Figure 1: Why Michael "Big Short" Burry Is Feeling Greedy About a S&P 500 Rebound
Bloomberg
The fourth quarter started on an exciting note for the markets. The three major U.S. stock indexes — the Dow (^DJI) , the S&P 500 (SPY) – Get S&P 500 ETF TRUST ETF Report, and the Nasdaq (QQQ) – Get PowerShares QQQ Trust Ser 1 Report — ended the first trading session of October up more than 2%.
Reuters noted that the biggest cause of the rally was the news that U.S. Treasury yields had tumbled on weaker-than-expected manufacturing data. This drop indicated a greater likelihood that rising interest rates will curb inflation and the demand for goods.
"The economic data stream actually came in worse than expected. In a very counterintuitive fashion, that likely represents good news for equity markets," Art Hogan, chief market strategist at B. Riley Wealth, told Reuters. "[While] good economic data, strong readings had been a catalyst for selling, this is the first time we've actually seen some negative news be a catalyst."
The market's good mood extended into the next day, with all three indices rising above 2% again. Investors are even more confident that the Fed will tone down its hawkishness and that there's the potential for a strong rally occurring by the end of this year.
But Scion Asset Management manager and "Big Short" protagonist Michael Burry is mega-skeptical about the American economy. According to Burry, the S&P 500 rebounded too early and made unsustainable gains after the COVID crash in 2020.
Burry thinks the current economic situation could lead to a shock worse than any stock market crisis in recent history. Since the market crashed in early 2020, lockdowns, meme stocks, crypto leverage, and rampant Inflation have pointed to a disastrous and chaotic future for the markets in general.
Recently, as the markets rose sharply at the beginning of the fourth quarter, Burry jokingly said on his Twitter account that he was feeling greedy about the latest events.
I admit I'm feeling greedy.
However, Burry later added that he was feeling greedy also in 2000, right before the dot-com bubble burst.
Just remember I was feeling greedy on the long side in 2000.
That's because, according to Burry, the recent spikes in the S&P 500 — which were caused by investors' hopes that inflation has finally peaked — are misleading.
The fund manager said that inflation has always been "peaky" and has never had a single peak. Therefore, according to Burry, investors should not be fooled by periods of mild deflation because inflationary cycles usually last for years, while inflationary eras can last for decades.
One of Burry's recent predictions was related to tech stocks continuing to suffer severe headwinds. He points out that the undercutting model for software and hardware that has been revolutionary in recent years has been responsible for tech stocks receiving very stretched valuation multiples.
With the high interest rate scenario, naturally high-multiple tech stocks won't be able to sustain the same growth rate of past years. Apple (AAPL) – Get Apple Inc. Report recently was an example of this. The company readjusted its production targets after receiving weaker demand for the iPhone 14.
Michael Burry thinks this trend will be stronger in the fourth quarter (Q4) — on top of an already very weak performance for tech stocks in 2022. Nvidia (NVDA) – Get NVIDIA Corporation Report, Microsoft (MSFT) – Get Microsoft Corporation Report, and Apple are examples of this.
Co-producer of The Street’s financial channels: Apple Maven, Amazon Maven and Wall Street Memes. Researcher and operations manager at DM Martins Research.
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