Michael Burry: How You Should Invest In 2022

Right, we bought basically short 8.4 billion of credit default swaps, um, related to mortgages or financial companies, and I was extremely confident in the outcome. Were your investors as confident? I know for sure that some of them thought I lost my mind. It's remarkable; there are investors who made tens of millions off this and, uh, were still pretty upset.

Michael Barry, the man that saw the housing bubble coming in the US in the early 2000s, the man that made over 800 million buying credit default swaps, uh, the man that earned a spot in Michael Lewis's book "The Big Short" and was played by Christian Bale in the movie adaptation. It's kind of funny, you know, at the end of that movie, Michael Barry says that he doesn't really invest anymore and he just focuses on one commodity, which is water. Hmm, that line in the movie didn't age very well because Barry is well and truly back in the world of the stock market, and, uh, he even reopened his fund with Scion Asset Management, being born from the ashes of Scion Capital.

Now, one thing you might not know if you don't follow the stock market super closely is that although we never see interviews with Michael Barry, and we also don't see him do any kind of like podcasts or Q&As or anything like that, throughout 2020 and 2021, many of us were still able to sneakily keep up with his thoughts and opinions on the stock market through his Twitter profile. That yes, has the name Cassandra. No joke, that is the real guy on his real Twitter account.

But even though I don't have great interview clips and lecture snippets to show you like normal, what I wanted to do in this video is summarize all of Barry's recent thoughts on investing, inflation, and the state of the markets to try and decipher what his advice, what his message would be going into 2022.

So what would firstly Michael Barry's advice be right now regarding the current state of the stock market? Well, like many super smart investors that I follow, Barry is certainly of the opinion that the US market is extremely hot right now. He sees big overvaluation and he isn't afraid to call it out either.

In November last year, he said he sees more speculation than the 1920s, more overvaluation than the 1990s, and more geopolitical and economic strife than the 1970s. So no ifs or buts there. Even looking at a pretty basic measure like the Schiller P/E, we can see this. The Schiller P/E is kind of like a big P/E ratio for the whole market, so the higher the number, the more investors are currently paying for the S&P 500's earnings.

Right now, investors are paying 36 times the average inflation-adjusted earnings of the S&P 500 to own it. Crazy, considering the average Schiller P/E is about 16-17, and that's even considering the fact that the S&P 500's earnings went up substantially last year. So no wonder he's so confident on that prediction. He said back in June, "People are always asking me what is going on in the markets. It is simple: greatest speculative bubble of all time in all things by two orders of magnitude."

And he's been of this opinion for quite a while now. Back in 2019, he did an email interview where he explained why ETFs were in bubble territory. His hypothesis made sense: low interest rates mean money gushes into the stock market, and with the rise in popularity of passive investing or index fund investing, money floods into the top 500 companies in America, not on each business's merit, but because people are just investing in the index because it's going up.

And I mean, that's how bubbles form, when the inflation of the stock prices of the underlying businesses are no longer based on fundamentals. But during that very same interview, he also said that he was still able to find value, but it was in international markets. For example, he said, "It's not that hard in Japan to find simple extreme undervaluation, low earnings multiple or low free cash flow multiple. In many cases, the company might have significant cash or stock holdings that make up a lot of the stock price."

So it's kind of weird; he's not really a doom and gloom kind of guy. In fact, he admits that there is still value to be had, but it's elsewhere. But definitely for those investing in the US, Barry thinks things are getting very hairy for everyone, just across the board, passive investors and active investors alike. So if you want deals, it's probably best to look elsewhere right now.

So I think that would be his best advice for investing in 2022. To be honest, Barry's tweets alongside, you know, Monish Pabrai's lectures, Charlie Munger's Q&A sessions, Ray Dalio's interviews, they've all had a consistent theme of finding better investing opportunities abroad, outside the US. So maybe it's not such a crazy idea to be looking internationally, as long as you can understand the businesses you're analyzing.

I think that's Barry's take on the state of the markets. But, of course, there's another big issue playing out in 2022: inflation, inflation, inflation, inflation, inflation, inflation! And boy, oh boy, does Barry have some things to say there as well.

Now, if you've been following my content over the past year, then you already know this, but maybe for those that haven't seen, Michael Barry is a big believer we're going to get crunched by inflation in the next 12 months or so. He actually called it back in February 2021. He said to prepare for inflation because of the reopening and because of all the stimulus that was happening.

