If any one is curious about the source of this aphorism:
> To prove that Wall Street is an early omen of movements still to come in GNP, commentators quote economic studies alleging that market downturns predicted four out of the last five recessions. That is an understatement. Wall Street indexes predicted nine out of the last five recessions! And its mistakes were beauties.[20]
That 723M$ figure for nasdaq is not the worth of the put options themselves, rather the value of the underlying shares that the contracts represent. He likely has 20K put options each for $SPY and $QQQ. No one is going to bet 93% of a portfolio is index puts. They're likely hedges worth tens of millions, not 1.5B$ in put options.
Michael Burry of ‘Big Short’ fame expects another ‘inflation spike’ after recession rocks U.S.
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Cassandra B.C.
@michaeljburry
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Inflation peaked. But it is not the last peak of this cycle. We are likely to see CPI lower, possibly negative in 2H 2023, and the US in recession by any definition. Fed will cut and government will stimulate. And we will have another inflation spike. It's not hard.
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None of these predictions were right.
The lesson here is always do your own homework. Or get a trusted financial advisor.
p.s since his twitter handles are ephemeral I saved the tweet that was attributed to him.
He can be wrong on the timing but right on the prediction. I think he could still be right here in 2024. Certainly he was right about inflation peaking. So now is that recession still to come or not?
Yes. Although short options aren’t reported. People are assuming this is a bet against the markets, when it could even be a bull put spread betting the markets go up or sideways.
He was wrong on the timing in 2007 as well. The only reason his short position was vindicated is that he held on despite the protests of his investors. Burry would have been rekt if the collapse had come later.
FWIW: Clark Howard, a finance guy I highly regard, predicts that the 4th quarter will see a softening of the economy. His reasoning is that the regional banks are being extremely tight with lending right now, and by the fourth quarter many small/medium businesses will have trouble staying afloat due to the lack of financing.
I have been watching for that as well, but as of yet there is no sign of it in the Fed's National Financial Conditions Index [1]. Financial conditions are continuing to slowly loosen. But things can change quickly.
> FWIW: Clark Howard, a finance guy I highly regard, predicts that the 4th quarter will see a softening of the economy.
Highly regarded finance guys aren't podcasters or media personalities. If the guy could predict the direction of the economy, he'd be a trillionaire living his best life. Not peddling silly books and hosting podcasts. But then again, jim cramer has a following. How do explain that other than the masses are naive.
> His reasoning is that the regional banks are being extremely tight with lending right now, and by the fourth quarter many small/medium businesses will have trouble staying afloat due to the lack of financing.
He is just parroting nonsense he saw on cnbc or read in a newspaper or on social media. Just like every grifter out there. Do you really think he has inside connections to all the regional banks? To the FED?
Fair, he is a media personality. That said, I've read a Jim Cramer book, I've listened to Dave Ramsey. Those guys are charlatans selling mysterious wisdom and, frankly, bullshit. Clark Howard doesn't do any of that.
Dave Ramsey once said anyone should be able to get a 12% return in a mutual fund. What?? Jim Cramer's constantly picking stocks and is about as good as a drunk monkey with a dartboard.
Everything Clark Howard has said that I've looked at doing, I've vetted and researched. Sometimes he gets it wrong, but I believe he is an honest actor and just trying to help people "Save money, Spend less, and avoid getting ripped off."
Honestly, nobody knows, but I put more weight on his take than most.
It’s already well-known that interest rate changes take a while (months? A year?) to effect the economy. It’s also well-known that higher interest rates hurt startups, “pre-revenue” companies, consumer buying power, etc. So to be bearish right now seems like a no-brainer.
Yes, of course it's important, they're people for fucks sake, with lives and salaries for expenses that move the economy.
What does it matter it's 1/5 of Wall Street salaries? Even worse, saying they aren't "important" because of how much they earn, I feel disgusted reading this comment...
I really have no idea if you were sarcastic on the previous comment and on this one or if you are just a gaping asshole. Either way it's not really conducive to any discussion.
I am DEFINITELY being sarcastic! That last one was the most famous piece of sarcasm ever written, "A modest proposal" by Dr. Jonathan Swift!
I can understand the limits of text to convey subtle meaning but if you're that far removed from culture that you cannot pick up when someone... I am loathe to say "alludes" (more like beats you over the head) to the most famous piece of satire in all of history then maybe you should consider getting off the internet and picking up a book.
I'm not English nor Irish (or from any anglo-saxon-adjacent place) to have Jonathan Swift as any important part of my cultural-literary canon, so excuse the ignorance but at the same time fuck you for telling me to "pick up a book" as if I should have known your cultural references :)
(And yes, the "fuck you" is in jest, I'm still astounded [and a bit ashamed] I didn't pick up the sarcasm at first...)
Burry and his Scion Asset Management fund bought put options (contracts giving the option to sell at a certain price) with a value of $886 million against the SPDR S&P 500 ETF Trust which tracks the S&P 500. Scion also bought put options totaling $739 million against against the Invesco QQQ Trust ETF QQQ that tracks the Nasdaq 100.
The $1.6 billion Scion spent betting against the market represents 93% of the fund's entire portfolio.
This is a reversal from the bank buying spree Scion went on in the first quarter before economic stress led to the dissolution of multiple mid-sized banks.
The S&P 500 and Nasdaq have actually had strong years so far in 2023, climbing 17% and nearly 40%, respectively.
He probably bought put options with a notional value of $886/$739, but the premium is dramatically less than that. He's not betting more than like 10% of the fund. It's not clear the way the article is written, but the man's crazy, not bonkers. If he spent $1.6B in put option premiums he's playing to be the first trillionaire.
