Christian Bale Says You Must Read This

Burry Big Short

Cash remains your best friend. Momentum remains red… Don’t trust the light buying. Protect your money. Wait for real support. Friday’s rally wasn’t real. And Monday featured even more choppiness.

Over the last few days, we’ve watched a lot of short-covering, squeezing, and low-volume buying in this market. That does not make for a sustainable rally. But speculators will speculate. And pundits will try to call a bottom at CNBC, the Wall Street Journal, Barron’s, and other media outlets. 

I don’t listen to them. I listen to Christian Bale. 

Wait. What?

Okay, not the actor Christian Bale. 

I mean, the character he played in the iconic Wall Street collapse film, The Big Short. If you remember the film, Bale played a real-life fund manager named Michael Burry, who famously shorted mortgage-backed securities during the 2008-09 financial crisis. 

Burry saw what few others saw: A credit and housing crisis brewing years before the inevitable crash… 

While his investors rallied against him as he lost money for a while, he turned out right and produced a staggering return by betting on the collapse of mortgage markets. He made more than $700 million for his investors. Pretty good, huh?

I listen to Burry because he tends to notice trends that few others do. And this week, he outlined a rather stunning statistic that all investors must know. 

A Tweet From Michael Burry

Burry, oddly, deletes a lot of his Tweets. But I was able to grab this one after the podcast All-In discussed the subject over the weekend.

Burry explains that stocks experience dramatic turnover compared to their total outstanding shares during big market drawdowns. 

So, from peak to trough during the Dot-Com bubble, outstanding shares turned over 5.2 times before the bottom came in 2002. In 2009, that figure for Microsoft (MSFT) was 3.3 times before the Federal Reserve stepped in to support the market. 

However, during this recent downturn, Microsoft’s outstanding shares have only turned over 0.5x, meaning that only half of the shares have flipped so far. A similar pattern happened with Amazon (AMZN) and JPMorgan (JPM). 

He concludes, “Enough takes time.” As you can see, the volumes so far have been light compared to these other historic downturns. So it could be quite some time before we find that bottom. 

Goldman Weighs In

I promise I’m not trying to be bearish. I’m just trying to be realistic. I hate to lose more than I like to win, which is why I’m hyper focused on buying cheap companies with strong cash flow and real assets. 

So, I look at Goldman Sachs’ recent update and wonder what world they are operating in today. Their economists are projecting a 35% recession in the next two years. I think they need to fire their economists. 

Because – if you strip away inflation – we’re deadly close to one. Goldman has said that a recession would push the S&P 500 to 3,600. That’s optimistic.

I want to do a very simple equation for you. If the U.S. markets enter a recession, the downside is much more. Here’s why…

Valuations Matter

So, the markets are pulling back without Fed support in an environment where we are facing a recession. I have to assume Goldman Sachs is pricing in the Federal Reserve stepping in – the so-called Fed Put, where the central bank just starts defying basic economics and prints more money – then they would say the bottom is 3,600.

But imagine that earnings aren’t as hot as people say they are… in a bad market. And imagine that investors aren’t willing to pay historically high earnings multiples for stocks… and multiples drop toward historical averages.

Why wouldn’t they? This analysis is static, but in this environment, it’s important. The S&P 500 trades at an average PE ratio of 31.68. Historically, the average PE is about 17.

So do the math. If valuation compression hits as it did after Black Tuesday and the Dot-Com bubble, the downside is immense. At 17x earnings today, the S&P 500 would be trading under 2,200.

Does that mean that will happen? No, because the Fed will likely step in because they can’t afford a market meltdown. And then, YOLO all over again, right?

But – if inflation runs too hot… they have to keep going with higher rates. And I don’t think inflation is even close to cooling. I think – we’re well north of 10%.

In Conclusion

So here’s the other thing… The worst-case scenario – and I mean base-case – is 6 times earnings. That’s Depression level. That’s post-Carter bad too. Recall that the best of Black Monday’s ratios were in line with the worst of the 2009 crash.

Think about a world where U.S. interest rates hit 10% out of necessity to stop runaway inflation. Government officials are flailing right now…

The CPI would be at record levels if we used the same equations as we did back in 1980. And I know my grocery bills are up 27% over the last year because I actually track my spending. I think I’m lucky with that figure.

I’ve been right by calculating institutional capital flows by pointing out when to be and stay in cash. I’ll tell you when the momentum goes positive again. The stock market could be at half where we are today. Crazy, right? I’m sorry to be the messenger. I’m just trying to save you money.

Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.
Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.

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