Michael Burry is the smartest guy in the room.
Somewhere, there might be a room full of NASA rocket scientists or Nobel Prize winners where at least one person in the room is smarter than Burry.
Maybe … but it’s not likely to be a room that you or I will ever step in.
You might not remember Burry. But you probably remember the quirky hedge fund manager played by Christian Bale in The Big Short. That’s the guy.
Burry rose to fame after betting heavily on the collapse of the mortgage market in 2008. He nearly lost his fund over it, as his investors thought he was stark raving mad. But he was right. The mortgage market did, in fact, collapse, and Burry’s investors made a fortune in the process.
Oh, and remember the GameStop short squeeze incident from last month?
Burry called that too … back in 2019. And he’s making headlines again.
Tweeting under the name “Cassandra,” Burry had this to say earlier this week:
Speculative stock #bubbles ultimately see the gamblers take on too much debt. #MarginDebt popularity accelerates at peaks. At this point the market is dancing on a knife’s edge. Passive investing’s IQ drain, and #stonksgoup hype, add to the danger. pic.twitter.com/VLHrzdNumB
— Cassandra (@michaeljburry) February 21, 2021
The literary geeks out there understand why he writes under the name Cassandra. She was a Trojan princess and prophetess in Greek mythology, cursed with the ability to see the future while no one believed her. She warned her countrymen that the Greeks would destroy Troy, and well … they probably should have listened to her.
At any rate, Burry is concerned about rising margin debt. He points out that major market tops are usually foreshadowed by peaks in margin debt. That was the case in 2000 and again in 2008. Adding to this danger is complacency caused by the rise of indexing and the exit (brain drain) of professional traders. A new generation of amateur traders who have never experienced a bear market are stepping in, and they are woefully unprepared.
But even more, Burry points out that the true leverage in the system is masked by the use of options, which have massive inherent leverage.
So, while things look fine today, that can change in a hurry.
Is Burry Onto Something?
Before you sell everything and run for the hills, I need to make one important point: Burry has a history of being early on his calls. He made ungodly sums of money on his credit default swaps in 2008 when the mortgage market collapsed. But he initiated those trades in 2005 and 2006. His investors revolted due to losses on the swaps in 2006, and he nearly lost his firm.
Likewise, Burry was screaming from the mountaintops that GameStop was an attractive buy in 2018 and 2019, noting the massive short interest and encouraging management to buy back shares. It wasn’t until 2021 that GameStop’s epic move finally happened.
So, if Burry’s track record is any guide, he’ll be proven right. But it won’t necessarily happen tomorrow. The current market rally, driven by government stimulus and the most aggressive Federal Reserve action in history, can keep the party going for a while.
So, what do we do about it?
The best advice I can give you is to stay tactical. By all means, keep trading and keep your money working.
That’s what Adam O’Dell and I do every month in Green Zone Fortunes. And we aren’t afraid to go short like Burry. In fact, we locked in a 100% partial gain in one month for our readers by targeting a short squeeze similar to GameStop back in December.
If you want to gain access to our highest-conviction stock picks each month, check out Adam’s Millionaire Master Class here.
To safe profits,
Charles Sizemore is the editor of Green Zone Fortunes and specializes in income and retirement topics. Charles is a regular on The Bull & The Bear podcast. He is also a frequent guest on CNBC, Bloomberg and Fox Business.
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Originally published at https://moneyandmarkets.com/michael-burry-margin-debt-fears/ on .