Michael Burry INCREASES His Bet On Inflation!

Well, we've already discussed a lot of what was in Michael Barry's 13F filing this quarter. There was obviously the big bet against Kathy Wood's ARK ETF. There was the dramatic increase in the Facebook call option position. There was a big increase in the Tesla put option position. But one thing that we didn't dive into in that video is that Michael Barry is still betting big against the market, and even throughout the media, this is very underreported as most are running with that controversial storyline of Barry versus Kathy Wood. However, this bet against the market is his third largest position; it represents 13% of his portfolio. So we better talk about it.

So with that said, let's roll the intro and get stuck into it.

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So, Michael Barry, of course, known from The Big Short, but in investing circles, really, he's known for his insane analytical skills and his fearlessness when making really big bets. He's the kind of person that will bet $700 million against Tesla with no fear. The kind of guy that bets against the U.S. housing market when everyone, including his own investors, were telling him that he's insane. He's the kind of guy that will stand up and call out potential hyperinflation in the United States and place a big bet against the 20-year treasuries.

So, I don't know if you guys remember, but last quarter Barry had multiple bets against the 20-year treasury bonds. He was doing this in a few different ways too. Firstly, he held shares in an inverse ETF that went up if the bonds went down. Secondly, he was buying put options on the iShares 20-year treasury bond ETF, so betting that the 20-year treasury bonds and thus that ETF would go down. Then finally, he was buying call options on leveraged inverse ETFs that bet against the 20-year treasuries.

So, he was using options to bet for these stocks that go up two or three times what the bond ETF goes down. Really, that's like double amplification that the bonds were going south because, firstly, he's used options, which can amplify your gain for the same amount of money deployed. Secondly, he's used leveraged inverse ETFs, which can be structured to achieve 2x or 3x the inverse daily return of something, in this case, the 20-year treasury bonds.

So, pretty crazy. But remember the thing is with these leveraged inverse ETFs: they get rebalanced daily. Remember, these are special investment vehicles constructed using derivatives. They aim to get, say, 2x or 3x the daily inverse return of the 20-year treasuries. Then they get rebalanced to do the same thing for the next day. For this reason, they don't work like a normal stock. These are only ever short-term investment vehicles because of that daily rebalancing. They don't achieve the opposite return of an index over the long run. As you can see, this is the Nasdaq 100 and what the chart looks like inverted. However, this is the chart for PSQ, which is an inverse ETF that gets the inverse daily return of the Nasdaq 100. Similar, yes, but not the same. So, they're not designed to be held for long periods of time.

Very confusing, I understand, but all of his bets were, at the end of the day, against the 20-year treasury bonds. So what's interesting is that now when we turn to his Q2 13F filing that he released just the other week, we see that he decided to sell his call options on TMV, TTT, and he sold 80% of his calls on TBT, which are all inverse ETFs betting against the bonds. He also sold his long position in TBT, but he has ramped up his put option position against TLT, which is the iShares 20-year treasury bond ETF.

So, people were seeing him selling this position thinking he's quit his position against the bonds. Not true. He did quit the positions in the leveraged inverse ETFs and fair enough. Remember, they are short-term investment vehicles only. However, he really ramped up his put option bet against the iShares 20-year treasury ETF.

Now, this is still a short- to medium-term bet, yes, because he's using options, and at some point in time, they will expire. But it's not as short-term of a bet as what he had previously. So make no mistake: Barry is still betting against these bonds. You know, as I said up top, he holds put options against nearly 2 million TLT shares, a position worth $280 million, representing 13.5% of his total portfolio. It's a significant bet. The only bets larger than that are his call options on Facebook and his put options against Tesla.

So, it's a sizable bet against the bonds, but really what this bet is telling us is that Michael Barry is betting on interest rates and inflation, specifically. He's betting on interest rates rising due to inflation running rampant. This is how we know that the Federal Reserve sets interest rates, right? And they've said that they want to keep interest rates as low as possible for as long as possible, and everything they've done so far has supported that theory.

So, the only way they will raise interest rates is if their hand is forced. And their hand can be forced if inflation rises because the way to stop inflation is by raising interest rates, essentially putting the brakes on the economy. Now, bond prices have an inverse relationship to interest rates. As we can see here, if prevailing interest rates increase above the bond's coupon rate, the bond becomes less attractive. In this situation, the bond price drops to compensate for the less attractive yield. Conversely, if the prevailing interest rate drops below the bond's coupon rate, the price of the bond goes up as it becomes more attractive.

So, for Barry's situation, he's looking at the first part of that paragraph: if the interest rates rise, then bond prices fall; and if the bond prices fall, then the bond ETF will fall; and if the bond ETF falls, those holding put options against it will make money. So, despite Barry technically betting against the 20-year treasury bond ETF, this position actually tells us much more than that. It tells us that Michael Barry expects, in the short to medium term, that inflation will not go away and the Federal Reserve will have to raise interest rates.

And we've started to see a trend towards that situation being a very real possibility. This is the inflation graph in the U.S. I mean, you don't have to be a genius to see that it's gone up a lot. But have a look; it's leveled off in the past month. So the question is: what happens next? The Federal Reserve has been adamant that the rise in inflation is transitory and will settle. You know, Barry clearly does not see that happening. He sees high inflation continuing, which will force the Fed to raise rates.

And at the moment, at least, the trend is in his favor. The Federal Reserve has gone from a position of no rate hikes until 2024 to more recently no rate hikes until 2023. And if inflation stays high, how long will it be before they say no rate hikes until 2022? And we should note this wouldn't be great for stock market investors. There's a lot of borrowed money in the market right now because money is so cheap to access thanks to the record low in interest rates.

Also, bonds aren't particularly attractive right now compared to stocks, so money that would normally just be flowing into the bond market is actually flowing into the stock market. That's why we see the stock market so inflated right now. It's also the reason why, you know, property prices are so expensive right now, just because accessing money is very cheap.

Now, this is making a lot of investors very happy, but at the same time, the smart investors are actually getting quite worried because they know the mechanics. If inflation runs right, as Barry is predicting, then interest rates get hiked, the brakes get put on the economy, and money increasingly flows out of stocks and into new bonds, and the stock market will fall.

But anyway, guys, that is Michael Barry's bet against the 20-year treasury bonds. That is his bet on, you know, interest rates rising; it's his bet on inflation rising; it's his bet on the stock market falling. Really, it's all the same bet due to the mechanics.

Now I want to hear from you guys. As we've discussed, this whole system hinges on what happens with inflation. So, you know, if inflation were to go crazy, we're in a bit of a pickle. So I want to hear from you guys. I want to hear your predictions: are you on Team Powell or are you on Team Barry? Is all this inflation transitory, or do you think we're going to see inflation continue to rise as Michael Barry was predicting on his Twitter page earlier this year?

So let me know! Definitely let me know what you think in the comment section down below. I'd love to hear you on Team Powell or Team Barry. We'll see which side wins. But overall, guys, that is Michael Barry's opinion on, you know, what he sees happening with interest rates and inflation over the next little while, and also the moves he's making to potentially profit from that situation he sees playing out in his mind.

So anyway, guys, I hope you enjoyed the video. Leave a like on it if you did enjoy it or if you found it useful. Subscribe to the channel if you have not done so already. And, um, if you're interested in checking out either of my investing courses, then you can check out the links down in the description below. But apart from that, guys, thank you very much for watching, and I'll see you guys in the next video. Thanks again to Sharesight for sponsoring this video.

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