Michael Burry Speaks | Michael Lewis

Introduction to Michael Barry

Who is Michael Barry?

• Michael Barry is a central figure in both the book and movie "The Big Short," portrayed by Christian Bale. He plays a crucial role in the narrative surrounding the financial crisis.

• Initially reluctant to participate, Barry's trading activities became public knowledge when he filed a 13F form with the SEC, revealing significant short positions against companies like Palantir and Nvidia.

The Impact of Public Disclosure

• Following his disclosure, Barry gained significant media attention on platforms like Twitter and CNBC, despite his desire to remain low-profile.

• His reluctance to engage with media adds an element of exclusivity for audiences who appreciate insights from less accessible figures.

Barry's Early Predictions on Subprime Mortgages

Innovating Financial Instruments

• Barry was among the first to bet against the subprime mortgage crisis but faced challenges due to a lack of available financial instruments at that time.

• He effectively collaborated with Wall Street firms to create credit default swaps on subprime mortgage bonds, which acted as insurance policies against bond defaults.

Understanding Credit Default Swaps

• A credit default swap allows investors to insure bonds backed by subprime loans; if these loans fail, they receive compensation similar to fire insurance on property.

• This innovation enabled other market participants to replicate his strategy and capitalize on the impending market collapse.

Personal Insights into Michael Barry

Intimacy in Conversations

• The hosts express appreciation for how open Barry was during their discussions, providing valuable insights into his thought processes and experiences in finance.

Unique Communication Style

• Barry’s extensive email correspondence throughout his trading career served as a real-time account of his thoughts and strategies regarding market movements.

The Complexity of Market Timing

Challenges of Being Right Too Soon

• The conversation highlights that while recognizing market irresponsibilities is crucial, timing those predictions accurately is equally important; being right too early can lead to significant losses.

The Impact of "The Big Short" on Michael Burry

Reflections on the 1990s Bubble

• Discussion begins with the unpredictability of market bubbles, emphasizing that timing such events is challenging and risky.

• The conversation shifts to "The Big Short," exploring its influence on Michael Burry's life, including the book and film adaptations.

Personal Experience with "The Big Short"

• Burry shares his perspective as someone on the autism spectrum, noting his ability to remain focused and unaffected by external pressures.

• He attended the premiere of the movie due to family interest but has not revisited it since, indicating a desire to move forward rather than dwell on past experiences.

Unique Trading Circumstances

• Burry explains that his trading strategy during the financial crisis was unique, allowing him to buy insurance on illiquid bonds without owning them.

• He recalls receiving inquiries from Goldman Sachs about his unconventional approach, highlighting how few understood what he was doing at that time.

Closing His Fund

• Despite significant profits for investors, Burry closed his fund due to dissatisfaction among investors who were unhappy even when they made money.

• He reflects on a lack of apologies or recognition from investors after they profited post-publication of the book and film.

Reopening and Current Operations

• Burry reopened his fund in 2013 but chose to keep it small and manageable, avoiding large-scale fundraising or Wall Street interactions.

• He emphasizes maintaining relationships with trusted investors from previous experiences while managing natural attrition within his investor base.

Understanding Options Trading and Market Sentiment

The Nature of Options Trading

• Discussion on purchasing put options for Palantir, indicating a belief that the stock is overvalued at $200 and could drop significantly in two years.

• Explanation of how short positions are calculated by multiplying underlying shares by current stock price, leading to inflated notional values.

• Mention of discrepancies in option pricing, where a low-value option was priced as if it were much higher, highlighting market inefficiencies.

Impact of the Financial Crisis

• Reflection on the changes in compliance and communication within financial firms post-financial crisis, emphasizing increased restrictions on discussions about investments.

• Personal frustration with compliance rules that limited public commentary on stocks, particularly during significant events like COVID-19.

Transitioning to Independent Investing

• Decision to manage personal funds instead of running a pooled investment fund due to concerns about market conditions and investor expectations.

• Comparison between current market dynamics dominated by passive investing versus past active management strategies.

Market Predictions and Concerns

• Insight into the potential for a prolonged bear market similar to 2000, with concerns that all stocks may decline rather than just specific sectors.

• Emphasis on challenges faced when trying to protect long positions in an environment heavily influenced by passive money flows.

Short Selling Controversies

• Description of how media coverage can misrepresent investment positions (e.g., large put options appearing as significant short positions).

• Notable reaction from Palantir's CEO regarding ownership of puts, drawing parallels with historical instances where short sellers were blamed during crises.

Understanding Palantir's Business Model

• Inquiry into what insights inform the belief that Palantir's stock will decline significantly; discussion centers around high installation costs for their software and reliance on government contracts.

