Michael Burry is betting 90 percent of his portfolio against the market.
You don't make such a move unless you are confident that the market will collapse.
He is betting $1.6 billion that the market will [crash.
An](http://crash.an/) insane amount of money, because if he is wrong, he will end up loosing
his entire fortune.
Michael Burry isn't someone who makes random predictions.
He has a good track record.
He firmly believed that the housing market would crash back in 2008, and he put his money
where his mouth was, even though people made fun of him back then.
Betting his entire portfolio against the largest market in the country was foolish, but he
ended up on the right side of history, making hundreds of millions of dollars.
In 2020, when the Fed lowered the rates, he made two predictions that ended up being entirely
accurate.
One, he firmly said that this would create massive inflation that could get out of control,
and that the market will crash in 2022, which we all saw happen.
The crash was so bad that some huge companies filed for bankruptcy.
We’re not talking about random companies nobody heard about but rather some of the
popular players in the market.
So let’s find out why Michale burry yet again betting against the market and why is
he so confident that he put $1.6 billions on the line.
Michael Burry bought $866 million in put options against a fund that tracks the S&P 500 and
$739 million in put options against a fund that tracks the Nasdaq 100.
To understand Michael Burry's prediction, we have to understand what put options are.
Options might seem complicated at first glance, but they are very simple tools that professional
investors often use to make a profit by predicting the market.
A put option is a contract that gives the buyer the right to sell a certain asset at
a predetermined price within a specified time frame.
Let's say I firmly believe that the price of Apple stocks will fall in the next 3 months
by 40 percent.
I can buy the right to sell, let's say, 10 Apple stocks at $200 each.
2 months from now, if Apple stocks fall to $120, I can buy 10 Apple stocks for $120 and
sell them for $200 because this contract gives me the right to do so.
On the other hand, if the price doesn't collapse and rather rises instead, I am not obligated
to buy and sell the stocks at that price.
It's a right but not an obligation.
It's a risk, but if things go south, I don't have to conduct that deal; the only money
I will lose is the cost of buying that contract.
It's a popular strategy among professional investors, especially on Wall Street.
But let's get back to Michael Burry's bet.
He put almost $1.6 billion against the S&P 500 and the Nasdaq.
Since the S&P 500 represents the entire US economy, he is betting against the entire
stock market.
The fact that he separately bet half of that money against Nasdaq makes it even more interesting.
Because Nasdaq is mostly focused on tech stocks, every major tech stock you see from Amazon
to Apple to Nvidia is traded on Nasdaq.
And since we are living in the age of technology, tech stocks make up the majority of the stock
market.
Here is the list of the top 10 S&P 500 stocks.
What is common among all of these companies is that they are all tech stocks, except for
the last 2, which are UnitedHealth Group and Berkshire Hathaway, an investment firm belonging
to Warren Buffett.
If you look at Berkshire Hathaway's portfolio, you will notice that 40% of its entire value
is from investments in Apple, which is a tech company.
Take that out, and Berkshire Hathaway is no longer in the top 10 largest companies.
And that tells us a lot about Michael Burry's bet.
Assuming that he is right, the entire tech market is one giant bubble that is likely
to collapse.
Tech stocks make up almost 30% of the entire S&P 500, and the collapse of tech stocks will
at least crash the market by 10%, which will lead to a domino effect and crash the market
overall by far more than just 10%.
To put that into perspective, in March 2020, when the pandemic hit the world, the stock
market witnessed one of the biggest crashes in its history when it collapsed by 30%.
So a 15% crash is at least half of the largest crash in history.
But unlike 2020, a crash at this time is going to be very different.
You see, if you go back to the pre-pandemic level, you will realize that the Fed kept
raising the rates to a substantial level.
So when the market crashed in 2020, the Fed had the option of lowering the rates to zero.
However, with the inflation we have today, that option is no longer on the table.
So according to Michael Burry, we might witness a crash that could be as big as the 2020 but
without the option of relying on the Fed to save the market.
While that sounds scary, the country has been through such crises in the past.
It's not something we haven't seen before.
Every time we go through such a crisis, it’s either the rich get richer, or wealth changes
hands from the rich to the new rich.
That's why often during a crisis, we have new billionaires.
The 2020 pandemic is the best illustration of that.
It's difficult to understand how big of a crash it would be but in May last year he
has tweeted that he expects the S&P 500 to fall to 1900 points.
To put that into perspective, the S&P 500 is now at 4300.
That would be an over 50 percent decline, which is way worse than the 2020 crash.
The basis of the stock market is - as companies grow, hire more people, build more products,
serve more customers, they make more money and become more valuable, and the job of the
investor is to find those companies that operate as efficiently as possible since the basic
principle is - all assets sooner or later will bounce back to their true value.
But 2020 has fundamentally changed that concept.
People stopped working, factories closed down, and companies just stopped growing.
But somehow, the stock market kept growing.
In fact, it grew by over 18%.
A good argument is that although people were required to stay at home, they still received
stimulus checks and many still kept working regardless of the pandemic.
But that wouldn't in any way have created a strong enough demand.
Besides, most US companies depend on Chinese factories where the government implemented
a zero COVID policy.
Supply chains were disrupted, demand barely grew, and companies were in chaos.
All that mattered was survival!
That's what should have happened in a real capitalistic world.
But that also meant a disaster that could have ended badly, so the government opted
for a more relaxed option.
Yes, I am talking about printing money.
The stimulus checks were nothing but the government's attempt to print and distribute money.
Although it was one of the main factors that led asset prices to dramatically rise, it
wasn't the main factor.
What saved the thousands of companies that should have gone bankrupt during the pandemic
were the zero rates.
That explains why the market grew by 18 percent in 2020 and 28 percent in 2021.
Unlike the stimulus checks, the government didn't distribute cash to companies for free.
The government just relaxed regulations to make it easier for corporations to access
capital.
But zero rates meant that companies could borrow money at a very low rate, as long as
the rate is below the inflation rate, it's basically free money.
It didn't really matter whether it was a huge company with dozens of billions of dollars
in cash or a small company that barely survived, no one could just sit aside and not take advantage
of this opportunity.
In normal times, companies work hard trying to build a product that would compete in the
market, try their best to satisfy their clients, and as more people purchased their products,
more money would have come to the company, which made the stock more valuable.
But now - all of that suddenly became irrelevant.
In order to show strong financial statements, companies just had to borrow as much money
as possible.
It didn't really matter whether they needed that money or not.
More cash coming in at a super low rate makes the company more profitable, which attracts
more investors
That's a perfect recipe to keep the economic wheel turning during the pandemic, but that
creates 2 fundamental problems.
First, what happens when the cheap money is no longer available?
Well, we already know.
2022 wasn't an easy year for the stock market.
The S&P 500 fell by over 18 percent, and many tech stocks collapsed.
But the panic is over, and the market is growing again.
The bad days are over.
However, there is still another problem.
Increasing the rates does make the cost of capital more expensive, but it doesn't solve
the fundamental problem it had created in the market in the first place.
All of that extra cash in the economy has turned the market into one giant bubble.
Raising rates does stop the bubble from growing, but the bubble is still there, and with each
passing day, the probability of it bursting rises.
That's why if you look at Michael Burry's bet.
He is primarily betting against tech stocks.
Half of his bet is against the Nasdaq 100, which are tech companies whose stocks were
inflated by the cheap cash that the Fed injected into the economy, and the S&P 500 that comprises
40% of tech stocks.
He is definitely right about the bubble, but timing the market is not an easy job, so betting
$1.6 billion on this is nothing short of a bold move.