There’s been a bit of some drama brewing within the traditional financial world as of late. As one of the few pieces of mainstream news I actually follow these days, I wanted to share a few of my thoughts around it.
Michael Burry v. Cathie Wood
Both of these figures are certainly recognizable for most people who are involved in the investing world. You’ve probably heard of at least one of these people from that crazy movie about the housing market crisis. The “Big Short” investor, Michael Burry has a very interesting past beyond his now famous bet against the housing market in the early days of the 2008 financial crisis.
From graduating at UCLA and Vanderbilt School of Medicine to become a physician, one could say Dr. Michael Burry’s life trajectory took a strange turn around later in life. Though he still maintains his continuing education requirements and is licensed to practice medicine today, in his off time while at school Dr. Burry was known to work on his hobby and study financial markets.
As of today, Dr. Burry’s fund has a collective portfolio value of around $2B, up over $600M from beginning of the year. From early bets on GameStop when it was trading sub double digits, it’s pretty clear he’s not just bearish on a multitude of things as the movies and media frequently portray.
Cathie Wood on the other hand, has an equally interesting history. Growing up as the eldest child to a family of immigrants, her father had a big role on her life trajectory. He was an accomplished radar engineer for the United States Air Force. Being routinely meticulous with details, he was a guiding figure for Cathie in teaching her to discover connections between things.
Fast forward to today, Cathie Wood is the CEO and CIO of Ark Invest. Ark Invest has over $52B in assets currently under management. With more than 5 active exchange traded funds (ETF’s), these ETF’s are not your usual ones. These ETF’s are actively managed and Cathie has been a strong proponent of investing in growth companies.
Dr. Burry and Cathie come to the cross hairs on this point though. Where Dr. Burry sees inflation and quantitative easing pushing the economy into the ground, Cathie places her bets on deflation.
The tension has bubbled since Dr. Burry disclosed in Scion Asset Management’s latest 13F filing he was placing put options against the Ark Innovation ETF. This prompted a public outcry from the ardent followers of Cathie Wood and she made some statements on twitter addressing it.
So… who’s right?
Let’s break down Cathie’s comments.
“Most bears seem to believe that inflation will continue to accelerate, shortening investment time horizons and destroying valuations. Despite what we believe has been a supply-chain related/short term burst in inflation, both equities and bonds have appreciated since March”.
First of all, Dr. Burry has had some great calls and he’s proven to be more than a “bear”. Inflation is accelerating, quite rapidly. By the very nature of injecting new supply, there has to be a demand greater than the injection itself to outpace it. We’ve seen over $7T injected into the economy just shy of a year now. That injection has yet to lead to GDP growth and we’re seeing shipping crises and shortages across the country.
No one wants to work and it’s a total mess.
On the last point, equities are rising purely in accordance with the FED balance sheet. If you actually compare that chart and put the S&P 500 chart next to it, both mirror each other nearly identically. Must be a coincidence. Not really, we’ve seen this dog and pony show play out before. It never ends well.
“Unlike the tech and telecom bubble, this equity bull market has broadened beyond the innovation strategies that boomed last year to value and other stocks that had trailed. The bull market has strengthened, setting the stage we believe for another leg up in innovation strategies“.
She’s certainly not wrong in the fact that there’s been some game changing innovation taken place over the past few years. But, the market has far from strengthened. We’re riding on hinges, in my opinion.
There’s a major decision that will be taking place soon. With interest rates at 0% for the first time ever, the FED will be making a decision to raise them within Q4 2021 to sometime next year. When that happens, we’ll begin to see what’s been dubbed the “tapering”.
Equities will plummet, in short. You combine this with key recession warnings being waved in the housing market and things are looking quite dire for the short term. With that said, I don’t think it’s wrong to be optimistic on the longer term. Cathie is clearly a longer term investor and Dr. Burry’s larger positions are usually more short-term focused.
“The equity market is likely to reward disruptive innovation strategies once again when headline inflation breaks and/or fears of recession increase. If the bond market is correct, one or both will be obvious during the next 3-6 months“.
“The deflation in commodity prices is cyclical but is adding to the secular forces caused by technologically enabled disruptive innovation (“good deflation”) and creative destruction (“bad deflation”)“.
Deflation is not the issue, full stop.
“To his credit, Michael Burry made a great call based on fundamentals and recognized the calamity brewing in the housing/mortgage market. I do not believe that he understands the fundamentals that are creating explosive growth and investment opportunities in the innovation space”.
This goes back to timeframes. In the short term, innovation and tech stocks will be most affected by a market downturn. This explosive growth is being fueled artificially. As I mentioned before, the FED balance sheet is mirroring the S&P 500 almost identically. What do you think will happen once that printer stops to keep buying equities?
It won’t be pretty.
As Warren Buffett once said, “Only when the tide goes out do you discover who’s been swimming naked.” In a bull market, everybody’s a genius. But a bear market reveals who’s got what it takes to achieve long-term success — and who doesn’t“.