Category: Uncategorized

The End Of The Financial World? Maybe, But Who Cares?

“How can I think of romance when my bronchial tubes are collapsing?” – The Addams Family

How can I have a low credit score?  The bank says I have an “outstanding” balance.  (all memes today are “as found”)

Let’s talk about Michael J. Burry.  Burry studied economics on his way to a pre-med decree at ULCA, and then got an M.D. at Vanderbilt.  I think he got bored with medicine, and he decided investing was more fun than doing pathology, and 2000 started investing.  Besides, I heard that when he did a report on a deceased patient that he put, “cause of death: autopsy” that people weren’t amused, but that joke still kills me.

By the end of 2004, he was managing $600,000,000 dollars, and had made returns of over 50% shorting the Tech Bubble when everyone still thought that Alta Vista® was worth more than a box of slightly melted Milk Duds®.  In 2005, Burry started in reviewing the housing and, more importantly, the housing lending market.  He saw it was all junk.

To be fair, I made the same observation at the time, but unlike Dr. Burry, I only made about $80,000 with a stop-loss on my own house from when I lived in Houston.  In my case, it was a one-of-a-kind situation, worked like a charm, and it won’t happen to me again.

I made (or, in my case didn’t lose) $80,000.  Burry made $100,000,000.  Burry made that much personally.  But, it really it took him a whole year to make that much.  Burry also made his other investors more than $700,000,000 in profit at the same time Bernie Madoff was attempting to convince his investors that the money must be in his other suit.  Or maybe he left it under the bed.

Burry cleaned out the market, Madoff cleaned out his investors.

Guess which one is Madoff and which one is Burry.

Also, Burry is a little ‘spergie like your ‘umble ‘ost, and also is a heavy metal fan.  I think he and I would get along, except I’m sure his car costs more than my house.  And The Mrs. has a shirt that she had autographed by Dimebag Darrell.  I’m thinking I could convince her to sell it to Dr. Burry.  For a particular car . . .

Also, like me, he has correctly predicted seven of the last three recessions.

I’ll admit, I do tend to see the cracks.  There’s a reason I say, “Better a year early than an hour too late” because I understand a fundamental principle of life as first noted by the stoic philosopher Seneca (and expounded upon by Ugo Bardi – LINK):  things are only built slowly, but disappear quickly.  A house might take weeks or months to build, but (I was advised by a firefighter) if my house has been burning for more than a few minutes, they show up to pull me, The Mrs., and Pugsley out and make sure that other houses next to mine don’t burn.

Destruction is more powerful than creation.  This is a restatement of the Second Law of Thermodynamics, and just shows what any father knows – the lawn won’t mow itself.

But, I digress.  Burry sees the larger patterns in the world, and his autism is a superpower in pattern detection.  And he doesn’t like what he sees.  In fact, he just posted this Tweet®:

There’s a new version of music called bubble rap.  It sound’s a lot like pop.

Well, I wonder what he meant by that?  I’ll turn it over to the philosophers at /pol/ to explain using GrugTalk®:

Why didn’t the caveman cross the road?  Because he was dead before roads were invented.

The slightly longer answer than the GrugTalk™ answer is that this is the graph that shows the relationship between the S&P 500 and the Federal funds rate.  Grug is right, sometimes line go up, sometimes down.  And when things start to collapse the Fed® normally cuts the interest rate.  But, of course, in 2001 the inflation rate was lower than Madonna’s current attractiveness on a scale of 1 to 10.

Now?  In late January, Burry had a one word Tweet©:

I sold my vacuum cleaner.  It was just gathering dust.

I wonder what he meant by that?  I don’t think we need Grug to translate.  Sell.  Burry is indicating he’s out.  The first graph shows that the Fed™ rate is approaching levels not seen since before the Tech Bubble popped.

But I think it’s going to be much worse, because inflation is exploding.  In 2001, life was better, and the real issue was the ludicrous level of optimism that caused money to flow into the tech sector.  Of course, the solution from the Fed™ was to pump in tons of cash and free up lending.  In the housing sector.  So, this graph represents how Burry made a lot of money, essentially shorting the Fed™ as it poured dollars from the Tech Bubble directly into the Housing Bubble which led to the Great Recession.

Guess some folks never learn.

This made Burry hundreds of millions of dollars as he profited from the tendency of the Fed™ to treat the symptoms and not the actual problems.  However, given that our debt, inflation rate, and business risk are going up faster than a Chinese balloon.  And then they’ll go down faster than a Chinese balloon.

My balloon elephant wouldn’t fit in the back seat, so I had to pop the trunk.

Now, to be fair, Elon Musk has characterized Burry as a “stopped clock” who is right enough times to make him a few hundred million dollars.  Elon might have a point – as Burry and I wait for the cracks to form and Seneca to be proven correct, there’s a world out there, growing and moving.  You can live life, but living it always on the defensive will end up in a losing ground strategy.

I think Burry is right, and I wouldn’t bet against him.  But I’m also not going to spend to my life living in fear.  It’s a mistake, and has probably cost me additional growth on what I have squirreled away for the future.  That’s on me, and I refuse to feel bad about it, though if I were 20 or 30 I would be all in online.

As we get older, we often worry far too much about the destruction part of Seneca’s lesson, and forget about the creation, which is the important part of the story.  We will have failures.  Economies will collapse.

The world will recover.  We will abide.  But we cannot live in fear, nor in regret.

Unlike Madonna’s face.