Michael Burry isn’t that Bearish. Hear me Out

Market Crash

When the markets were in a similar situation in 2004, the stock market was flat for the next six years and didn’t double until a decade later in 2014! Let’s not forget that in the middle of this period, in 2007-2009, a massive recession also crippled the global economy.

Are today’s similar circumstances the reason that Michael Burry’s latest 13F filings reveal he had bought put options on the market, which, if fully realized, would have already netted him $1.6bn, a figure we’ll learn about in his next quarterly filing?

I want to show you where Michael Burry’s conviction in his move comes from, but also to remind you that he still owns roughly $110M in equities and that his put options probably cost him a few million dollars, at most.

In other words, Michael Burry is really no different than my hedge fund manager, who also occasionally makes short-term bets against the market, while retaining a much bigger LONG position… this is just what hedging is…

Courtesy: Zerohedge.com

The S&P 500’s breakout has really distanced it from its long-term trend line, so a bet on mean reversion is not bad idea for a hedge fund, which aims to condense volatility in its performance.

The calls for a recession are, in my mind, more accurate today than a year ago.

China’s economy has disappointed everyone; the consensus of the post-pandemic opening-up boom has completely blown up, and though the economy is growing, the spending is so much lower than the consensus that it is creating the environment for a mild recession in the EU and in the U.S. In light of that, let’s look at why this could turn into a rough 2024:

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Courtesy: Zerohedge.com

The most painful realization is that the banking industry, which has a monopoly over mortgages, is refusing to lend.

Banks want the borrowers to commit to a +7% interest rate for a 30-yr loan!

It will take time for homebuyers to wrap their heads around such figures, but if the banks have the means and the fortitude to keep making profits, even with the housing industry freeze, this sort of lending environment could become more of the norm.

What I want to show you next is the reason that everyone and their mother are in money-market accounts and the stock market is rallying, but with low trading volumes:

Courtesy: Zerohedge.com

Just this week, I committed a 6-figure sum to Carlyle’s lending fund. What they do is make business and real estate loans, which generates a return of 8%-10% to you, bottom line.

Why would anyone put money in the stock market, with its long-term returns of 7.5%, when he can LOCK an 8%-10% return, without market risk?

The ONLY reason would be if the premium that the investor received is justifiable.

If, for example, a business that I admire would trade for half its current quote and I thought that the 2-yr upside potential was 100%, that would demand action on my part.

But, if that business can only support a hypothetical 12% return and is susceptible to market fluctuations, most would reject the unmeaningful difference between 10% and 12% and choose a lending fund that guarantees, to the best of its ability, the predictable ROI.

As you can see, today’s equity premium is very low!

The only two ways to change this are:

1. Lower interest rates.
2. Higher dividend yields.

I believe that we are entering an era of higher yields for stocks, when companies invest less in the future of the business and distribute more in dividends to the owners.

Best Regards,
PortfolioWealthGlobal.com