Have you read any of the recent articles from Michael Burry – curious about your thoughts on his perspectives. From what I can tell he does seem to look at things in a different and intelligent way but I think he would only be accurate if things were fair instead of manipulated and I also think that he greatly underestimates the level of exuberance irrespective of how irrational it might be.
Jeremiah
From what I’m able to read about Mr Burry, I guess he makes large sector bets by shorting asset sectors.
Prior to QE, predicting bubbles was easy
It was a much more straightforward process to predict when to short a particular sector before quantitative easing QE was established as a bona fide monetary tool.
For instance, I owned eight rental houses back in the closing couple months of 2005 and sold off six of them, anticipating a housing crash. I made this prediction, because the rental income I was deriving was not rising nearly as much as the prices. I was running the numbers with a pen and paper on my kitchen table and determined that the values had gone insane.
Okay. For about 18 months, the prices continued to move higher and I began to initially regret selling off my portfolio the way I did. However, I parked the proceeds in physical gold and silver and then the stock market crash happened in 2008. The property values on those houses dropped by at least 50% and I was sitting pretty. I was able to make this determination because before the GFC 2008, there was no viable way for the FED to step in the way it does now.
In 2008, the old world reached its financial denouement
The reason why the GFC occurred in the first place was because for the first time in modern history the supply of debt was greater than the world’s ability to absorb it all. That’s it, pure and simple.
Yes, organic fixed income demand was no longer high enough to absorb all of the new supply of fixed income securities.
With the sovereign nation-states running ever larger fiscal deficits and financing them with sovereign debt securities, the nation state governments were crowding out private investment on a scale not seen since World War II.
But there were no wars occurring during the aughts. These trends had become institutionalized and the world had reached a financial denouement. Essentially, the world was consuming more than 100% of its net savings rate. As a result, the industrialized nations began to experience a spiraling of debt defaults that had never been experienced since the Great Depression.
QE changed everything and created a new world
Since the GFC and Bernanke’s conjuring of QE, we no longer can deduce outcomes based on simple math.
What do I mean? Because of QE, the nation states can go into hock for any amount desired and run fiscal deficits to levels that were previously inconceivable. The central banking cartel can absorb the excess debt.
As a result, asset sectors that look over valued can now continue remaining overvalued for years if not decades longer than they normally would be. For many prudent contrarians, the stock and housing markets have been grossly overvalued since 2015 and before. Good luck shorting it. Many of these traders who didn’t adjust to the new reality are no longer around.
How we survive with QE
I started a shortwave show back in 2015, and I would analyze all of the Cassandra’s in the stock and housing markets who were pounding the table about imminent collapse. I told my listeners and the readers of my blog not to be concerned about this as the Federal Reserve was more than capable of absorbing all of the extra debt issuance.
It’s all so very clever and ingenious and this is why the standards of living for the average person have continued to fall as the asset owners have been able to consolidate their wealth and power over the masses.
The world is slowly sinking in a sea of red ink, yet those with the income-generating assets have life preservers and boats. Every person on the planet suffers from QE and all of the debt outstanding, so it’s vital that we figure out ways to keep our heads above water.
Think of all that debt that needs to be serviced in a post-QE world. The interest costs are mind blowing, but those who only have a pocket full of debts and a wage are not only servicing their own personal debts, but are effectively servicing everyone else’s via monetary and price inflation.
In order to survive in this crimson ocean, we must own enough of the assets, so that they go up in value more than our standards of living would otherwise fall. Wage earners and fixed income pensioners get decimated. Essentially, the more income generating assets someone owns the better his or her relative outcome. And this is all made possible because of QE.
Going insolvent waiting to be right
So, Mr. Burry could lay out all of the cogent points on his investment thesis and be able to show with all of his analysis and evidence that a market is overvalued and yet be wrong for a long time. And that’s the important concept to keep in mind. The markets can remain overvalued for much longer than someone can remain solvent waiting to be right.
I cannot overemphasize how QE has completely changed the investment landscape. In a world of quantitative easing, everything goes up in value. I mean everything. And at the end of the day, I would prefer to be swimming downstream than to be fighting the rapids going in the opposite direction.