The Second Inflation Wave is Coming... (Michael Burry's Big Bet for 2024)

Well, you might have seen recently that Michael Barry is back in the news, and that is because he has just released his latest 13F filing, giving us a peek behind the curtain as to what he's doing with his own stock portfolio. While Michael Barry definitely can chop and change a lot from quarter to quarter, making it difficult to take away any strong themes in what he's thinking, well, in this 13F, things were a little bit different with two prominent themes emerging.

So, what on Earth is going on with the big short investor's portfolio? Well, having a look at the changes in his portfolio, there was, as usual, a lot of chopping and changing. He sold out of 14 stocks, including Google, Amazon, Oracle, and more. He added to 11 positions, and then of note, he bought five new stocks entirely. That's where the first big story emerges because one of these stocks is, in fact, Sprott Physical Gold Trust. In Q1, he bought over 440,000 shares, representing 7.37% of his U.S. portfolio.

This is super interesting because, as the name suggests, this is an investment in physical gold. Specifically, Sprott is a closed-end fund that holds assets in physical gold bullion. But with gold prices at practically all-time highs and the price of Sprott's gold funds similarly touching all-time highs during Q1, which is when Barry bought it, on face value, it seems odd that Barry would be so keen to get in. He is, after all, a value-minded investor.

But gold, as we know, is an interesting commodity. Gold is a commodity that investors flock to in anticipation of economic uncertainty and particularly in anticipation of inflation, both factors of which we know Michael Barry is acutely aware of. In fact, Barry's investment in Sprott Physical Gold Trust does align with his now-longstanding concern about economic instability and market volatility. It's no secret that Barry has been quite wary of economic conditions over the past few years, as was evidenced back in his tweeting era, and I can't imagine his stance has changed at all over the past year or so.

Gold has historically been a safe haven asset during times of economic uncertainty, providing a hedge against potential market downturns. As we can see here, the price of gold spiked back in the Great Depression, skyrocketed back in the 70s for a reason we'll discuss in a second. It also spiked up coming out of the tech bubble and particularly after the 2008 global financial crisis, and more recently, it also spiked around the time of COVID. Historically, it has been viewed as that safe haven against economic storms, and while that is mostly psychologically driven, the trend certainly still exists.

Michael Barry is seemingly jumping in, hoping the uptrend we've seen in gold since October last year continues. With all that's happening in the world, from tariffs and elections to wars, supply chain disruptions, and inflation, that leads us to the other reason beyond economic downturns that investors like to flood into gold. It's a similar argument to what the crypto folks argue—that it's a hedge against the debasement of a currency and it's a hedge against inflation.

Now, I don't have to tell you guys that over the last few years we've seen some enormous sums of money printed, and we've seen that lead to some quite high levels of inflation. It's no Zimbabwe, but 9% for the United States was pretty bad. The thinking of investors during these times is to convert their hard-earned cash into something like gold, or as it's been argued more recently, cryptocurrency, because it's a more finite resource and the value can't be eroded in the same way that a currency like the U.S. dollar can be.

So, that's why you saw a lot of chatter about crypto and gold while the Federal Reserve was printing a lot of money a few years back and when inflation was really hot. But here's the thing: inflation has cooled considerably since then, and the Federal Reserve is no longer printing more USD. In fact, since mid-2022, they've been lowering the money supply. So, why is Barry buying gold now? Well, it's a surefire sign that he does not believe inflation has been controlled, just like his tweets hinted at a few years ago.

This move is most certainly an indication that Barry believes we are likely to see inflation pick back up, causing more investors to flock to gold, causing the already high price to rise again. That's the thesis, so that's the takeaway from Barry's purchase of Sprott Physical Gold Trust. But beyond that, we also have another big theme from his 13F to hone in on. But before we do, we need to talk about internet safety.

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Now, moving on to Michael Barry's second big theme coming out of his 13F filing: it is his continued purchasing of the Chinese tech giants. In Q3 of last year, Barry bought into both Alibaba and JD, which are both large Chinese e-commerce sites. But what surprised investors is that he significantly increased these positions in the following quarter and has now significantly increased the bet once again. In fact, he added 80% to his JD position and 66% to his Alibaba stake in Q1.

So, in a portfolio that is known for being totally overhauled on a regular basis, these two Chinese tech giants have now stayed at the top for three straight quarters. In fact, Barry has even opened a position in Bilibili this quarter, which seems to suggest he's really doubling down on China. Although it is worth mentioning that his Bilibili bet is considerably smaller—less than half the size of his Alibaba and JD positions.

So, what's the story here? Well, these three companies are obviously massive companies integral to China's broader economy. They're massive market leaders; the companies have amazing competitive positions. Their products and services are relied on by the masses. But the thing is, none of these businesses have been doing very well over the last year or two because China's broader economy has been really struggling. The stock prices tell you a lot: Bilibili is down two-thirds from their 2021 highs, Alibaba is down roughly 70%, and JD is much the same—down 67%. This has to do with China's broader economy.

