In 2021, Michael Burry tweeted about his prediction for the 2022 Stock Market Crash. Here are the now deleted tweets which are explained in simple terms for newbie investors.
Michael Burry, who inspired ‘The Big Short, predicted the 2008 Global Financial Crisis caused by the housing crisis, predicting that US mortgage-backed securities were no longer stable investments due to greed and corruption. He ended up making a personal profit of $100,000,000 and made his investors over $700 million from this bet. He now warns us of a 2022 stock market crash.
In February 2021, Michael warned us of high inflation as a consequence of the Fed’s unprecedented money printing.
He called out the US government and Federal Reserve over the trillions of dollars worth of stimulus they had provided in the pandemic. When he first stated this, he was the contrarian, as at that stage inflation rates remained low despite the printed money. The inflation rate was 1.7%, below the Federal Reserve's margin. But, in a fashion similar to the housing crisis, Barry was simply early with his predictions.
In 2022, the inflation rate has risen to 8.6%. Over the past few months, Burry has also been tweeting about an impending economic crisis and market downturn, that is bound to worsen. The Scion Asset Management manager believes that the S&P 500 rebounded too quickly and disproportionately from the COVID-19 crash in 2020. This belief runs to the extent that he states the S&P index could plummet by as much as 54% in the coming years.
He observed the following historical trend in the S&P index –
In the 2009 crisis, the SP500’s bottom was 13% lower than the 2002 bottom
In 2002, the SP500’s bottom was 17% lower than the 1998 LTCM crisis low
In 1975, SP500 was 10% lower than the range in the 1970s
Essentially, he is implying that the bottom of a current market crash is lower than the one preceding it by about 10 to 15%. Hence, following this trend, he predicted a drop by 15% of the COVID low in the S&P index. This brings the S&P to 1862 points.
Burry is predicting a peak to trough fall of a total of 61.4%, bringing the market back down to the historically normal Shiller PE of roughly 16.
The Shiller P/E ratio is a valuation metric that measures a stock's price relative to the company's earnings per share.
Here, Barry alludes that even during market downturns, strong short-term recoveries have often been observed, despite the long-term downward market trend. A dead cat bounce is a temporary, short-lived recovery of asset prices from a prolonged decline or a bear market that is followed by the continuation of the downtrend.
In technical analysis, a dead cat bounce is considered to be a continuation pattern, where at first the bounce may appear to be a reversal of the prevailing trend, but it is quickly followed by a continuation of the downward price move. Hence, he once again insinuates that we are in the early stages of an impending crisis.
Taking the examples of Microsoft, Amazon, and JP Morgan shares, he also mentions that current trading volumes are low as compared to earlier times. This insinuates that over the next few years, as selling increases, it would lead to much larger declines in the stock market.
Further, Barry tweeted the following chart, showcasing concerning similarities between the 10 years leading up to different financial crises. The green shows the market in the years leading up to the Great Depression.
The yellow shows the S&P 500 leading up to the Dot Com bubble 2000 crash. The white shows the S&P500 run-up to today. The model is uncannily similar. He points out the consistency of human nature, for human spending and buying patterns to periodically lead up to the same bleak situation.
This approach discusses the stock market. However, the core reasoning behind Barry’s view is the economy. The rise in inflation has resulted in the Fed increasing interest rates to make borrowing harder for businesses. However, this interest rate rise will also affect the consumer, the fundamental building block of the economy. In such an economy, consumers have less income to spend, as money goes towards servicing their debts.
This starts a vicious cycle, as less discretionary spending results in less sales for the companies that have been invested in. Barry comments upon the current state of consumers:
This perpetuates a cycle of less consumer spending, less savings, and higher credit card debt, which will further result in less discretionary spending (to pay off the credit card debt), and so on. The less consumer spending will also result in decreased sales for businesses, resulting in layoffs and unemployment, which full further leaves the consumer will less money and force him to dip into savings and debt.
We observe the negative impacts on businesses with the example of Amazon, which had the slowest growth rate of 7% since the dot com bubble burst. This is abysmally low compared to the 44% expansion rate in the year-ago period and is the second consecutive quarter of single-digit growth. And there goes Barry’s tweet –
Hence, we conclude that inflation, interest rate hikes, reduction in consumer savings, and less discretionary spending result in lower business profitability and an overall downward market trend.