It Started: The Worst Market Collapse In 50 Years | Michael Burry

What's up, Graham? It's guys here, and it's official: the stock market makes absolutely no sense. Despite weak earnings, a recession that's all but confirmed, and JP Morgan's recent warning that the market could fall another 20%, prices have begun to do the unthinkable by going back up. That means we're either setting the stage for a rally that's about to make people a lot of money, or this is just another euphoric push before everything goes to.

On top of that, we also have investors like Michael Burry making the argument that inflation is about to get a lot worse, stocks are about to erase all of their gains throughout the last few years, and we're not even close to the bottom. So without further ado, let's talk about exactly what's happening: why the stock market might begin to sell off again, and then finally Michael Burry's latest warning in the stock market. Because so far, he says that he's been correct the last seven times.

Although, before we start, you might have noticed that the layout on mobile has been completely redesigned. And I'm not gonna lie, it looks pretty bad and very similar to TikTok. So if you agree with me, do me a favor and hit the like button and subscribe if you haven't already. Plus, as a thank you for doing that, here's a picture of Christian Bale pretending to be Michael Burry.

All right, so to start, in terms of the stock market's recent growth, we have to talk about a term that most investors fear, and that would be a bear market rally. This is a term that refers to a stock market increase of at least five percent in the middle of an even larger downtrend. During bear markets, it's actually incredibly common. In fact, Investopedia notes that every bear market between 1901 and 2015 spawned at least one five percent rally.

Rallies of 10% or more interrupted two-thirds of the 21 bear markets over that span, or basically our markets are performing exactly as they had been throughout history. It's also noted that the deeper the decline, the higher the rebound. For example, in 1929, the Dow Jones increased by 48% before then falling 86% to a brand new bottom. The dot-com crash also had eight bear market rallies of at least 18% and four gains of 30% before then dropping even lower.

The same was also found throughout the 2008 Great Financial Crisis, which had nine bear market rallies between six and twenty-four percent before eventually bottoming out after two years. Even worse, had you collectively sold at the bottom and bought at the peak, you would have been down more than eighty percent. Which, uh, hey, it's pretty much on par with most crypto investors.

Now, to answer that first question, we should look no further than Michael Burry, who had some rather choice words to say about what's happening in the market. He started off by making a point that since the peak on December 31st, we've entered a pattern of falling eight to ten percent, rallying five percent, falling another eight to ten percent, and then rallying five percent. But this time, Michael Burry notes that dead cat bounces are the most epic.

Twelve of the top 20 NASDAQ one-day rallies happened during the 78% drop from the 2000s. Nine of the top 20 S&P 500 one-day rallies happened during the 86% drop for the 1929 top. He also goes on to say that the Dow had 10 bear market rallies of more than 10% before bottoming down 89% in 1929, suggesting that it's probably going to take some time before we hit the true bottom.

Morgan Stanley also tends to agree with this, saying historically speaking, no bear market has ever bottomed without a VIX reading of 45 or more. And sure enough, throughout recent history, that's been true. As you can see, the VIX hit a peak of over 70 in November of 2008 before bottoming out just three months later. The VIX also hit 57 and 65 at the exact same time we reached our March 2020 low.

So this is absolutely something to consider, even though metrics like this are always true until the one time they're not, and that's going to catch you off guard. However, in terms of determining a stock market bottom, it's also worth mentioning that Michael Burry has some other points that are at least worth considering. First, he mentions that as of right now, more than 13% of stocks have closed above their 200-day moving average, and generally, the absolute bottom occurs when that number is closer to five percent.

As you can see, this was the case throughout 2009, 2011, and 2020, with the only exception being the dot-com crash, which was primarily centered around high-growth tech stocks. Now, speaking of tech stocks, second, he mentions that there are currently 218 companies worth more than a billion dollars that lose a hundred million dollars a year.

And 29 companies worth more than a 10 billion dollar market cap still can't turn a profit. As he says, all the silliness must go, with a Michael Burry stock tracker pointing out that these companies include Snowflake, Uber, Shopify, Rivian, and Lucid, among more than two dozen others. If the trend continues, we would be following a pattern similar to 2008, where the market doesn't bottom for another two years.

Then, third, he points out that inflation appears in spikes, it resolves, fools people, and then it comes back with the chart showing that since the 1940s, inflation has never just occurred once and then completely disappeared, all because of the velocity of money. This tracks how often every dollar is actually spent and then how often it recirculates throughout our economy.

For example, if I spend ten dollars at a restaurant, who then pays their server ten dollars, who then spends ten dollars at the grocery store, who then spends ten dollars to their wholesaler to pay for more food, who then spends ten dollars to the farmer who makes the food, then pockets the money to make a YOLO investment in GameStop, that works out to be a money velocity of five, because the money exchanged hands five times.

