Michael Burry's Impeccable Timing... and Movie Night...
The Big Short trader has come out of the box hot with a $1 billion bet against tech... Just $1 billion, Michael?
As you know, I’m watching a film I’ve never seen before each night this month…
Last Night’s Haiku Movie Review - The Pelican Brief
Pelican chaos.
Law flies south for winter plots…
Two beaks out of four.
Tonight’s Movie: Chinatown
Dear Fellow Traveler:
These are longer days in the market when the stress starts to build.
Our Russell 2000 reading has been negative (off and on) for a month.
But things took a much bigger dive today with the number of stocks breaking down, accelerating at a breakneck pace.
The S&P 500, however, had largely remained resilient. While the banking sector had shown some cracks… the crowded trade in the MAG 7 continued to push names like NVIDIA, Micron, and AMD higher.
Something went wrong today, however…
So, it’s incredible timing that Michael Burry reportedly made a $1 billion bet against NVIDIA and Palantir, according to a regulatory filing.
Burry came out of nowhere last Thursday with a Tweet talking about the financial crisis after a long time away from social media.
On Friday, the Fed stepped heavily into the repo market, and banks tapped $50 billion from the Standing Repo Facility (SRF). The Fed engaged in repo operations yesterday and today as well… just a reminder that they’re trying to unclog the piping…
After months of markets peaking at new highs, we’ve had a few short-term tests of the S&P 500 in negative conditions. But those tests have largely just been periods of minor selling, quick bounces of key resistance levels, and a resurgence of buying…
What makes this time different?
What makes Burry come off the sideline now?
Because it all feels way too convenient to lean on fundamentals - when fundamentals largely didn’t matter on the way up for NVDA and PLTR…
I’m sure that there will be plenty of people who aim to secure that answer - and to trickle into the narrative about how suddenly valuations being four miles past the moon are now infinitely more dangerous than just… at the moon.
That doesn’t quite register.
Because the reality is that post-2008 crises haven’t centered on valuations.
They’ve been massive liquidity cracks and massive amounts of unwound leverage… And each time, there’s been some catalyst…
The European Banking Crisis…
The liquidity panic and taper tantrums that fueled more Quantitative Easing…
China’s debt-deflation panic…
The Repo crisis and Volmageddon…
The COVID Crash
Archegos…
GILT Crisis
SVB Crisis
Nikkei Crash
Money Market Spasms due to capital drain during tax season or at year-end…
The Trade Crisis…
What’s different now?
Perhaps how well aware everyone is of what’s wrong…
Markets have been blatantly aware that reserves have been under pressure for months…
We watched the Reverse Repo drain… and now we’ve seen banking reserves drop under the dangerous line of $3 trillion… We’ve seen multiple defaults in private credit, and the so-called “cockroaches” have appeared.
And even THEN… this market slowly… and quietly bled into negative momentum now - signalling greater outflows that can’t be ignored (until they suddenly are.)
Oddly enough… the MAG 7 ETF is still 2% above its 20-day moving average. So, any algos programmed to bottom-dip on intraday price swings will probably do so as long as the MAG7, or even the S&P 500, remains above key support levels…
For those stocks—all heavily supported by massive passive flows in ETFs and leveraged positions… we would need to see a dramatic unwind.
A sizeable one… And that hasn’t happened at all (as the FNGD has yet to breakout…)
As I look back at all these other crises, there is something much different this time…
That’s what’s made me feel so odd about the way momentum signals are working…
We know what’s coming.
The Fed set the path for rate cuts at Jackson Hole in August, delivered two cuts, and then suddenly applied the brakes.
The U.S. economy - the real economy - needs the cuts.
The labor market needs support - not ghost jobs, more healthcare positions, and seasonal employment. Employers need to reduce financing costs.
Just three weeks ago, Powell talked about reserves and plumbing…
“Our ample reserves regime has proven highly effective, delivering good control of our policy rate across a wide range of challenging economic conditions, while promoting financial stability and supporting a resilient payments system.”
Then, a few sentences later, say,
“Some signs have begun to emerge that liquidity conditions are gradually tightening, including a general firming of repo rates along with more noticeable but temporary pressures on selected dates. The Committee’s plans lay out a deliberately cautious approach to avoid the kind of money market strains experienced in September 2019.”
There it was… a reference to the 2019 repo spike, with SOFR hitting 10%… He didn’t give historical context, but he referenced it openly… a surreal foreshadowing of where we sit today…
So did Lorie Logan, Dallas Fed President, last week… having publicly advocated shifting the FOMC’s operating target from the fed funds rate to a repo-type rate.
This all came on suddenly…
In conversations I’m having, people are realizing more and more that the system relies on cheap, liquid collateral to keep humming… More people are talking about repo now.
That’s like everyone being a fan of Rainbow Kitten Surprise after them being around for 13 years… and no one knows who the hell I’m talking about…
They’re Protecting a System
Cat’s out of the bag now. The attention around repo signals the importance of the system…
And more importantly, protecting that system, which is what really matters.
Because the system is designed to achieve outcomes for those in control…
That is the core message of The Wave Speech that I give once or twice a year…
Financial stability is the actual mandate.
Not inflation… Not unemployment… but enabling the structural system - that by the way - enhances leverage and creates critical demand for U.S. debt at a time that rates are elevated and inflation could return with cuts…
All while ignoring the asset inflation fueled by the shadow system that the Fed feeds and largely ignores… until it can’t anymore.
The question is - how far will Jerome Powell go?
Quantitative Easing… the actual buying of assets and printing of money… is likely if they can’t keep repo under control, according to Dallas Fed President Lorie Logan.
QE would drive the market up and bring inflationary pressures…
Their current stabilization efforts… lending money overnight (but still cooling the pace of a liquidity drawdown)… aim to achieve stability (the end goal of QE) but can also fuel inflation in asset prices…
The timing of Burry’s bet suggests to me that it’s not so much about valuations…
Because his last big short bets worked out thanks to serious problems in the financial plumbing…
This feels more about collective fear… and less about fundamentals…
Because it’s all out in the open now.
Will the retail traders do what they’ve done over and over again… Buy the Dip?
That wouldn’t make this time different…
Would insiders try to call the bottom when accommodation arrives?
That wouldn’t be that different…
Fear to do so… would be different…
If that’s the case, Burry would be looking for the endgame… like so many people are…
Or some sudden liquidity drain that overwhelms the Fed’s ability to respond fast enough.
That’d be evidence that the system isn’t sustainable… and that this time is therefore different - in that there would be nowhere else to go in a drastic selloff scenario.
Any blowout in spreads would inherently unwind leverage on so many of these Mega Cap names… like we’ve seen before.
All the king's horses and all the king’s men wouldn’t be able to fix what they broke…
I’m not convinced we are there at this point… I still believe this manic system can reach into another decade. We’ll get there… because it’s inevitable at this point…
But this is an important moment in that trajectory…
Which begs the other question… Have Powell and Logan’s 2019 repo confessions become the paradigm shift that we’ve been seeking…
An open admission that all of this has been an illusion in the post-2008 world…
If so, the effort to telegraph stability around one of the most complicated areas of finance… ever… and make everyone, everywhere, an expert on repo… would really be a plea for the market’s calm and patience by leadership who honestly deserve none.
Stay positive,
Garrett Baldwin
Did you catch Alex Karp’s earnings rant…I mean briefing?
The background plot points of 'Chinatown' would make for a captivating movie even today... Enjoy, great flick.