Is This The Big Short 2.0?

Last month, the financial world was taken aback by a massive put option purchase on the part of Dr. Michael Burry, the now-famous fund manager who brilliantly foresaw the crash of 2008 and made billions for his investors in the process.

According to 13-F filings with the SEC, Burry made large acquisitions of put options in both SPY, an ETF that tracks the S&P 500, and QQQ, an ETF that tracks the Nasdaq 100. Many see these trades as a clear indicator that Burry has lost confidence in the market altogether.

When an investor of this caliber turns bearish, the assumption is often that they see something the rest don’t. The question is, what? To understand what he might be thinking, let’s first take a brief look at Burry and his rise to fame in the financial world.

The Big Short: Burry’s Most Important Trade

The Big Short is one of the most relevant films in the history of cinema concerning financial markets. In the movie, Christian Bale portrays Michael Burry, an investor who discovers numerous vulnerabilities in the mortgage-backed securities market after conducting a thorough analysis of the credits extended to the public. Despite his findings, the valuations of banks and multiple real estate developers reflected complete confidence in the repayment of mortgages granted to individuals with low credit scores.

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This realization prompted him to take a bearish stance on the housing market, persuading Goldman Sachs and other investment banking firms to sell him credit default swaps (CDS) related to subprime deals he deemed susceptible. In essence, he took short positions operating under the belief that housing prices would decline. The rest is history. Michael Burry now has a personal net worth of more than a billion dollars and runs Scion Asset Management.

Burry’s Current Decisions

Due to market regulations, every quarter Burry and other institutional investors have to reveal the holdings of their funds, which is the reason why we know he has turned bearish and has developed an interest in tangible assets.

The latest holdings report from Scion Asset Management reveals clear trends about what Burry thinks of the market and the economy in general. Let's break down some of the most important ones:

Bearish Market View

Michael Burry has once again taken a bearish position by acquiring $886 million and $739 million worth of S&P 500 and Nasdaq puts. Specifically, these are puts on SPY and QQQ ETFs, which are the most liquid ETFs that track those indices. Buying a put without purchasing the underlying shares indicates that he has an overall bearish view of the markets, as he will earn money the worse things get.

Overweight on the Consumer Discretionary Sector

Among his most significant holdings is discretionary consumption, which refers to goods or services that we purchase when we want to ‘treat ourselves.' In particular, we see a rebalancing from the banking sector, such as First Republic Bank (NYSE: FRC) and Western Alliance Bancorporation (NYSE: WAL), towards travel-related companies like Expedia (NASDAQ: EXPE), now the largest holding of Scion and MGM Resorts (NYSE: MGM). The exposure to this sector has to do more with inflation rather than the general well-being of the economy, but we will come back to this later.

Tangible Assets and Diversification

On a second level of importance, Burry appears to be diversifying his exposure to tangible assets and businesses outside of the United States. According to the report filed with the SEC, the second-largest holding in Scion's portfolio is Charter Communications (NYSE: CHTR), a company whose business is based on real assets, owning cable and fiber infrastructure. Burry also acquired a significant stake in Liberty Latin America LTD (NASDAQ: LILAK), a similar business to Charter Communications but focused on Latin American markets.

Burry also owns, or is exposed to, significant assets in the farmland space, stating quite clearly in an interview that “I believe that agricultural land with water on site will be very valuable in the future and I’ve put a good amount of money into that.”

The Bear Case in a Nutshell

Michael Burry has stated on more than one occasion that his investment philosophy can be boiled down to the concept of the "margin of safety," popularized by Benjamin Graham. In a previous article, we mentioned the existence of multiple ways to interpret the overall state of the markets and that there are reasons to believe that we are facing a potentially bearish scenario, or at least one where the downside risks outweigh the potential returns. In other words, an insufficient margin of safety.

Market Concentration

The composition of the S&P is limited to only a handful of companies and industries. A clear example of this is that just 20 companies represent 36.04% of the entire index. Similarly, the technology, finance, and healthcare sectors account for 53.5% of the index. Can we really claim that the well-being of the entire economy is represented solely by the prices of 20 companies or just by 3 sectors?

Hidden Inflation

One way inflation might be "hidden" is in the way many official statistics are calculated. Data provider Shadowstats calculates inflation using official methodologies used until 1990. According to Shadowstats, if we consider the methodology used until 1990, the real inflation in 2022 was above double digits and currently stands close to 8%, approximately twice the figure declared by the Bureau of Labor Statistics.

High Market Valuations

The famous Buffett Indicator, designed to "measure" how expensive or cheap the stock market is, is still in historically expensive territory. The Buffett Indicator is the ratio of the total United States stock market to GDP, and it currently stands at 177%. This means the market is almost twice the size of the U.S. GDP

Inferences from Burry's Perspective

In addition to the inferences we can draw from his portfolio, Burry often shares some of his thoughts on social media, specifically on Twitter (X). For instance, Burry subscribes to the theory of suppressed inflation and believes that it may take longer than expected to bring it down to "acceptable levels."

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A direct consequence of higher inflation is that individuals save less money because keeping it in the bank becomes more expensive. Consequently, consumption increases due to expectations of rising prices and the inability to acquire goods that require more capital, such as cars or mortgages. In other words, the best defense against price increases is the consumption of goods and services in the present. This logic, which is similar to what happens in some Latin American countries, may be one of the reasons behind the increased allocation in the discretionary consumption sector, such as travel or resorts.

At the same time, Burry mentions the rising food prices as one of the significant issues stemming from inflation. If Burry can see this, could he also be observing a shift in countries that would benefit the most in the event of an increase in primary goods and commodities?

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Latin American economies (and their currencies) are characterized by their correlation to commodity prices, as commodities are their main export category. In the last 3 years, the price of commodities has increased steadily, even after the Federal Reserve increased interest rates at a fast pace, and as we have seen before, Burry also keeps part of Scion’s funds exposed to Latin American returns.

In previous articles, we evaluated the currencies and countries in Latin America with the greatest potential for returns and we concluded that despite recent bumps on the political front, Colombia is a particular case of economic success.

Will Mike Burry invest in Colombian farmland? It certainly seems to fit his portfolio goals. Burry has spoken at length about the importance of tangible assets, has invested significantly into farmland already, and has prioritized exposure to water-related assets. Colombia, as it happens, is the number one country on Earth for precipitation per land area. Plus, he holds assets in Latin America already.

Whether or not Burry acquires farmland in Colombia - or whether his Big Short 2.0 comes to pass - it’s never a bad opportunity to look for more diversification and security in your portfolio. Click the button below to reach out to our staff about farmland ownership.