“The market is dancing on a knife’s edge,” according to legendary “Big Short” trader Michaell Burry, who boldly tweeted in June 2021 that we might be in the midst of the “Greatest Speculative Bubble of All Time in All Things,” as Michael Burry about Market warned to investors of an approaching economic disaster.
Both his opponents and his fans said that he was being too negative at the time by focusing too much emphasis on events impacting the economic situation. However, no one appeared to care. It seems that erring on the side of caution would have been the smart move, even without taking into account the hyperinflation that was predicted to occur as early as 2020, despite global markets reaching all-time highs during a severe and frequently out-of-control worldwide epidemic.
Michael Burry about Market
Michael Burry’s warning on Twitter
Michael Blurry issued a dire warning to his followers on Twitter. It read;
“As I said about 2008, it is like watching a plane crash. It hurts, it is not fun, and I’m not smiling.”
His stark comparison between today’s market to the 2008 market meltdown is supported by current market sentiment. According to CNN’s Dread and Greed Index, which is now hovering at 12 out of 100, high fear is present. It takes into consideration seven elements, including the put/call ratio and the volatility index (VIX) in relation to its 50-day moving average. And if Burry’s bearishness is on par with his 2008 outlook, what is he banking on?
Burry’s hedge fund, Scion Asset Management, is a high-volume firm with a lot of activity and significant turnover. It has an average holding time of 0.08 quarters, Whale Wisdom reports. Scion has an AUM of about $291 million, according to the most recent Form ADV. Except for Bristol-Myers Squibb, all of the fund’s holdings were acquired during the first quarter of this year (NYSE:BMY).
General Dynamics (GD), Geo Group (GEO), and Corecivic were among the names Scion sold out of during the third quarter (NYSE:CXW). The fund has 12 holdings in its 13F portfolio at the current time. In light of Burry’s remark, it’s not unexpected to learn that his biggest holding is an option to sell Apple stock (NASDAQ:AAPL). A total of 2,060 put options are held by the fund. If these put options expire worthless, the holder will be able to sell 206,000 shares of AAPL. The options make up 17.86% of Scion’s 13F portfolio in total.
Details about his warning
On Twitter, Michael Burry indicated that the S&P 500 index lost between 25 and 26 percent in the first half of this year, while the technology-centric Nasdaq lost between 34 and 35 percent. Almost two-thirds of the entire market value of the cryptocurrency industry was lost as a result of this devastating loss. As the owner of Scion Capital Management, Burry, cautioned that the deterioration was evidence for multiple compression. Burry, on the other hand, believes that the general market downturn is just “maybe” half-way over.
The next step, according to him, will be profits compression, which will truly get the attention of Wall Street. If you’re a retail investor, here’s his warning: Multiple compression is best understood by recognizing the two fundamental reasons why equities rise in value. For starters, investors believe that underlying profits will increase. There will be a rise in future earnings streams and market multiples.
Investors are no longer prepared to pay ever-increasing premiums for equities due to multiple compression. Even if nothing essentially has changed with the underlying firms, their share prices have fallen. Multiple compression is caused by what? As a result of Federal Reserve policies, an easy-money climate became even simpler in the new normal. Multiple growth was encouraged by this dynamic, since money held in bonds or other secure vehicles would lose actual value if it were to be withdrawn. Indeed, the rise of cryptos was fueled by the same thing: cheap money. It is clear, however, that when economic and monetary conditions change, risk-on stocks and assets are unwinded. However, Michael Burry warns that this is only the beginning.
Multiple compression, despite its foreboding connotation, is a reflection of the inevitable ups and downs of the free market. Certain assets command a premium from investors at particular points in the cycle, while others will fetch a discount. The market eventually reaches a balance, just to begin the cycle all over again. Burry, on the other hand, is worried about a compression cycle. Investors’ refusal to pay previously accepted premiums is causing current market volatility. However, the next slump might be caused by fundamental flaws.
As a result, earnings compression addresses the primary driver of stock market volatility. This might change in the future, since investors may no longer feel the company’s profits will increase. As the negative cycle continues, investors lose faith in corporate America’s ability to weather the looming economic disaster.