Michael Burri, I don’t know if you guys have watched the big short or not, but he was the one who made a ton of money by betting that the housing market would collapse in 2008. Fast forward 13 or so years and he is sending another warning away for US investors. He thinks that index investing stock hype groups and free money is causing the stock market to soar in terms of prices. And he warns that this may not be sustainable. Here’s what he said. Speculative stocks, hashtag bubbles ultimately say the gamblers take on too much debt. The market is dancing on a knife’s edge.
People say, I didn’t warn last time I did, but no one listened. So I warned this time and still no one listens. But I will have proof that I warned. So these are big words from someone who has a proven history of predicting correctly a market crash. Obviously, that’s what he did back in 08. He even went on further to make his Twitter display Cassandre. This is a reference to the priestess who in Greek mythology was cursed to share true prophecies and no one ever believed her. Burri in some way is saying he is the financial version of this priestess. He’s freely giving out warnings on his Twitter accounts, but not too many people are paying attention. They’re just enjoying the short term returns that they have had. But let’s see who wins in the long term. So I want to dig a bit further into some of the things that he’s saying and what we need to watch out for as investors. First of all, we’ve got to talk about all of these hype groups that we’ve seen on Reddit, on YouTube and across the Internet. These hype groups, they promote certain stocks, generally high growth, risky ones, and a bunch of short term money gets plowed into them. For example, the recent saga that we’ve seen on Wall Street, bets with GameStop, with AMC and all of the other ones, we saw the stocks get out of control in terms of price and people weren’t afraid to throw their stimulus checks into them. Where they researching the fundamentals of the stocks? Most, of course, no. Did they understand the risks with the stocks? Most, of course, didn’t. They were just trying to make short term quick money. Michael Burry, who actually invested in GameStop when it was cheap, was not happy with all of the so-called uneducated money going into GameStop.
He said, if I put GME on your radar and you did well, I’m genuinely happy for you. However, what is going on now? There should be legal and regulatory repercussions. This is unnatural and sane and dangerous. And one of the reasons for this is just because there’s so much free money floating around. We’ve seen the new one point nine dollars billion in stimulus checks come through. We’ve seen the Fed keeping interest rates to pretty much all time lows. This free money, a lot of it is entering the stock market and a lot of it is answering the so-called mean stocks. Michael Burry clearly doesn’t think this is natural or sustainable, and I tend to agree with him on this points. The next thing that Burri talks about that is inflating stock prices is all of this passive investing. He said passive investing IQ. Draine and stocks hyp groups add to the danger. He said a while ago that index fund inflows are now distorting prices for stocks and bonds in much the same way that CDO purchases did for subprime mortgages more than a decade ago. The flows will reverse at some points, and it will be ugly when they do. He mentioned that central banks and Basel three have more or less removed price discovery from credit markets, meaning risk does not have an accurate pricing mechanism in interest rates anymore. And now passive investing has removed price discovery from the equity markets.
The simple thesis in the models that get people into sectors that is indices or ETFs and mutual funds mimicking those strategies. These do not require the security level analysis that is required for true price discovery of stocks. This is very much like the bubble and synthetic asset backed CDOs before the great financial crisis in that processing. And that market was not done by fundamental security level analysis, but done by massive capital flows based on Noboa approved models of risk. That proved to be untrue, he said. The dirty secret of passive index funds where the open and closed end, or ETF, is the distribution of daily dollar value traded among the securities within the indices that they mimic. In the Russell 2000 index, for instance, the vast majority of stocks are lower volume, lower value traded stocks. He said, today, I counted 1049 stocks that traded less than five million in value during the day, that is over half and almost half of those 456 stocks traded less than one million during the day. Yet through annexation and passive investing, hundreds of billions are linked to stocks like these.
The S&P 500 is also no different. The index contains the world’s largest stocks, but still 266 stocks, over half traded under one hundred and fifty million dollars today. That sounds like a lot, but trillions of dollars in assets globally indexed to the stocks. The theater keeps getting more crowded, but the exit door is the same as it always was. All of this gets worse as you get into even less liquid equity and bond markets globally. Potentially making it worse will be the impossibility of unwinding the derivatives and naked buy sell strategies used to help so many of these funds. So don’t match flows and prices. And every day this fundamental concept is the same one that resulted in the market meltdowns in 2008. However, I just don’t know what the timeline will be like. Most bubbles, the longer it goes on, the worse the crash will be and quotes. Because the thing about today’s market is, let’s be honest, most investors, they can’t determine the intrinsic value of a stock. You asked them and they wouldn’t even know where to start. But they do know how to put money in an index fund. They know how to follow the crowd. But how many people actually do the intrinsic value analysis of each stock? Not that many. And this adds to the danger of the market. I personally pooper I don’t mind index fund investing. Well, I do mind is index fund investing by those who have no idea what they’re actually investing in. This is a recipe for disaster. And if things start to go down, most of these investors will just panic and sell. So I’m going to ask you, the viewer, do you know how to determine the intrinsic value of a stock? Do you have a strategy for what you’ll do if the market crashes? People who can answer these questions will be the ones that do well over the long term. And Michael Burry, he’s been saying that the market is too high for a while now.
He’s been saying these things since twenty, nineteen and potentially even earlier than that. And you’ve got a whole bunch of people out there who think Burri has lost his touch. But we must remember that he’s never predicted the timing of this crash. He’s just warning that things are getting dangerous. As he says, the market’s dancing on a knife’s edge. He mentioned in a tweet those saying May and Munger and Singer are so out of touch and not considering that we have seen this all before and not just ones that have been around the game for quite some time. They’ve have seen and studied the market crashes of the past. So perhaps these are people we may want to listen to. The other thing that Buhriz warning strongly of is inflation. Inflation, of course, is just the increase in the price of everything, devaluing what your dollar can buy, Burri said the U.S. government is inviting inflation with its MMT Tenge policies and brisk debts GDP M-2 increases while retail sales, PMI, Stage V recovery, trillions more stimulus and re-opening to boost demand as employee and supply chain costs skyrocket, he said. To read the book The Dying of Money Lessons of the Great German and American Inflations. In this tweet, he compared the hyperinflation in Germany in the 1920s to what’s going on in the U.S. today, he tweeted Germany in brackets. The U.S. started by not paying adequately for its war and brackets for the US on covid and the GFC fallout out of the sacrifices of its people Texas but covid its deficits with the war loans, Treasuries and Brackett’s and issues of newspaper Resh remarks. And in the case of the U.S. today, doulas hashtag doomed to repeat history is not useless, he said in another tweets. This text explores the 1970s American inflation, which is more relevant today than one might think. So Burri seems to be massively against these new economic theories that the government has come up with to manipulate the economy. One of those is MMT, where it’s argued that the government can spend as much as they want because they can issue their own currency and. Pay it all back that way, as we all know, our parents were wrong. Money does grow on trees now and it’s been handed out freely by the governments. But problems occur when you think you can give away endless amounts of money problems like inflation, where your dollar becomes massively devalued.
One thing that we don’t want to end up like is Germany in the 1920s, where inflation crept up on them from behind without any warning. Burri sent out his warnings on inflation, on passive investing, on high debt levels, on hype investing. Is he right to be concerned about these things or is he just an old grudge? Who’s lost his touch, funnily enough? I think we should be paying attention.