Michael Burry's Warning for the Stock Market Crash
On May 19, 2005, Michael Bury bought his first credit default swaps in anticipation of the housing crisis: 60 million of credit default swaps from Deutsche Bank, 10 million each on six different bonds. His prediction: the U.S. mortgage-backed security, once a stable, respectable investment product, had slowly turned into a dangerous and deceptive time bomb, all caused by greed and corruption. In his eyes, this bet was no gamble. He did the digging, he read the documents, he knew what the outcome would be. His problem was that it would take the rest of the world another two years to even start looking.
It took until the 11th of October, 2007, for the S&P 500 to top out at 1,576 points. A year and a half later, on the 10th of March, 2009, the S&P closed at just 676 points, a 57% crash. Michael Bury ended up making a personal profit of a hundred million dollars and made his investors over 700 million from this single bet. But in the years leading up to this amazing success, he received constant criticism from the investing world and even his own investors; criticism that ultimately led him to close his fund after all had been said and done.
But why am I telling you about this now? This happened 15 years ago. Well, you guessed it: history is currently repeating itself. The first one to see that something was seriously amiss in the burgeoning subprime mortgage market was Dr. Michael Bury. "I can see the credit standards within these pools deteriorating." So you made a ton of money? "I was extremely confident in the outcome." Were your investors as confident? "It's remarkable; there are investors who made tens of millions off this and we're still pretty upset."
It was back in February of last year that Michael Bury first warned of high inflation as a consequence of the Fed's unprecedented money printing. He was tweeting to prepare for inflation, hashtagging "doom to repeat," and calling out the U.S. government and the Federal Reserve over the trillions of dollars worth of stimulus they'd done. At this point, he was the contrarian. At the time, all looked well; you know, the Fed was printing money. Yes, but inflation was staying low. At the time, the latest published data showed an annual inflation rate of just 1.7%. That's lower than the Fed's target. But in classic Bury fashion, he was just early.
Fast forward 12 months and we're now running at a red-hot inflation rate of 8.6%. "Habitually, I’ve been one to two years early on literally everything, and you too can attain broken clock status," Bury tweeted a month ago, of course referencing a tweet made by Elon Musk, where he labeled Bury as a broken clock. But what's very interesting is that in the past month or so, Michael Bury hasn't just been doing victory laps. Instead, he's been tweeting quite extensively, explaining why he believes this economic crisis and subsequent market downturn has only just begun.
Now, I certainly don't like to be a big doomsday predictor on the channel, so please don't take this video as me fear-mongering. However, I do want to at least cover Michael Bury's full rationale to begin to understand what he's thinking. Yes, the overarching message is he believes the worst is yet to come. So much so, he thinks the S&P 500 could lose another 50% from where it sits today.
On May the 3rd, Bury tweeted regarding paradigm shifts and speculative peaks. "The S&P 500 bottomed 13% lower than 2002's bottom in 2009, 17% lower than 1998's LTCM crisis low in 2002, and 10% lower than the 1970s low in 1975." 15% lower than the covered low is an S&P 500 value of 1862, roughly Shiller PE of 16, nominal PE of 9 in historic range. I'm not gonna lie; I'd read that one quite a few times to actually get that phrasing.
What he's noting is the trend we've seen over the past 25 years: the bottom of a current market crash is usually lower than the one that came before it by about 10% to 15%, adding that 15% below the S&P 500 low that we saw in 2020 takes us down to 1,862 points. That's crazy because it shows that Michael Bury is anticipating a peak-to-trough fall of 61.4%, which would bring us back down to the historical normal Shiller P/E of roughly 16. Essentially, from where we are today, Michael Bury anticipates a further 50+% drop-off in the stock market.
It's a bold prediction, and it's a prediction that was once again met with criticism. Over the past few weeks, we saw the market bounce 6.5%, but as we've seen even just across the past few days, short-term bounces certainly don't mean we're out of the woods. Michael Bury actually commented on this possible scenario; he recently tweeted, "Dead cat bouncers are the most epic. 12 out of the top 20 NASDAQ one-day rallies happened during the 78% drop from the 2000s top. Nine of the top 20 S&P 500 one-day rallies happened during the 86% drop from the 1929 top."
Again, that's a lot of numbers to wrap your head around, but what he's alluding to here is that even during the worst times, the statistics show that it's actually quite common to see strong short-term recoveries amongst the longer-term downward trend. 12 of the top 20 NASDAQ bounces happened along this slope; nine of the top 20 S&P 500 bounces happened along this slope.
