Michael Burry's BIG Bet On Inflation (The Big Short 2.0?)

Well, earlier in the week, we did a deep dive into Michael Burry's put option position against Tesla. But that wasn't even the biggest takeaway from Cyan Asset Management's 13F filing this quarter. The most alarming thing you find when you read between the lines is that Barry is betting that we'll see big inflation, and thus, he is betting heavily against the market. This isn't hugely shocking if you followed his Twitter before he deleted everything; he warned inflation—or even hyperinflation—may be just around the corner. He compared America to the German inflation in the 1920s and even warned of a stock market crash, saying, "People say I didn't warn last time; I did, but no one listened. And still, no one listens, but I will have proof I warned."

So, in February, Barry was talking the talk on Twitter, and now, a few months later, with this most recent 13F filing, we can now see that he is walking the walk. So, let's dive into Barry's multiple bets against the market right after this.

So yes, Michael Burry is betting big time on inflation, and he's doing it mostly through options—call options and put options. The reason for doing this is that with options, if you hit the nail on the head, you can make much larger returns while putting less money at stake. The problem, though, is that if you get it wrong and your options expire worthless, you don't salvage any of the money you used to buy the options; that money is gone. You lose a hundred percent.

So, with that said, what has Michael Burry bought? Well, he's bought a few things. He's bought put options on the iShares 20-plus year Treasury Bond ETF, equivalent to 1.3 million shares, or 171.5 million dollars. So he's betting that the long-term bond ETF will go down. He's also bought call options on the Ultra-Short 20-plus year Treasury ETF, equivalent to 2.5 million shares, or 55.1 million dollars. So that one gets two times the inverse of the bond ETF, so he's betting that that one will go up.

He's also bought call options on the Ultra Pro Short 20-plus year Treasury ETF, which is the same as the one before but three times the inverse of the bond ETF instead of two times. Furthermore, he's also bought call options on another three times levered inverse bond ETF. Lastly, he's gone with a regular long position in that same TBT 20-year Treasury Ultra-Short ETF from before, the one that's two times levered to the inverse of the US 20-year Treasury bond index.

Now, that's a lot of jargon, but what he's done here is he's found investments related to the 20-year-plus Treasury bonds index. If the investment is structured to go up as the bonds do, he's bet against it. If the investment is structured to rise if bonds fall, then he's betting on that investment. Overall, it's the same thesis: Barry is betting on bonds falling.

Now, when does it suck to be in bonds? Well, it sucks when interest rates start rising on you. Why would interest rates rise? Because the central bank has had to control inflation. So this is Michael Burry betting that we're about to see big inflation, so large that it will force the hand of the Federal Reserve. Interest rates will be raised, the bond prices will fall, and Burry will make money.

Michael Barry is not alone in this sentiment. Economists around the world are sweating right now on inflation running rampant with all the money printing that's happened for stimulus, alongside the scarcity in many raw materials globally. This is actually becoming such an issue that Warren Buffett, the world's best investor and CEO of one of America's largest companies, wanted to alert Berkshire Hathaway shareholders recently that he is seeing big inflation through Berkshire's various businesses from raw material purchases by Berkshire subsidiaries.

"Are you seeing signs of inflation beginning to increase?" Let me answer that thing Greg can get more. "We're seeing very substantial inflation. It's very interesting. I mean, we're raising prices; people are raising prices to us, and it's being accepted. I mean, it's not, you know, take home building. I mean, you know the cost of—we've got nine home builders in addition to our manufactured housing operation, which is the largest in the country. So we really do a lot of housing. The costs are just up, up. There's more inflation going on—quite a bit more inflation going on—than people would have anticipated just six months ago."

Where there about, so Buffett sees it too, as do many clever investors globally. It's not just Barry, but going back to Barry's bet. So firstly, he's amplifying the return on the cash he deploys by using predominantly options. But the really crazy thing about this bet is that he also uses those leveraged inverse ETFs to amplify the amplified bet. Take his call option position on TMV—that is an inverse ETF that goes up three times the amount that the 20-plus year bond index falls.

These inverse ETFs really are special investing instruments, and they actually bear very little in common with regular exchange-traded funds. They are constructed using various derivatives to provide a daily return almost exactly opposite of something. For example, an inverse ETF to the S&P 500 uses derivatives to give the opposite return of the S&P 500 on that day. But at the end of each day, they get messed with; they get rebalanced to ensure that tomorrow they again get the exact opposite of the index.

In Barry's case, they're rebalanced to ensure they get very close to three times the opposite of the 20-year Treasury bond ETF. However, this daily rebalancing means that they are only ever short-term investment vehicles. You can't be holding these things for years; you'll basically always underperform.

Have a look at this. This is the ProShares Short QQQ; it bets against the Nasdaq 100. This is the five-year chart for it, but this is the five-year chart for the Nasdaq 100. Now, they don't look like perfectly reflecting charts, do they? In fact, over five years, PSQ has gone down about 74 percent, but the Nasdaq 100 isn't plus 74; it's plus 197. The difference is because of the daily rebalancing, and it's this reason why these products are considered short-term only.

And that leads me to my last point, and that is that while it's very exciting that we see Michael Burry make a bet against the market, and it gives us something to analyze, and it gives us something to chat about, it's actually quite likely that he's already ditched these positions, at least the ones in the inverse ETFs. Because remember, the 13F tells us exactly what was in his portfolio on March 31st. It's now late May; normally, inverse ETFs are held for a few days or a week or two—usually not months.

So it might just be the case that Barry bet against bonds at some specific point in Q1, happened to hold that position at March 31, but has since closed those positions. However, even if that was the case, chances are he's probably still done pretty well because TLT, the regular bond ETF Barry was betting against, went down all through Q1, losing 14 percent. Because of that, all of the inverse ETFs Barry was betting on have done very well. TBT went up 32 percent in Q1 and hasn't really dropped from there; TTT went up 51 percent and has since dropped two percent, and TMV also went up 50 percent in Q1 and has since dropped seven percent.

So, Barry has almost certainly made good coin from this bet, and although he probably isn't even in these positions anymore, it still does give us really helpful information—and that is that in this climate, Barry is willing to pull the trigger and bet against bond prices.

So, what should we take away from this? Well, we should take away this: a hint—a hint to keep an eye on inflation and watch what happens with interest rates. If interest rates start to rise, expect stocks to fall, particularly companies that right now are extremely overvalued.

So overall, guys, very, very, very useful information. I'd love to hear what you think. What do you think is going to happen with inflation and with interest rates over the next couple of years? The Federal Reserve has said no, no, no; we're going to keep interest rates low. However, remember, inflation can force their hands.

So, I'd love to hear what you guys think down in the comment section below. Drop me a comment and leave a like if you found this video interesting or useful. I really appreciate it—a lot of time and effort does go into producing these videos. So if you did enjoy it, or if you got something out of it, I would really appreciate a like rating on the video. But that will do me for today, guys. If you're interested in how I go about my investing, you can head over to Profitful—links down in the description. That is the business that I started up a year and a half ago. Pretty much just two courses up there from me: one about passive investing, one about active investing. It's just full in-depth, step-by-step how to get through both of those strategies. But check it out if you want to, but no stress if you don't want to.

But that will do me for today's video, guys. Thank you very much for watching, and I'll see you guys next time.