AI Market Dynamics and Corporate Strategies

Shifts in AI Market Perception

• The perception of AI companies has shifted from dominance to a more balanced market, with corporations increasingly seeking AI solutions.

• Companies like IBM are also significant players in the AI space, often overshadowed by Palantir's public image despite having larger business operations.

Financial Insights on Palantir

• Palantir has produced five billionaires due to its stock performance, raising questions about its revenue-to-billionaire ratio which exceeds one.

• The company's revenue is around $4 billion, but much of its income is tied to stock-based compensation for employees.

Stock-Based Compensation and Valuation

• Wall Street tends to add back stock-based compensation when calculating earnings per share, which can misrepresent actual profitability.

• Historical analysis shows that Palantir does not generate substantial profits when accounting for stock buybacks aimed at offsetting dilution.

Timing and Market Comparisons

• The current landscape resembles the dot-com bubble era; both Palantir and Nvidia have benefitted from being associated with AI without directly producing related products.

• Nvidia's rise was initially fueled by crypto mining demand for GPUs before transitioning into the AI sector.

Capital Expenditure Trends

• Current capital expenditure trends suggest a potential bubble similar to past investment manias, where announcements of spending lead to inflated market valuations.

• Historical data indicates that major peaks in capital expenditures often occur after stock market highs, suggesting caution in current investments.

Future Predictions and Investment Advice

• Major companies announcing large capital expenditures on AI see immediate increases in their market cap; Oracle's recent announcements exemplify this trend.

• Recommendations include investing in healthcare stocks as they are currently undervalued compared to tech stocks that have seen significant gains.

Stock Market Insights and Predictions

Discussion on Berkshire Hathaway's Investment in Google

• The speaker expresses skepticism about the valuation of a stock that is "shooting straight up" and suggests it might be time to sell.

• There is uncertainty regarding whether Warren Buffett personally made the decision to buy Google stock, but it's noted that Google is favored among value investors for being relatively cheaper than its competitors.

• The speaker highlights that a significant portion of Google's search queries are not monetizable, raising concerns about profitability amidst rising AI costs.

Impact of AI on Google's Business Model

• The cost of running AI queries has increased significantly compared to traditional search queries, which were previously very low-cost for Google.

• A comparison is drawn between the current AI boom and the telecommunications revolution of the late 1990s, emphasizing how transformative technology can be over time.

• While many users currently benefit from free access to LLM (Large Language Models), there’s skepticism about future monetization opportunities for average consumers.

Concerns About U.S. Debt Crisis

• The speaker discusses challenges in predicting debt crises, likening it to waiting for Castro's death—an unreliable strategy due to the resilience of powerful countries like the U.S.

• Current U.S. tax revenues are highlighted: $4.5 trillion from individuals versus only $400 billion from corporations; this raises questions about fiscal sustainability given high interest payments on national debt.

Perspectives on Federal Reserve Independence

• The speaker expresses a controversial view that Trump's potential influence over the Fed could lead to widespread discontent with its operations.

• Criticism is directed at the Fed's historical performance since its inception in 1914, suggesting it has caused more harm than good without providing necessary support during economic downturns.

• There's an argument against lowering interest rates as inflation rises; doing so could negatively impact savers who have struggled under previous low-rate environments.

US Treasury and Bitcoin: A Critical Discussion

The Role of the US Treasury

• The speaker suggests that the US Treasury could benefit from having a dedicated department to make financial decisions, indicating a potential overlap with the Federal Reserve's current role in monetizing Treasury debt.

Skepticism Towards Bitcoin

• The speaker expresses strong skepticism about Bitcoin, labeling it as "the tulip bulb of our time" and criticizing its perceived value at $100,000. They argue that it has facilitated significant criminal activity, making it worse than historical speculative bubbles.

Personal Investment Choices

• When asked about safe investments, the speaker reveals they have held gold since 2005, suggesting a preference for traditional assets over cryptocurrencies like Bitcoin.

Vulnerability in Sharing Personal Stories

• The conversation shifts to personal anecdotes where one participant reflects on their initial vulnerability when sharing their story with Michael Lewis, acknowledging concerns about how they would be portrayed given Lewis's critical reputation in financial narratives.

Trust and Transparency in Storytelling

• The speaker emphasizes the importance of full disclosure during their interaction with Lewis, wanting to ensure transparency due to their belief that they had acted correctly in past situations. This highlights themes of trust and integrity in storytelling.

Unique Perspectives on Financial Topics

• The discussion touches on the unique perspectives held by individuals who may think differently from mainstream views. One participant appreciates another's ability to articulate unconventional thoughts without embarrassment.

Closing Remarks and Future Engagement

• As the conversation wraps up, there is an expression of mutual respect and a desire for future engagement over dinner, indicating ongoing camaraderie despite differing views on financial matters.