Michael Burry's Biggest Bet Just Made Him a Fortune

Well, it is highly likely that in the last couple of weeks, Michael Barry has made an absolute fortune. If you don't know Michael Barry, he was one of the few that accurately predicted the US housing bubble back before it all blew up in 2008. Overall, he made $100 million for himself and $700 million for his investors. This, of course, led him to be featured in Michael Lewis's book "The Big Short," which, as we know, got adapted into a movie in 2015 with the same title, where Michael Barry was played by Christian Bale.

Now, Michael Barry has been reasonably silent over the past year or two after deleting his Twitter account. But, of course, we have been able to sneakily keep tabs on his stock portfolio through the 13F filings. Usually, with Michael Barry, you really can't take too much information out of them because he chops and changes a lot of positions from quarter to quarter. But interestingly, the only bet he's maintained over the past 2 years has been a big bet on the Chinese tech stocks. Have a look: it started back in Q4 2022 with Alibaba, Baidu, and JD, and he's held those stocks since, plus adding to them more recently as well.

It's not hard to understand why Michael Barry, the value-minded investor, bought into these stocks. Have a look at the share prices over the past few years; literally, all of these stocks were down very, very heavily off of their peaks back in 2021. Alibaba down 73%, JD down about 75%. As we know, this led not only Michael Barry but also a lot of other value investors to buy into these big behemoth Chinese tech stocks. For what you get in terms of, say, price to free cash flow, all these businesses were trading cheap—big quality Chinese firms at rock-bottom prices.

Well, today, their bets are paying off big time, as over the past few weeks, their share prices have been absolutely soaring. I kid you not: over the last 2 and a half weeks, Baidu shares have jumped 30%, Alibaba shares have jumped 35%, and JD shares have now jumped a whopping 75%. Now, if we look at the last available data from Michael Barry's 13F, we can see that at the end of Q2, he held 155,000 Alibaba shares, 75,000 Baidu shares, and 250,000 JD shares. At that time, the respective position sizes were $11.2 million for Alibaba and $6.5 million each for JD and Baidu.

However, look at the share price gains from that point until now: Alibaba up 58.67%, Baidu plus 28.13%, and JD plus 82.12%. So overall, assuming he's held the shares until now—which isn't a certainty but is reasonably likely—he's made an easy $6.5 million on Alibaba, $1.8 million on Baidu, and $5.3 million on JD. He's turned a $24.1 million position into $37.8 million in the space of 3 months, overall a $13.7 million gain. So, not too shabby.

Now, again, I do have to caveat that this is making an assumption that he still holds the same number of shares in each company as he did at the end of Q2, which may not be exactly the case. But I do think it's reasonably probable that he still held a large position in the Chinese tech stocks, considering he has kept that bet running since Q4 of 2022.

But then the next question: well, why on Earth are the Chinese tech stocks on a massive rally? Because it's not just Michael Barry's three picks in Alibaba, Baidu, and JD. In fact, if we turn to the CSI 300 index, which is the predominant blue-chip index for mainland China stock exchanges, which tracks both Shanghai and Shenzhen, we can see that the index has risen a staggering 26% in 2 and a half weeks. So, it really is the whole Chinese stock market.

The reason for that is stimulus, baby—massive amounts of stimulus announced from Xi Jinping and the Chinese Communist Party (CCP). If you haven't been following the situation over in China, they really have been struggling with their economy over the past year or two. And there are really two key reasons for that.

The first reason stems from their real estate sector. So, in 2020, the CCP was getting concerned about the sheer amount of debt that was funding their decades-long property boom. So, they implemented the three red lines policy. For those interested, the three red lines are that number one, the company's liabilities can't be more than 70% of its total assets. Then secondly, the company's debts can't be more than its equity. Finally, the company needs to have enough cash to pay off 100% of its short-term debt.

You know, these all seem like reasonable rules, but just a year after they were implemented, it turns out actually 2/3 of Chinese property developers were in breach of at least one of the three red lines. Now, that caused heaps of real estate projects to falter because now they can't get the funding to continue. Evergrande, China’s second-largest property developer, completely collapses. House prices start falling, and that takes a toll on Chinese citizens because 90% of people own their own home in China versus around 65% in the United States.

Because of this decades-long ethos to just invest in residential property, around 70% of household wealth in China is tied up in real estate. So, with new home prices and prices of pre-existing homes both falling fast, Chinese citizens are seeing their wealth get eroded before their eyes, and this makes them cut back on spending in a major way. But then, just to add insult to injury, when China goes through its massively restrictive COVID lockdowns, the CCP was very hesitant to implement any major form of stimulus. Essentially, they told citizens to eat a spoonful of cement and harden up, whereas most Western economies, as we know, did implement stimulus measures, which came with other problems, but it did help out their citizens.

So, long story short, what this leads to over in China is a real estate sector in massive decline, which is one of the key pillars of the Chinese economy. Citizens have to massively tighten the belt, Chinese businesses make way less money, and thus stock prices in China fall a very long way. All the meanwhile, the CCP refuses to do anything meaningful to help. That was until a week and a half ago, because yes, a week and a half ago, China's Central Bank unveiled a truly massive plan to support their real estate sector and their stock market.