He said, "The US government is inviting inflation with trillions of dollars of money printing, plus reopening boosting demand as employee and supply chain costs skyrocket." And for context, this was the annual inflation rate in the US back in February 2021 when he made this call: 1.7%. And this is what followed—a progressive rise in the annual inflation rate all the way up to now 7%. I mean, what can I say? He definitely nailed that one, didn’t he?

And I think it's kind of funny because he knows it too. He tweeted in November, "Inflation, it's not just reopening anymore, folks. Not that anyone could have seen this coming." So, a bit of an "I told you so" moment there from Barry. But all through last year, he was talking about inflation and honestly, he was betting on it too. Last year, he actually bet against the 20-year US Treasury bonds.

Now the reasoning here is that when inflation rises, the Federal Reserve should step in and raise interest rates to pull it back down. And then when interest rates rise, bond prices fall. So Barry decided to bet that the iShares 20-year Treasury Bond ETF, whatever it was, would fall, and his thesis was correct. But because the Fed decided not to act early, the trade probably didn't make him any money.

Now, he's since abandoned those bets against the bonds, but that bet and his recent tweets definitely still tell you that he is certainly expecting inflation to continue. And importantly, he's expecting interest rates to rise. Well, what do we take from this? Well, I don't think we need to take any action on any of this stuff. We don't need to copy his trades or buy puts against the iShares Bond ETF.

But like I said in my recent video about Warren Buffett's position going into 2022, we just need to be aware that in the next year or so, we may see some pretty steep interest rate hikes if inflation continues to bite. So I think we just need to be mentally ready for the possibility of interest rates going up. You know, make sure you're not going to get into any strife personally by, say, interest payments on any loans you have getting suddenly more expensive, or by the possibility of bond prices falling, or by the stock market potentially coming under a lot of pressure.

So I think that's what we can take away from Barry's current thesis on inflation. And they're really the three big things that are going to affect investors in 2022: overvalued markets, inflation, and interest rates. I kind of find it funny that despite someone like Warren Buffett and Michael Barry being really quite different investors, you know, when we take the time to analyze their thoughts and what they've been saying coming into 2022, we kind of get to the same conclusion on a lot of these points.

And I think the reason for that is that these two investors have one key thing in common, and it's that they're very rational in their approach. Over time, they have mastered the investing temperament needed to do very well in the market. So, they're the main points that I wanted to bring up.

But before I finish up the video, I just wanted to draw your attention to Barry's thoughts on another few investing issues that are definitely less important but no doubt will continue to grab headlines again in 2022.

So firstly, in terms of cryptocurrency, uh, Barry is definitely bearish on crypto. Last year, he pretty much continuously held the opinion that Bitcoin is just a big speculative bubble, and also warned that the crypto markets might be propped up on a lot of borrowed money—a situation obviously that wouldn't end very well when interest payments start increasing on that borrowed money.

You know, personally, I don't actually know how you can determine the amount of leverage in a particular cryptocurrency or a particular asset, but Barry is definitely of the belief that crypto is a big bubble waiting to pop, and it's being fueled by leverage.

Another big topic Barry has been discussing has been the meme stocks as well, the GameStops, AMCs. If you don't know, Barry actually owned GameStop in 2020, but unfortunately for him, he sold his entire position by the 31st of December 2020, just weeks before the big short squeeze at the end of January 2021.

But for a little while now, he's actually been warning, you know, the people that are still holding the bag that this situation will likely end in disaster. It was actually in July last year he did an email interview where he said, "I don't know when meme stocks such as this will crash, such as GameStop, but we probably don't have to wait too long, as I believe the retail crowd is fully invested in this theme, and Wall Street has jumped on the coattails.

We're running out of new money available to jump on the bandwagon." And I know a lot of people are saying, you know, you don't need new people to jump on the bandwagon; we just need the shorts to cover, and that will spike the share price. But the truth is, Barry was definitely right here—the bandwagon just isn't there anymore.

And we're already seeing even over the past few weeks people are losing interest and abandoning ship, which is just by itself driving the share price down. You know, GME, GameStop, is now down over 50% from its November high. AMC is down 71% from its short squeeze high.

So I have to agree with Michael Barry on this one. I think his gloomy prediction for meme stocks will probably age pretty well in 2022. So it's definitely a speculative area that personally I'm avoiding. But overall, guys, that's Barry's thoughts on the big issues in the market for 2022.

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