Because of that, Michael Burry notes that despite the Federal Reserve taking money out of the economy by raising interest rates, the average dollar is now being spent more frequently with a high money velocity. And because of that, inflation will continue to be high. He also explains that this will add more pressure to the housing market, where almost 1 in 10 homes are slashing prices at the fastest pace since 2015.

However, before we talk about how he's using this information to profit as well as the latest housing trends in terms of upcoming price reductions, we have to discuss the actual statistics because history could tell us exactly what is most likely to happen. All right, now in terms of what history says is going to happen, once you begin looking objectively, you'll begin to see that it's actually pretty mixed.

For instance, Morgan Stanley believes that stocks could see a 16% increase from today's levels, which would be in line with bear market rallies this year and prior. That eventually, the S&P 500 would bottom in between 3032-200, putting us back to pre-pandemic levels. In fact, even the Wall Street Journal published an article that we're probably about to see another bear market rally, noting that since 1990, the biggest rebounds often come right after the worst falls, and out of those, only two are sustained while the others lasted a maximum of three months before making new lows.

Although here's the thing: when it comes to statistics like this, even though it's easy to point to the average and say the average stock market declines for 1.4 years with an average loss of 41%, throughout history, there's always going to be times that prove to be an outlier. The market is almost never going to follow exactly the average. For example, in 2020, the markets fell 34% in a single month, in the shortest bear market ever in history, before then recovering to where we are today.

Prior to that, the markets fell 56% throughout the Great Recession, and had you invested at the peak, it would have taken you over four years just to break even. The same applies to the dot-com crash, where technology stocks lost 78% of their value, and many took over 10 years to recover, if they were the lucky ones. Of course, we also have the 1960s and 1970s decline of 36% and 48%, and plenty, plenty others throughout history, all for their own reasons.

But in this case, it's estimated that standard recessions cause an average 26% drop from peak to trough earnings, suggesting that we still could have a bit more room to fall. However, there's some good news in the fact that now could actually be a pretty good opportunity to buy, because this is where a lot of the money is made. In terms of the average bull market, if we don't include drops of less than 20%, the average bull market has lasted a whopping 9.1 years with a cumulative return of 476%.

And if we include the drops of less than 20%, which are really more like minor hiccups along the way, the average bull market still lasts an average of four years with a cumulative return of 129%. But that still doesn't necessarily mean that the next bull market is going to last 48 months, because if we start going back in history since 1940, the shortest bull market we have ever had was just after the dot-com bubble, where markets rose 21% over 3.5 months before then declining 34% over the following nine months.

We then also had another brief period where stocks rose 24% during the Great Recession over one and a half months before then falling another 27% two months later. But besides those two occurrences, we have to go all the way back to the 1920s to find something that's even comparable. Like throughout the Great Depression, there are plenty of examples of bull markets lasting just days, like a 23-day long bull market with a 25% gain.

After that, there was a 42% drop followed by another month of a bull market going back up 30%. So just given the context, even though bull markets do last a lot longer than bear markets, history has shown us that volatility like this is very normal, and seeing drops or gains of 20% on a regular basis happens quite frequently. It's also shown that even though stocks lose on average 36% in the bear market, they gain 114% during a bull market.

In terms of what Michael Burry is doing, he believes that free cash flow is totally on sale and ignored, while former momentum stocks are coming down but not far enough. Value was about to take off for years despite more crash on the way, suggesting that the boring, staple, profitable businesses will be the ones to outperform in the short term. Now, others like Oppenheimer believe that we're already at that point and what is likely an extreme oversold condition in the stock market could become a catalyst for a modest rally before the year's end.

This could be from better-than-expected earnings as people begin to spend more money, or any reduction in inflation, along with the end of midterms. The housing market is also seeing a lot of attention, with many analysts believing that the hardest hit markets could see a decline of 20% throughout the next year, especially as homebuilder confidence tanks. That's why I believe that it's best to be cautious in a market like this and plan for the worst, but don't tailor your investment strategy around a plan that may or may not even happen.

Just from what I've seen, too many people have lost more money planning for the inevitable crash than those who keep buying on a regular basis. Consistently in dollar-cost averaging, regardless of what happens, I think the main focus for everyone should simply be to stay employed and do your best to maximize your income as much as possible over the next one to two years. That way, even if the market does drop, you're gonna have the resources available to you to take advantage of those lower prices.

Everything else is simply a shot in the dark, and regardless of what happens, you're never going to look back and think, "Oh geez, I shouldn't have been so time efficient and made so much money in 2020 and 2023. That was a bad idea." And also, on top of that, it's never too late to subscribe if you haven't done that already.

So with that said, you guys, thank you so much for watching. As always, feel free to add me on Instagram. Thanks so much for watching, and until next time.