Genius from The Big Short Predicts Next Financial Crash Is Coming
Eccentric and hard rock–loving hedge fund manager Michael Burry (brilliantly interpreted by Christian Bale in the recent Hollywood movie The Big Short) warns that another major financial crash is looming. This may be a financial crisis warning you won’t want to ignore.
The Big Short recounts how Burry and a handful of other sufficiently distant Wall Street professionals saw the 2007 sub-prime mortgage crisis coming, taking measures to profit from it even as they were appalled by its effects. The Big Short film is adapted from the bestselling non-fiction book by the same name, written by Michael Lewis (published 2010).
While analyzing the U.S. mortgage numbers, Burry discovered before anyone else that a major financial crisis was brewing back in 2005. He decided to bet against the apparently thriving real estate market, selling short by investing in a new customized financial product targeting sub-prime mortgages. The day the bubble exploded—and burst it did—he and his clients made huge profits.
After the financial crisis, Burry focused on investing “in water.” However, Burry has not lost his penchant for issuing dire predictions.
In a recent interview with New York Magazine, the neurologist-turned-financial guru reveals his concern that society has learned little from the last financial crisis and that debt and so-called “easy” money are pushing the world toward the adoption of negative interest rates, placing tremendous stress on the financial system.
Burry says that easy money “hasn’t worked,” adding, “The Fed’s policies widen the wealth gap, which feeds political extremism, forcing gridlock in Washington. It seems the world is headed toward negative real interest rates on a global scale. This is toxic. Interest rates are used to price risk, and so in the current environment, the risk-pricing mechanism is broken. That is not healthy for an economy.” (Source: “Michael Burry, Real-Life Market Genius From The Big Short, Thinks another Financial Crisis Is Looming,” New York Magazine, December 28, 2015.)
Given Burry’s Record, His Economic Collapse Concerns Are Worth Considering…
Michael Burry is nervous about the future. In particular, Burry worries about debt: “The idea that growth will remedy our debts is so addictive for politicians, but the citizens end up paying the price. The public sector has really stepped up as a consumer of debt. The Federal Reserve’s balance sheet is leveraged 77:1. Like I said, the absurdity, it just befuddles me.” (Source: Ibid.)
Burry is not entirely pessimistic. He still sees the United States as being the center of innovation: “Innovation, especially in America, is continuing at a breakneck pace, even in areas facing substantial political or regulatory headwinds… Americans have so much natural entrepreneurial drive. The caveat is that it is technology that should be a tool making lives better in the real world and in line with the American spirit of getting better and better at something, whether it’s curing cancer or creating a better taxi service.” (Source: Ibid.)
Burry has often wondered why Washington, if not Wall Street, never asked him how he came to his predictions and successful conclusions about the sub-prime crisis and the housing bubble.
Burry said he learned the answer: “Al Hunt of Bloomberg Television, who had read Michael Lewis’s book, The Big Short, which includes the story of my predictions, asked Mr. Greenspan directly. The former Fed chairman responded that my insights had been a ‘statistical illusion.’ Perhaps, he suggested, I was just a supremely lucky flipper of coins.” (Source: “I Saw the Crisis Coming. Why Didn’t the Fed?” The New York Times, April 3, 2010.)
Regardless, luck can strike twice and if Michael Burry was right the first time, investors may not want to entirely chock it up to luck this time around, too, if The Big Short genius turns out to be right on his second financial crisis prediction.