial sector. This is a significant reason as it highlights potential vulnerabilities in the financial system, which could have broader implications for the economy. It might prompt regulators and policymakers to address these issues to prevent a more severe crisis.

Do you still find this unremarkable? Remember, this is just one perspective on the situation.

b. Unemployment Rate

It is crucial to examine the Unemployment Rate, and I’ve specifically focused on the Unemployment Rate in California. This is because, in the end, the fundamental Unemployment Rate tends to converge to a similar outcome.

Currently, in the graph, we observe the color white, which indicates the start of an uptick in unemployment, representing slow growth.

White denotes a slow growth momentum or a potentially deceptive rally.

Therefore, it’s important to note that we have not yet reached the green phase, which signifies a definite increase in the Unemployment Rate. Historically, every time the Unemployment Rate has turned green, it has been followed by an economic downturn.

it is essential to remain vigilant. If the Unemployment Rate continues to rise steadily, it may lead to economic stress. On the other hand, if M2 money supply is shrinking or experiencing volatility while the Unemployment Rate is increasing, it points to economic stress and potential issues. A declining money supply reflects reduced liquidity, making it harder for businesses to access capital for growth and causing financial stress. Simultaneously, a rising Unemployment Rate indicates that more people are struggling to secure jobs, further straining the economy. This situation can result in reduced consumer spending, decreased investment, and heightened economic uncertainty, potentially contributing to a market downturn or recession.

c. Gold Investors

Currently, there’s something intriguing happening among certain investors worldwide. Over the past few months, some investors have been stockpiling gold.

Since March 2023, gold has displayed a (green) signal, indicating a bullish trend. This suggests that people have been accumulating gold from March until now, similar to the trend seen in 2003.

It’s possible that some investors perceive the market as risky and view gold as a safety net. However, it’s important to note that there can be instances of deception, as seen in 2016 and 2017 when gold turned green but didn’t perform significantly and even dropped by 10 percent on three occasions.

Such situations occur periodically and not consistently. For instance, investors also purchased gold from 2019 until the end of 2021 (despite the significant impact of COVID-19 starting in 2020), indicating that some investors can spot signs ahead of time.

There are more examples from the past. Hence, it’s fascinating to closely monitor recent developments in the gold market to see if it can break records or experiences setbacks like in 2016-2017.

There are many more examples, but I will stop here. The purpose of this post is to emphasize that thinking outside the box is often more fruitful. Instead of sticking to a linear approach, gather as much information as possible, seek connections between two factors, then three, and continue to cross-reference vast datasets.

By effectively cross-referencing, we enhance our ability to assess probabilities and reduce uncertainty. This reflects my personal viewpoint.

I observe that the market has reached a plateau in the SP500, NASDAQ, and most markets. There is a possibility that this is a temporary phase, or it may indicate an impending decline. My focus is on monitoring real-time data and responding accordingly, rather than attempting to predict the future.

Whenever I perceive the market as (red), I take action. Likewise, when I see it as (green), I take action. Ultimately, my goal is to remain adaptable and respond to prevailing market conditions.

In the future, I will continue to provide updates in the event of shifts in market conditions, inflation, new data, and additional information. This will contribute to assembling a comprehensive puzzle that offers clarity on the overall situation.