It's been well reported that China's economy went through an extremely sluggish recovery after COVID, and that's partly because, unlike the Western world, China opted not to do wild-scale stimulus involving printing a lot of money. Beyond that, they've also had big problems in their property sector, with property valuations falling and real estate developers going bankrupt. This has fallen onto Chinese citizens, who have had to weather the storm by simply tightening the belt, and that's shown in the data too. This report by McKinsey and Company shows that Chinese citizens are locking their money away in 2023.

China finished with urban unemployment of 5.1%, the same as pre-pandemic levels. Inflation was 0.2%. Consumers saw a rise in their average disposable incomes by 6%, but as McKinsey notes, consumers preferred to stash their cash away in the bank rather than spend it, pushing the savings rate higher. The savings rate in China hit 31.7% in 2023, propelling the country's total pool of savings to record highs. So, Chinese consumers are stuck in a rut, and the data shows that they have not been spending.

Now, this obviously has a flowing effect on businesses as they produce less revenue and less profit, and naturally, it has really hit their share prices. But I don't think anyone is saying this is the end of China, right? This is where Barry's thesis comes in. There's no doubt these big Chinese tech businesses are some of the best businesses in the world. You have world-famous investors like the late Charlie Munger, Monish Pabrai, Guy Spier, Howard Marks, and Ray Dalio all singing their praises.

So, the overarching thinking is one of proactiveness: China will likely return to being a powerhouse economy. These Chinese businesses are uniquely positioned to capture an incredibly large amount of business, thanks to the size of their market, which is over a billion people, and also the fact that they more or less block Western competitors' access to that market. So, is it worth establishing a long-term minded position in these businesses now at share prices that have been crunched 60% to 70% and simply wait out the economic storm? That's the thesis of many investors right now, and it seems to be the thesis of Michael Barry as well.

Particularly when you consider two main positions of Alibaba and JD, which are predominantly e-commerce businesses whose revenues depend greatly on the spending behaviors of the broader population. It's a take that might already be on the right track. That report that McKinsey put out a month ago notes that Chinese retail sales in the first two months of 2024 show a healthy year-on-year increase of 5.5%, with goods contributing a 4.6% rise. Food service sales led by 12.5%, air passenger numbers soared by 44.4%, and even the auto industry is bouncing back with auto sales growing 177%, with specifically EVs rising 37%.

Spending is starting to increase, and in all three of Barry's China bets, you can see the share prices really ticking up in the past month or so. Those are the main two themes of Michael Barry's portfolio: the bet on gold and also the bet on Chinese tech. However, I guess you could make an argument that there is a sneaky third theme as well, and that is his cash pile. While the 13F doesn't actually tell you anything about cash, it does show you the total portfolio value.

For Barry, this time around, it sat at $103,488,000. However, if you look at prior quarters, you can see that that number changes a lot. For someone like Michael Barry, this is not because his portfolio returns are extremely volatile; it's simply because he's putting money in and pulling money out of the market as he sees fit. As you can see, while his portfolio value is $103 million now, going back a few years, at some points that had up to $165 million invested. Then in the very next quarter, he had just $3 million invested. I assure you, he did not suffer a catastrophic 98.2% loss in one quarter; he just pulled his money out of the market.

So, with that said, how much money does he actually manage? Well, if we open up his Form ADV, we can actually see that Barry manages around $238 million. At least that was the size of his fund on the 17th of January this year. So, that represents a potential cash position of 56%, and that high cash level is consistent with most quarters going back in the last few years. What does this tell us?

Well, it shows us that, despite him chopping and changing large chunks of his portfolio and us being alerted that he's just added to 11 stocks and he's bought into another five, in reality, he isn't finding that many significant opportunities in the market right now. Remember back when he bet against the housing market in the mid-2000s? He had one massive bet because he saw that as such a big opportunity that he needed to go all in on it. He must have been pretty confident this thing was going to blow up.

We had a giant bet for us, and I was extremely confident in the outcome. We made $725 million, I think, on the funds in 2007, and in the first six months of 2008, there were about $730 million in withdrawals. Perhaps I had made the trade too big for the fund, and my confidence in the trade had ticked off some people. When you understand that he is willing to bet heavily when the time comes, it kind of makes sense that even these $79 million positions at the top end of his portfolio are not really all that significant.

JD is the top stock in his U.S. portfolio right now, worth $99.86 million, but compared to an estimated fund size of $238 million, it's only 4%. So, who knows, heck, maybe he's just sinking all his money into U.S. Treasuries at 52%. You really do have to be careful when you read these 13F filings to try and step back to put together the bigger picture. For example, we mustn't forget that 13F filings, again, are just an SEC filing, meaning that it only shows us what's in their U.S. portfolio; it tells us nothing about Barry's potential international investments.

So, when you zoom out, there are definitely limitations to looking at these filings. Don't get me wrong; I love looking into them. They're extremely helpful, but you have to be careful that you understand the full picture. While we spoke at length about Alibaba, JD, and Bilibili, after looking at the complete picture, putting all of these investments together only represents a small percentage of Barry's total assets under management.

But with that said, guys, thanks very much for watching. Hope you still found the video useful. If you did, please leave a like and subscribe. If you would like to learn how to go through the full value investing strategy, you can definitely check out New Money Education down in the description. But apart from that, guys, thanks very much for watching, and I'll see you guys in the next video.