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Michael Burry is the king of short selling. He foresaw the dot-com bubble, 2008 recession, and is now predicting the biggest market crash in US history. Burry recently warned about a vast array of indicators that may be pointing towards a massive crash ahead. But this video is not a typical market crash video. I’m simply going to objectively present and analyze the implications of China’s situation and several indicators. The purpose of this video is not to spread fear, but to inform you about the serious risks ahead.
Michael Burry always puts his money where his mouth is and usually makes large sums of money. From 2000 to 2008, Burry averaged a return of 28.6% per year. And from 2016 to the present day, Burry averaged a return of 22.8% per year. These kinds of returns are on par with the greatest investors in the world. But this isn’t that to say that Burry knows exactly when the market is going to crash. Timing market crashes is extremely difficult, and Burry is not immune to that difficulty. One of Burry’s investors once said that a classic Burry trade goes up by 10 times in value but first goes down by half. This type of pattern may be occurring again. Michael Burry was early to the 2008 recession and could be early again. Burry first warned of a market crash in December 2020, so he is likely down on his positions at the moment. Nevertheless, Michael Burry has always been right in the end and may be right again. Burry recently shared a 53 page article talking about the micro and macro elasticity of markets and the intuition behind the GIV estimator Unless if you’re a market expert you’re probably confused as to what I just said. Although the research report sounds complicated, the concept is actually quite simple. Let’s say an investor sells $1 of bonds and purchases $1 of stocks. The question is: what will happen to the overall valuation of the bond and stock market? A simple model would tell you that the bond market would go down by $1 and the stock market would go up by $1. This is not the case in reality. Using a variety of calculations, researchers found out that $1 invested in the stock market would actually result in the market going up by $5. This is because when people purchase stocks, it incentivizes mutual funds to purchase stocks as well. For example, let’s say someone invested $10 in the stock market, which leads stock prices to increase by $10. This causes a mutual fund to invest $10 in stocks as well because they want to get in on future returns. Because that mutual fund invested $10, stock prices would increase by $10 again, bringing the total increase to $20. That $20 increase would then lead another mutual fund to invest $10, bringing the total market increase to $30. According to the mathematical models in this research report, every $10 invested in the stock market right now would cause the overall market to go up by $50. The problem with this ratio is that it won’t always stay the same. Burry tweeted that “If $5 incremental market value results from $1 added to stocks and 90% of millennials (aka future wealth owners) are in passive market vehicles, that 5:1 ratio will get much, much sillier in time. COVID didn’t stop it. Inflation might (not). #epiphany.” Burry then elaborated by saying that “the first step is to recognize that 5:1 is not a natural ratio. It is a product of a paradigm. So what will continue this paradigm? What may reverse it? This is the knife’s edge, BECAUSE we are at 5:1. It may go to 100:1. Or become -5:-1. But parabolas don’t resolve sideways.” Because market valuations are extremely high, a small negative event could trigger a massive crash ahead. Nobody knows when a market crash is coming, but almost any bearish event can trigger a crash. As I’ve covered in previous videos, Michael Burry believes that we are in a situation similar to the dot-com bubble. Burry found out that the price movement 15 years before the year 2000 was heavily correlated to the most recent 15 years. He tweeted that there is a “94% correlation between the Nasdaq 100 in the 15 years to today, and the 15 years to 2000. The S&P 500 shows 95%.”