In fact, as reported by Bloomberg, there were no fewer than 15 different stimulus measures being implemented across monetary policy, real estate financing, and interestingly, to investors, stimulus for Chinese stocks. I won't go through each scheme individually, but if I had to summarize all the major measures China is taking, the main ones are interest rate cuts, freeing up cash for banks to lend—that's by lowering reserve requirements—and then liquidity support for stocks.

Also of note, four major cities—Beijing, Shanghai, Guangzhou, and Shenzhen—also eased home-buying curbs, including lowering deposit requirements. Finally, the Central Bank moved to lower mortgage rates to help homeowners. So, most of the measures are targeted at boosting their real estate sector, which really is the heart of the economic troubles in China. By lowering interest rates, lowering bank reserve requirements, and also lowering deposit requirements for home buyers, these measures should all work to encourage people to buy homes and take on mortgages, which they're then hoping will revive sales and thus reverse the downturn in home prices.

Hopefully, that has a flowing effect into helping the wealth of the Chinese consumer rise, which hopefully will bring back a level of normalcy to their spending behaviors, which in turn will help Chinese businesses. That's one of the reasons investors in stocks are getting excited. But beyond that, the CCP did also announce specific measures that will directly benefit big Chinese companies. As reported by Bloomberg, the CCP announced a swap facility allowing securities firms, funds, and insurance companies to tap People's Bank of China money to purchase equities. This would be worth an initial 500 billion yuan, which is $71 billion, with a possible ceiling of three times that.

They also announced a relending facility for listed companies and major shareholders to take on loans to buy back their own shares and raise their holdings. So, this will be worth an initial 300 billion yuan, with a possible ceiling of 900 billion yuan. Finally, there were discussions of some sort of stabilization fund, although there are no more details on that at the current time.

Overall, this is set to initially provide at least 800 billion yuan, or $113 billion, of direct liquidity support. Without getting too into the weeds, I think you can understand why these announcements have triggered a massive reversal in short-term sentiment around Chinese stocks. Until a few weeks ago, investors had just about given up hope that the CCP was going to help stimulate this economic rebound and support massive tech behemoths. Now they've walked in with the stimulus bazooka.

So, no doubt this is a huge positive sign for investors, and accordingly, the short-term prices of all Chinese stocks have been rocketing up, which has made people like our friend Michael Barry a lot of short-term money. But there are also a few things that investors should consider in relation to this stimulus. The first of which is we obviously have not yet seen the results of it yet; we don't know how much these measures are going to help. Now, yes, the implementation of all these stimulus measures will have a good impact on both the real estate sector and businesses in general—I'm not disputing that—but we have no idea as to the size of that benefit yet.

So, while in the short term the stock market is a voting machine, remember that in the long run, it is a weighing machine. The long-term price movements of these big Chinese businesses will ultimately depend on their business performance, not just the announcement of some stimulus measures. Secondly, I should point out that this stimulus bonanza by the CCP has been fairly criticized for not actually having much of a defined goal. For example, with the Federal Reserve, every single time Jerome Powell speaks, he opens with the Fed's goal of promoting maximum employment while ensuring price stability and trying to get inflation back down to the long-term target of 2%. It is crystal clear what they're trying to do.

In the case of the CCP stimulus, there really hasn't been a specific and measurable goal that they've been working towards. In fact, the only stated goal by the Politburo was to make the real estate market "stop declining." As the author of this Bloomberg article rightly notes, did the highest decision-making body mean for a month, a year, or forever? And how will that be measured? We do have earlier confirmation that the CCP is looking to target a 2024 GDP growth rate of 5%, but beyond that, it's hard to find specific and measurable goals of this stimulus package from the CCP.

Finally, I also wanted to remind prospective investors in Chinese businesses that while it may seem like a great momentum trade to get in on right now, there are still some risks around holding Chinese equities. I spoke more about this in my recent video with Matt Peterson, which I'll link up on screen, but as a quick summary, you do have to remember that you're investing in a system that is heavily controlled by the government. There are geopolitical risks when investing in China from America or other Western countries, and also the structure of holding Chinese shares through offshore variable interest entities does have some risk attached to it in and of itself.

But overall, that is the lowdown on Michael Barry's short-term win on the Chinese tech stocks. Just quickly before I sign off, if you liked the video, I would really, really appreciate it if you gave it a like, and also please subscribe. We're really hoping to make it to 1 million subscribers, hopefully sometime this year or next, and hitting the subscribe button really does mean more to us than you can imagine. Furthermore, if you did want to support the channel financially and get access to some really awesome professionally edited investing courses teaching you about both passive investing or Warren Buffett style stock analysis, please do check out New Money Education linked in the description and the pinned comment.

But guys, with that said, thank you all very much for watching, and I'll see you guys in the next video. [Music] [Music]