One stock. The famed hedge fund manager – Michael Burry – only owns ONE stock right now. If you don’t know Michael Burry – he made a name for himself in the Michael Lewis book on the 2008 financial crisis – The Big Short. If you saw the movie – dramatized and shortened and full of anecdotes from famous celebrities – he was portrayed by Christian Bale.
Long before the 2008 financial crisis, Burry had a hunch that the housing market would crash. He told his investors that he would buy insurance – or credit default swaps – against tranches of housing bonds and make them a fortune. He traveled from bank to bank – Goldman Sachs laughed at him – and bought as much insurance against housing as he could.
Of course… he was VERY early to the party. By late 2007, the housing market was still defying logic despite the crash of various lending institutions. Burry faced ridicule because the banks weren’t pricing the true value of these cratering assets to their book. Eventually, the system did implode, and he made a fortune. But his investors took a lot of convincing – and threats of lawsuits – along the way.
Now, Burry projects an even bigger problem. It’s not just the housing market that Burry warns about today. It’s – pretty much everything. And nothing says putting your money like your mouth is than selling EVERYTHING in his portfolio – except for one stock. Let’s talk about this market…
What 13Fs Say About Burry
This week, hedge fund managers from around the world filed reports with the Securities Exchange Commission on what stocks they bought and sold in the last 90 days. We learned what Bill Ackman and George Soros traded. But one name stood out above the rest of the crowd.
Michael Burry’s filing shows that he sold everything in his portfolio and bought one stock. In total, he dumped 11 positions. He dropped Meta Platforms (META), and sold Alphabet (GOOGL). He left no prisoners…
Well… hold that thought. What did he hold? He bought shares of GEO Group (GEO). This private prison company operates detention facilities for the U.S. government (especially on the border) and other detention centers around the globe. Perhaps he believes that a possible immigration crisis looms in Europe over food…
Or maybe, he’s just trying to prove a point. Burry has been active on Twitter over the last few weeks. He has been warning us about the fairy tale rally we’ve witnessed over the last two months. Burry expects that the recent policy optimism around the Fed will fade. He’s invoked comparisons to the Dot-Com Bubble. It experienced a short-term bear market rally, only to take a nasty hit on the chin on the other side.
Markets have bounced off a bottom on June 16 in low volume. The narrative has shifted from “Armageddon” to expectations of Fed rate cuts in early 2023.
Such optimism – as I’ve warned – is dangerous. Inflation is not likely to cool at the same pace that it surged across the economy. And, core inflation remains very high, especially as American wages continue to grow. The Fed’s monetary policy actions are a blunt hammer to aggregate demand, one reason consumer demand is likely to struggle in the months ahead.
As I’ve noted, gasoline prices are down not because of increased supplies. Aggregate demand remains lower than in the Summer of 2020 when COVID raged. The housing market — fueled by years of easy money by the Fed and lower rates – is experiencing a surge in supply – but slumping demand. And we are seeing slumps in manufacturing numbers right now – a sign that durable goods demand may soften in September and October.
There are plenty of people who think that the Fed will avoid a recession. But I pay attention to people like Burry and other names who speak to the contrarian side of the market. Perhaps my favorite data point in the world today comes from Eric Basmajian at EPB Macro.
Basmajian notes that consumer spending on housing and other durable goods are the primary drivers of macroeconomic growth in the United States.
Cyclical Demand in U.S. Economy
These two components of the U.S. economy comprise less than 15% of GDP today but are the primary factors that decide whether the U.S. economy swings between recessionary and expansionary periods, he notes.
If we see a return in cyclical demand return to levels that we saw in 2007 or even 2018 – during the Fed’s last hiking cycle – Burry will be right.
The only way to properly play this trend is through momentum.
We have reliably called exits from the market on four occasions this year. The last big move down was in early June. And today’s buying conditions – with little selling to match it – rival only the start of November 2021 – when the entire market downturn began.
Be very careful. And most of all… check in every day to this letter to know whether the momentum is Green, Yellow, or Red.