On the 5th of May, he added, "After 2000, the NASDAQ had 16 bear market rallies over 10%, averaging 22.7% before bottoming down 78%. After 1929, the Dow had 10 bear market rallies over 10%, averaging 22.8% before bottoming down 89%." So Bury certainly seems confident that we're simply in the early stages of a much bigger problem.
To further his point, he also took the time to comment on the comparatively low trading volumes we've seen during the 2022 downturn thus far. He said, "Top to bottom, Microsoft traded 5.2 times shares outstanding by 2002; 3.3 times by 2009; and 0.5 times so far. Amazon traded 5.7 times by 2002; 6.6 times by 2009; and 0.9 times so far. JP Morgan traded three times by 2002; 5.9 times by 2009; and about 0.7 times so far," etc.
Enough takes time, so really when you look at the trading volumes, even though we've seen the market cool down quite a bit in 2022 and everyone seems bearish, from what you hear, the selling really hasn't even started. Have a look at this chart. As you can see, withdrawals from the market haven't even really started yet; money is still flowing into the markets. So in Bury's eyes, we're likely going to see a lot more selling volume coming over the next few years, which would lead to much larger declines in the stock market, and it's a scenario that he said he's not looking forward to facing.
On the 24th of May, he tweeted, "As I said about 2008, it's like watching a plane crash. It hurts; it's not fun, and I'm not smiling." And that's the interesting thing to remember with Michael Bury: he's seen this happen all before. The first time through: the dot-com bubble. The second time: in 2008. He's seen these repetitive patterns of human behavior time and time again. He's studied the greed and excess of the major booms and busts, and I think that's what gives him such confidence when he talks about these issues; when he tweets about them.
He recently posted this chart to his Twitter, which I thought was quite eye-opening. In white, we see the 10-year S&P 500 run-up to today; in yellow, we see the run-up to the dot-com bubble; and in green, the run-up before the Great Depression. It's pretty scary how similar they are, and Michael Bury comments on this saying, "Third time's a charm. Gotta love human nature. Nothing if not consistent." You know, for him, he's seen this pattern of human behavior many times before, and he understands where it leads.
It was only 12 months back that he was tweeting that he saw the greatest speculative bubble of all time, by two orders of magnitude. Perhaps now, in his eyes, it's been pushed to its breaking point. But of course, this is all just the stock market. We have to remember the core reasoning behind Bury's point of view is, of course, the economy. Now, we already know Bury's thoughts on inflation, and yes, we are seeing the Fed raise interest rates to make borrowing harder for businesses.
But we have to remember that interest rate rises also affect the fundamental building block of the economy: the consumer. You know, in harsh inflationary environments that bring about large interest rate rises, unfortunately, consumers have less money to spend because more of their savings and income go to servicing their debts. This very frequently starts a negative spiral because less discretionary spending means less sales for the companies that we're invested in. So ideally, you want the consumer to be bringing it in.
However, recently Bury's been hinting that consumers aren't doing too well right now. "U.S. personal savings fell to 2013 levels; the savings rate to 2008 levels, while revolving credit card debt grew at a record-setting pace back to pre-COVID peak despite all those trillions of cash dropped in their laps. Looming a consumer recession and more earnings trouble." So Bury is quite clearly worried about the depletion of savings, not just because it's pushing everyday people to use more credit cards in an environment of rising interest rates, but also because lowering of savings equals less spending, which hosts the bottom line of these businesses that we're invested in.
You know, one anecdotal piece of evidence that Bury referred to recently was Amazon's Q1 results. As CNBC wrote, "Revenue at Amazon increased 7% during the first quarter, compared with 44% expansion in the year-ago period. It marks the slowest rate for any quarter since the dot-com bust in 2001 and the second straight period of single-digit growth." Bury responded by saying, "And so Amazon says to GDP, 'there's your weakening consumer.'"
To follow on from that point, Bury also posted this tweet comparing U.S. personal savings with GDP. As you can see, the savings are covering less and less of America's GDP at a point where America's GDP is shrinking. So overall, in Bury's eyes, we have inflation, interest rate hikes, reduction in consumer savings, thus less discretionary spending, which ultimately leads to lower profitability of businesses, and what we've seen thus far: re-ratings on their stock.
In Bury's view, we are only in the first inning. It's a very interesting topic to explore. I'm certainly not going to put my hand up and say that I'm the guy that knows exactly which way we're headed next, but definitely please let me know, you know, what do you think of Michael Bury's thoughts? He's certainly extremely bearish, but I think he quite commonly is; you know, do you think he's on the money? Do you think he's missing the mark? I'd love to hear what you guys think.
Drop a comment down below, give the video a like if you found it interesting, subscribe if you'd like to see more—always appreciated. But guys, that will do me for today. Thanks very much for watching, and I'll see you guys in the next video.