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Is This The Greatest Bubble Of All Time?

US Stock Market Bubble Meter 3D Illustration

There’s been a lot of talk lately as to whether the stock market in 2021 is in a bubble. If you look at Google Trends data you can see that search traffic for the term ‘stock market bubble’ hit an all-time high in January of this year:

stock market bubble google trends

Search data may have deflated since that January peak but global stock markets haven’t. This has caused many pundits to continue with the bubble talk.

What Does Michael Burry Think?

Michael Burry’s Twitter profile is named Cassandra. If you’re wondering why, Cassandra comes from Greek mythology. She was a trojan priestess whose curse was to share true prophecies that no-one believed.

Burry, who made $700 million from the credit crisis, has made a lot of good calls recently and was an early investor in GameStop. Last week, he laid out his views on Twitter very clearly.

According to Burry, we are living in the greatest speculative bubble of all time. Burry later deleted his tweets which has become something of a theme for the investor.

michael burry greatest bubble of all time tweet

Burry also has strong views on bitcoin and cryptocurrencies. His latest tweets suggest that he views bitcoin negatively. He indicated that bitcoin is in a classic head and shoulders pattern. He said the problem with cryptocurrencies is the amount of leverage in the system.

The problem with crypto, as in most things is the leverage. If you don’t know how much leverage is in crypto, you don’t know anything about crypto, no matter how much else you think you know.

Michael Burry

Despite the bearish commentary, Burry also admitted there are opportunities in the market, but they are in the very small and lesser known companies. These are companies that major funds often can’t buy due to their size or regulatory constraints.

michael burry deleted tweet

Michael Burry’s Portfolio

If we take a look at Michael Burry’s hedge fund Scion Asset Management you can see that he is largely backing his convictions. SEC 13F filings show Burry has various bearish and inflationary focussed trades.

As reported by Whale Wisdom, Burry’s fund has a huge short position in Tesla which makes up 40% of the portfolio. He is also bearish on Treasury bonds with a 12.7% short position in TLT puts and a 4% call position in TBT. He’s also got a short trade on the Russell 2000 Growth ETF (IWO) with a position that makes up around 3% of his holdings.

Balancing out those bearish trades, Burry has long positions in Google, Facebook, Kraft Heinz, CVS and NTAP and a number of other smaller longs.

michael burry portfolio

Burry’s trades can change at any time and these filings online may not reflect all his real positions. However, it’s very clear what Burry’s general outlook is for the market.

Michael Burry’s Tesla Short

Burry’s Tesla short is not a new position but one that he has held since around December 2020. We don’t know the strike prices but according to latest filings, his Tesla short now amounts to a market value of ~$534 million.

Burry has tweeted in the past that Tesla’s positive net income was enabled by the sale of hundreds of millions of regulatory credits. He became skeptical of the valuation in September last year, apparently exiting when the stock had a valuation around ~$458 billion.

Since then, Tesla’s market cap has soared to $600 billion and Burry has grown his short position. Burry wrote:

Chinese regulators summon Tesla on quality issues as consumers complain about quality … but $TSLA bought $BTC. In my mind’s eye, so much #digitalconfetti.

Michael Burry

Burry also noted:

$TSLA and $BTC correlation coefficient is 0.951967 over the last six months. @elonmusk going for perfect unity? Nah, Elon dreams the impossible. He is determined to break unity. Correlation > 1. And he has history on his side. $TSLA and $BTC investors can make anything happen.

Michael Burry

In other words, Burry believes Musk’s foray into bitcoin is in part to distract investors from some negative news out of China. As we wrote last week, the Model 3 was recently taken over as the best selling car in China by the Wuling Mini EV.

The fact that bitcoin and Tesla have such a strong correlation is not a good thing either. It suggests the same types of investors chasing bitcoin are chasing Tesla and Burry believes both markets are in a bubble.

Our View – Is There A Stock Market Bubble?

Michael Burry has become a legendary investor and it’s always good to hear what he’s thinking. From our own point of view, we cannot disagree that stock markets are extended and could be in a bubble. All the signs point to an unprecedented level of speculation in markets which has extended to most areas.

When it comes to signs of excess and indicators of a stock market bubble, you can really take your pick. But one chart that really caught my eye is the FINRA investor margin debt chart. It shows how investor margin debt soared to a record in 2020. The first time it has done so during an economic recession:

finra margin debt stock market bubble

Is it the greatest bubble of all time?

Who knows? The 1929 bubble was big and so was the dotcom bubble. The Japanese stock market bubble was also massive. At one point, the Japanese Imperial Palace was worth more than all the land in California.

This time around, financial excess is spreading to all areas, so perhaps one day it may be classed as the greatest.

stock market bubble in the nikkei

What About Tesla?

With regard to Tesla, we still own a small position and have no intention to short the stock. However, it is certainly one of our smaller trades. There is so much competition in electric vehicles we think the stock may well have topped out at it’s recent high.

We are also not keen on bitcoin or cryptocurrencies at this moment. They may be useful and have potential, but alongside Tesla, these are the areas that are seeing the most speculation from investors.

There’s Always An Opportunity Somewhere

We also believe that there is always an opportunity somewhere. Maybe in Europe, in Asia, or in smaller companies.

It’s for this reason that we will continue our monthly investing process. We will simply be targeting specific areas of the market and do so at a slower pace.

The speculative frenzy means that we have to be especially careful and we did lighten up on a few of our existing positions. We want to have some cash available in case of a market correction. We are not against putting on a hedge though we have not done so yet.

Even if there is a stock market bubble, timing it may not be straight forward.

Comments (1)

well done! thanks

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