Over the course of the previous several years, Michael Burry has established himself as one of the most talked-about investors.
On the subject of the economy and the stock market, he does not shy away from expressing his radical and often unorthodox points of view. Take a look at this tweet from a few days ago if you need any more convincing.
“Which tactic will lead us out of this severe economic downturn?” Which factors are pulling us in this direction? There is not even one. So, the economy will be in a long-term slump that will last for many years. Who is making these projections? There is not even one.” Michael Burry is the kind of person who backs up what he says with action, regardless of whether or not you like or dislike him. He liquidated practically all of the stocks in his portfolio earlier this year, and only a month ago he tweeted, “You have no clue how short I am.”
It is rather simple to disregard the warnings that were given by Michael Burry, particularly in light of the recent 10% gain that the S&P 500 saw over the last few weeks and the fact that consumers spent a record 9.1 billion dollars shopping on Black Friday. To me, it doesn’t seem like a sign of a recession.
Therefore, the purpose of this post is to investigate just how accurate Michael Burry’s most recent forecasts have been. And in that manner, we will be able to determine how seriously we need to take his warnings about a lengthy recession that would last for several years, as well as the collapse of the stock market that he believes will follow along with it in 2023 and beyond.
You’ve probably already had a thought or two about Michael Burry. Maybe you agree with Elon Musk that Michael Burry is a broken clock because he was right about 10 of the last two crashes. Or, it’s possible that you agree with Burry, who admits that his forecasts could be off by one or two years, but they do, in the end, turn out to be accurate.
Let me at least show you that despite the fact that I disagree with Elon Musk on this point, you shouldn’t demolish me in the comments just yet. I believe that a significant number of us can look back and see how the government of the United States destroyed supply when they shut down the whole system, and I believe that all of us understand how they artificially pushed up demand by printing and giving away billions of dollars.
It is basically the ideal prescription for tremendous inflation across the board, which is precisely what we got as a result of the supply falling apart while demand was shooting through the roof. This catastrophe is glaringly clear in retrospect, yet at the time, very few people anticipated its occurrence. But Michael Burry did “plan for inflation reopening and stimulus on the road Pre-Covid,” as the phrase goes.
It needed three times as much debt to produce one dollar’s worth of economic growth, and the situation has become far worse since then. Back in February of 2021, he described the situation as an inflationary disaster. This was ten months before the stock market had reached its all-time high. In another of his tweets, he made the following statement: “The US administration is encouraging inflation with its policies that are tinted with current monetary theory.” Demand will be boosted by the injection of trillions more in stimulus money and the reopening of businesses, despite the rising costs of labor and supply chains.
I don’t believe Michael Burry gets nearly enough credit for predicting how severe inflation would become. I think he was right to do so. Despite the fact that practically every self-proclaimed authority maintained that it was just temporary, I’m not suggesting that the Federal Reserve should take action based on Michael Burry’s tweets, but I am saying that nine months later, Jerome Powell did have to admit that he was wrong on inflation, and then he began raising interest rates at the fastest pace in nearly four decades, which he hopes will crush consumer and commercial spending.
I’m not suggesting that the Federal Reserve should take action based on Michael Burry’s tweets. However, if the Federal Reserve had begun increasing interest rates nine months earlier, they may have been able to at least cushion some of the big shocks that they are now delivering through the economy.
In other words, Michael Burry was very accurate in his assessment of inflation; yet, this is only one part of the whole picture. Michael Burry has been drawing attention to a number of important issues, one of which is how well businesses will do in the current economic climate and the amount of money investors should be ready to pay for profits. He posted the following on Twitter: “Adjusted for inflation, 2020 first half S&P 500 down 25% to 26%, and Nasdaq down 34 to 35%.
” That was earnings compression, and then multiple compression, so maybe we’re halfway there.” Later on, he elaborated on this tweet by saying that “subscription software and hardware revenue models transformed the way that business is done and made for larger multiples in the market.” This was mentioned in reference to a statement that he had previously made. However, this indicates that a large number of companies will exhibit signs of weakening later in the year. As we get into the fourth quarter and complete one full round around the first quarter, this should become more obvious.
Therefore, organizations that deal in software and hardware often commit substantial portions of their total income all at once. Consider the instances in which you purchase pricey equipment that only get updated once every few years or yearly subscriptions to magazines or newspapers. The holiday shopping season is often when a significant portion of such acquisitions are made. This is due to the fact that at that time period, big discounts are offered for the holidays. Thanksgiving, Cyber Monday, Christmas, and New Year’s Day are all coming up.
These discounts cut into the profit margins of a corporation. There is still a significant amount of revenue decline on the horizon for businesses that deal in the storage and sale of physical products. Consider online shopping giants such as Amazon, Walmart, and Target, all of which have stockpiles that have been steadily growing over the last several months. Because of the expenses associated with retaining these inventories, businesses desire to get rid of their older items in order to create ways for new ones.
Because of this, Amazon had two different Prime Day specials this year, and practically every other firm held higher discount offers over the Christmas season; all of these events cut into the margins of profit that each company makes. This is exactly what Michael Burry is pointing out in this article, namely that the stock market is not pricing in a bad performance at the end of the year due to inflation and interest rates, or that sales of physical items might be much less lucrative. Because of deeper reductions only to get products moving off the store shelves.
Alright. Now, it should be clear that Michael Burry is not just a one-hit wonder and that he made the right choice during the subprime mortgage crisis in 2007 and 2008. Hopefully. His forecasts about inflation at the beginning of the previous year were spot on and quite prescient. I believe that his forecasts of profits for major technology firms over the next couple of quarters will follow the same pattern of accuracy.
Because of this, I believe that we need to at the very least give his forecasts for the stock market for the remainder of this year and into 2023 some serious consideration. To begin, it is very evident that Michael Burry believes that the stock market is still significantly overpriced since he tweeted, “This morning, there were still 218 principal stock listings in the United States with a market valuation of over $1 billion.”
” A negative EBITDA of less than one hundred million dollars. 29 of them had a market capitalization that was more than 10 billion, which brought the total to 655 billion. I’ll say it one more: there can be no more foolishness. Do not overlook the fact that this comes on top of already reduced projections for future profits as the economy moves closer to full-blown contraction.
But wait. Shouldn’t the stock market’s valuation take into account all that I just went over? The best way to do this comparison is to look at prior economic downturns. In late 2002, the S&P 500 index had just finished a two-month run in which it had gained 22% of its previous value. Keep in mind that the dot-com bubble didn’t completely burst until October of 2002, despite the fact that its peak occurred in March of 2000 and the bottom occurred in October of 2002.
And during the Great Financial Crisis, the S&P 500 didn’t bottom out until March of 2000, after falling another 50% over the course of 18 months, and Michael Burry believes that the same thing might happen as we go closer and closer to the year 2023.
