Burry Pulls Out. Market Melt-up?

Michael Burry, renowned for his successful bets against subprime mortgages in the 2008 financial crisis, has shifted his focus by closing out his short positions on the S&P 500 and the Nasdaq 100 (that we reported at the time here). Burry's hedge fund, Scion Capital, revealed in a recent SEC filing that it had closed its "put" positions on the SPDR S&P 500 ETF (SPY) and Invesco QQQ Trust (QQQ) as of the end of September. The bearish positions on these indices amounted to over $1.6 billion (notional/leveraged) at the close of the second quarter, and during the third quarter, the indices experienced declines of 3.6% and 3%, respectively.

For those who have not seen the film "The Big Short", Michael Burry gained widespread recognition for his strategic moves during the 2008 crisis, where he accurately predicted the collapse in residential real estate prices and profited by shorting subprime deals using credit default swaps. His exploits during this period were chronicled in Michael Lewis's book "The Big Short," later adapted into the popular film starring Christian Bale.

In the third quarter, Scion Capital significantly reduced its exposure to the stock market, selling 76% of the shares it had disclosed at the end of the second quarter. Notably, the hedge fund reopened positions in JD.com and Chinese tech giant Alibaba (BABA) after divesting from these companies in the previous quarter. Simultaneously, Scion eliminated its remaining exposure to regional lender New York Community Bank (NYCB), following a period marked by substantial investments in financial shares during the first quarter.

Despite these adjustments, Michael Burry continued his bearish stance on shares by opening two new positions. One involved shorting 100,000 shares of BlackRock's semiconductor ETF, the iShares Semiconductor ETF (SOXX), while the other comprised 2,500 shares betting against the online travel website Booking Holdings Inc. (BKNG). Interestingly, the firm also purchased 1,500 shares of Booking Holdings Inc. outright during the same period.

Melt Up?

A "melt-up" is essentially a reverse stock market crash. This can happen when leaders decide to create money aggressively rather than fix underlying issues. If you would like to see one of the most successful stock market bull runs, you only need to look at a country like Venezuela, which had its stock market pump a whopping 200,000% in a very short period of time several years ago. This was, of course, simply due to their currency being devalued. We forget that countries like the USA are the same in some fundamental regards. The US also has a share market and measures it in its local currency, and much of the incredible "rise" in shares from 2020 onward was nothing but a devaluation in the currency that the shares are measured in.

Will the US give up on the currency and let it take off, or will the perceived value of the stock market be sacrificed during an election year? If shares are smacked down, this could put Gold/AUD especially in the position to rise. Notice how opposite it has been moving to US shares:


Gold/AUD daily price chart


Fed Push Back

The Fed's excuse to raise interest rates and potentially engineer a market crash has been that inflation is out of control and needs to be brought down. The recent CPI print has supposedly invalidated their invisible enemy by showing that inflation is apparently no longer an issue. So what might the Fed do if they wanted to hold rates high anyway? Would they simply ignore the data and keep going on the same warpath? That is exactly what the Fed's Mary Daly has just done.

Daly has been pushing back (weakly, one might argue) against the good CPI print. She stated in a newspaper interview that it is “very, very encouraging” but she would not rule out rate hikes. She also stated that “We have to be bold enough to say ‘we don’t know’ and bold enough to say ‘we need to take the time to do it right’.” If they do not know, then what is the reason for discussing the CPI print? This is essentially claiming that the data is not trustworthy, or that the Fed simply wants to hold rates high and is clawing for another excuse. In any case, Daly reiterated that rate cuts will not be happening for “a while” and she may be right. The markets have consistently misjudged the Fed this year and they may be forced to face the music.