I re-watched The Big Short recently. The movie was based on the book by Michael
Lewis which follows the accounts of several people who predicted the housing
market collapse. Now I don’t think the
book was Mr. Lewis’s best (see Flash
Boys or The Undoing
Project), and I don’t even think that it was the best movie based on one of
his books (see Moneyball)
but it holds a special place in my movie library. This is mainly due to the movie’s portrayal
of Dr Michael Burry.
Dr Burry had accurately predicted that subprime mortgages
(especially those with “teaser” rates such as 3/1, 5/1, 7/1, & pay-option ARMs) would
adjust to higher rates causing homeowners to be unable to afford their
mortgage. This in turn would cause the
bonds built on top of these mortgages to fall in value. To trade this thesis, Dr Burry purchased
credit default swaps against these subprime deals. Between the time of his purchasing of the
swaps and the eventual collapse of the subprime market, Dr Burry was under
extreme pressure from the investors in his fund. Many worried that his predictions were
inaccurate and demanded to withdraw their capital.
So, why do I bring all this up? Two reasons. The first is that Dr Burry saw something
going on in the market, set up a trade in his favor, and then had the patience
to see it through. This all in the face
of people telling him that he was wrong and the trade moving against him. However, his perseverance paid off. I feel we are encountering a similar time now
as the Fed has just gone on a gaslighting tour that seems to have spilled over into
this week. NY Fed Presidents Williams, Vice Chair Quarles, and Pres Barkins are
speaking today. Barkins is also speaking tomorrow and Wednesday. Bostic also speaks on Wednesday, as well as
Thursday. We’ve seen the tidal wave of
inflation that is coming our way with high CPI and PCE readings. I wouldn’t put it past the Fed to change the
way they look at these statistics in order to downplay their significance. In fact, this very thing has happened
before. Stephen Roach, who served on the
research staff at the Fed from ‘72 until ‘79, wrote an opinion piece last month
for Project Syndicate that was picked up by MarketWatch. You can find it here. In it, he details how the Fed chairman at the
time (Arthur Burns), would argue that the inflation that was happening was
transitory (!!). He would purposely
exclude items from the CPI because he argued that these items were experiencing
increases that had nothing to do with monetary policy. Things like oil, gas, and food. This is how we ended up with the “core”
CPI/PCE indexes. Burns even argued that
an El Nino event which decimated Peruvian anchovies was the cause of rising
fertilizer, which in turn raised food prices.
Burns didn’t concede that monetary policy was the issue until 1975. Now what does Mark Twain have to say about
this?
The second reason I bring up Dr Burry’s story is that he
reopened his hedge fund in 2013. He is
required by the SEC to disclose his holdings (13F reports) because he has over
$100M in assets under management. I know
that he was bullish on Gamestop (GME) in 2019, so I looked up his 13F to see
what he was up to now. Anyone can do
this by going to the SEC’s Edgar search found here. Using the search, you can lookup public
companies to review their quarterly statements and hedge funds who file the 13F
reports, as well as a litany of other info such as merger/acquisition
announcements and insiders buying or selling their stock. Here’s the link to Dr Burry’s latest
filing.
What jumped out to me was this:
Dr. Burry has put on a big bet that interest rates are going up. He has put options against TLT which is the 20+ year treasury ETF, call options on the ultra-short 20+ year treasury ETF, 300k shares of that same ultra-short ETF, and calls on the -3x 20+ year treasury ETF. For those of you who don’t trade options, I’ll put out a primer later. In the meantime, this is quite a position against interest rates. Dr. Burry, like myself, believes that the Fed has painted itself into a corner and will eventually need to raise interest rates. The Fed wants to keep interest rates low but this feeds the inflation that is coming.
The problem the Fed faces is that by raising interest rates,
the stock market will get crushed.
Especially the growth stocks and growth stock ETF’s like the QQQ and IWO
(which Dr. Burry is also betting against).
This is because growth stocks are heavily reliant on high P/E ratios
which discount future earnings. These
stocks look really good when interest rates are low but when interest rates are
high, future earnings aren’t valued as high.
So, what’s an investor to do?
Important and Potential Market Moving Events This Week
6am NY Fed Pres Williams speech at the BIS
7.30am Dallas Fed Manufacturing Index (June)
9am Richmond Fed Pres Barking speaks at Rotary Club of Atlanta
10am Vice Fed Chair Quarles speaks at Utah Bankers Association
6am FHFA house price index (April) & Case-Shiller index (April)
6am Richmond Fed Pres Barkin speaks at MNI event
7am Conference Board consumer confidence (June)
5am Fed Pres Bostic speaks are Buckhead Coalition event
5.15am ADP employment report (June)
7am Pending home sales (May)
10am Richmond Fed Pres Barkin speaks at Northern Virginia Hispanic American Chamber of Commerce
6.45am Markit manufacturing PMI (June)
7am ISM Manufacturing Index (June)
7am Construction spending (May)
11am Atlanta Fed Pres Bostic speaks are Habitat for Humanity event
5.30am Nonfarm payroll employment (June)
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