How often does the Nasdaq go up 40% and then stay up? I don't really know anything about the stock market, but do you really need to be a maverick to guess that it might go down again?
Last year, the entire Nasdaq was rocked with companies like NVidia, Meta, Tesla, Netflix, Apple, Google down anywhere between ~35-70% from their all time highs. A rally of this magnitude is notable, but they're by-and-large just regaining ground they already had (save NVidia which just rocketed past its all time highs). For some perspective on how much those megacaps influence the entire index, the top ten companies in the Nasdaq account for ~50% of the entire index.
that's what everyone said in 99 when nasdaq basically doubled in a year... then continued to more than double the year after that! a lot of guys blew up being too early trying to guess when the selloff would finally happen...
they're called bulls for a reason - they're not the brightest, but you gotta be sure to either join 'em or get the heck out of the way while they're in control!
The market did great in the 1980s, and the Fed Funds rate averaged about 10% over the decade and never dropped below about 6%, which is higher than it is today. So, there's that.
This guy was very right once and has basically been wrong ever since - why is this interesting? Remember his massive bets on water and disastrous short position on Tesla?
Not in general, depends on interest rates & others' bets for or against.
Shorting means selling without owning (borrowing) the underlying stock, and paying a borrow fee for as long as you hold the position.
Buying (being 'long') a put means paying money up front (the premium) for the option to sell a stock (doesn't matter if you own it or not at the moment) before a certain expiry date.
Typically you would be more likely to hold a short position longer than you'd roll over options, as far as I understand. But it's not clear cut and generalisable because the fee structure is different.
Also buying puts you have no risk if the stock rises - you're out the premium but you were anyway. If you sold short, it's getting more and more expensive to cover if you want to give up on the bet (and borrow fee probaby rising too, so also increasingly expensive to hold).
The VIX index, a mean-reverting proxy for risk aversion on the S&P500, is currently relatively low. This makes buying options, both puts or calls, relatively cheap. Usually volatility is negatively correlated to spot price of the underlying instrument (in this case the S&P500), but if the market remains flat and there's a significant spike in volatility, the position can still be P&L positive.
As for the convexity, assuming the puts he's buying are out of the money, his total position increases in $ value as it becomes in the money and vice versa. The opposite is true with an outright short.
Of the two possible ways to bet against the market we are discussing Burry chose the one with less immediate downside if you have to wait to be right. But there isn't much difference.
Looking at the real estate market the bubble did not deflate. (Maybe it's not in one?) Now it just costs people buying at today's interest rates significantly more per month.
It’s a 13F filing [1], so the article’s phrasing is a little sensationalist. The big number is the value of the underlying stocks, not the premium paid on the options, which is what they’d be risking. The information is 45 days old and they could’ve exited this position the next trading day, 42 days ago (July 3rd).
The $1.6b number comes from listings of:
$738,840,000 for QQQ Puts.
$886,560,000 for SPY Puts
Which is calculated based on the closing value of the underlying stocks on June 30th. Option contracts are for 100 of the underlying security, so 2M reported shares is 20k options.
$886.56M = $443.56 * 20k * 100
If the value of the options contract is $1, the positions for both securities could be replicated for $40,000 total risk.
It doesn’t tell the reader anything about the expiry date or the value of the premium paid, which would be actually useful information.
If someone wanted to, they could guess the size of the risk based on the immediately previous 13F filing and comparing what was sold off, but that would be based on too many assumptions to be super useful either.
It’s a crapshoot of course, but I tend to agree with a bear case these days. It takes a while for interest rate changes to completely affect the economy and the Fed is still raising rates. Credit card debt recently crossed $1T. Layoffs are still occurring in the tech industry and elsewhere. My thinking is the Fed will overshoot (as it always has historically) with interest rates and when the economy starts tanking like in 2007/2008 they’ll cut back to 0.00 immediately. By then the damage is done, unemployment shoots up, credit defaults shoot up, foreclosures shoot up, and we probably get some deflation.
Except for retirement savings, I’m almost entirely out of stocks… not so much because I think it’s downhill from here for a while, but more because my high yield savings account is giving me about 5% APY guaranteed.
I'm not an stock options hedge fund trading expert, does he not have to report the expiry date? These have an expiry date right? Or is it some type that doesn't expire?
I still don’t get why he wouldn’t just wait for the crash and then buy the index. Shorting has 100% upside at most and infinite downside. Going long has infinite upside and at most 100% downside. Buffett has gotten pretty rich by buying during crashes, so you can’t say it doesn’t work.
If the market ends up crashing, I think we'd have our 3rd crash in 3 years, which is a little crazy. Also large caps like $META trading like a penny stock where it does it a 3x in 5 months while small and mid-caps are still down since the 2022 crash. It feels weird.
Equities are wildly divorced from real value and have not had any major broad-based corrections for quite a while in my estimation. Like since before 2019.
I feel strongly that the stock market is due for a massive crash but I'm also aware of the possibility that some highly connected individuals may find a way to cheat, cover up and censor their way to extend the 'growth' period by some arbitrarily long amount of time by which point my put options will have expired many times over.
There is no way that the stock market would experience a massive crash without some serious massive-scale cheating. If this is an extinction-type event, some banks would go rogue and come up with new (possibly illegal) ways to start printing money to prop up the stock market... Given the complexity of the monetary system and correspondent banking, they could keep this going for a while. I mean there are thousands of institutions involved and countless ways to corrupt the system.
Our modern system is all made up of centralized databases with thousands of participants trusting each other; trusting the data that all those thousands of distinct centralized systems are reporting and treating them as if they were a cohesive whole... That's our monetary system; thousands of databases managed by different people who trust each other based on what each others' systems are reporting with no way to verify any of those systems.
