According to Y! Finance report, Michael Burry, who famously shorted subprime mortgages during the 2008 financial crisis, closed his bets against the S&P 500 and the Nasdaq 100 in the third quarter. Michael Burry has been bearish on stocks for a long time but his shorts have not worked out since his subprime mortgage bet. I am very anti-short because it’s a leverage bet and investors can get wiped out easily. Also, I think structurally, it’s an upward battle to short because we are actually still in a loose monetary environment.
The YouTube interview shared above gave a lot of insights of why our economy is humming along after the rapid rise of interest rates. First, a majority of people are locked into the fixed long-term mortgage rates or corporate debt so the impact of high interest is not as pronounced as many people expected. Second, there’s a big government stimulus program on climate and industrial investments from the (ironically called) Inflation Reduction Act. Consumers and businesses might have tightened their belt but the government is actually increasing their spending. Third, the increased issuances of treasury bills effectively moved a portion of money parked in the RRP facility to bank deposits, which increased liquidity of the banking system. In essence, we have (relatively) high interest rates that are supposed to constrict the economy but these three other counter forces are stimulating the economy. Shorting the stock market in anticipation of a recession in the current environment is a super risky move. Also foreign economies are probably going to break before the US economy because they have more floating rate debt and they cannot print US dollars. If investors want to short, they should at least wait until foreign countries are in deep recession. I personally de-risked my portfolio by holding a lot of treasury bills but I am still 50% in equity. But I will not short the market. Inflation is good for corporate earnings and companies with strong balance sheets and cash flows should be able to handle high rates. It’s primarily the less profitable and highly leveraged entities that will suffer and investors shall stay away from them.
A couple disagreements 😁 sorry im advance for the rant. I get frustrated with talking heads in these videos that consistently share incorrect info.
Long stock market during QE statistically not risky. Long stock market during QT is statistically risky. 150B is getting drained from the financial system every month by the fed. The fed isn't even talking about talking about stopping QT. QT means risk assets decrease in value. Mortgage spreads widen. Corporate credit spreads widen. Equity values fall. The fed wanted RRP above 1T it fell below this level last week. Liquidity is getting drained from the system at a rapid pace. It's part of why Russell stocks are getting hammered and market breadth is super narrow with all liqudity crowding into the largest cap names at historically ridiculous multiples.
The treasury bill narrative is super silly. If you look at RRP it's continuing to fall at same pace it had before the announcement. People parking their money in RRP want no interest risk duration exposure for a variety of reasons. Two year bills had a great yield before the treasury announcement. They weren't buying two year then, why would they buy them now with more supply coming in? I actually stopped buying two year on the announcement because I now expect those yields to increase on excess supply. The treasury announcement was basically the equivalent of an emergency rate cut by the fed. Things are so bad with US debt demand that they can't issue more bonds. Absolutely horrible situation for the US but the market is celebrating. It's pretty funny to watch. It's like when people called BTFP QE or when the market believed "not QE" wasnt QE when it absolutely was.
Being naked short is definitely scary. I cap that at 25% and normally under 10%. You can hedge out long equity risk by buying ITM(in the money) index puts. Say qqq which is ridiculously overvalued on pretty much every historic metric at this point. 10% ITM puts out to say June 2024 would maybe cost 11% premium but the most you risk is 11% on the position and if it falls 40% then you make about a 400% return. And if it rallies 100% on some short squeeze then you only lose 11%.