Saturday, February 24, 2024

The Prophet of Doom – How Michael Burry’s 2023 Predictions Fared Against Reality

HomeStock-MarketThe Prophet of Doom - How Michael Burry's 2023 Predictions Fared Against...

Michael Burry rose to fame for his prescient bets against the subprime mortgage market ahead of the 2008 financial crisis, a story immortalized in the book and movie “The Big Short”. Since then, the hedge fund manager has developed a reputation as an iconoclastic figure in investing – with his ominous warnings and contrarian market calls closely followed by investors.

As 2023 draws to a close, it is worth revisiting some of Burry’s major predictions and trades this year to see how reality measured up.

A Recession That Never Came

Burry rang alarm bells in early January with a tweet predicting that the US would likely enter a recession at some point in 2023. He based this on the view that inflation had peaked in 2022 but would see another spike when the Federal Reserve inevitably begins cutting interest rates to resuscitate a slowing economy. This in turn would tip the country into a technical recession “by any definition”.

Nearly 12 months on, his recession call has clearly not panned out. The US GDP expanded at a solid 4.9% annualized rate in Q3 2023, the fastest pace since Q4 2021. While economic growth is expected to slow in 2023, most economists remain relatively upbeat on the overall outlook rather than foreseeing an imminent downturn.

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The Fed is also still holding rates relatively steady for now rather than rushing into rate cuts that could re-ignite inflation. So on his big picture economic prediction, Burry’s pessimistic outlook has fallen wide off the mark so far.

Two “Big Short” Bets That Went Sour

While Burry did not publicly disclose any other specific market forecasts for 2023, his fund’s stock trades this year can be viewed as proxies for his market outlook.

Securities filings in August revealed that Scion Asset Management had taken a massive $1.6 billion short position against the overall US stock market through put options tied to the major S&P 500 and Nasdaq-100 ETFs. This seemed like a clear signal that Burry expected a market downturn.

However, the stock market rally extended through the second half of 2023, reaching new record highs in December. With his bearish bets sinking deeper into the red, Burry was eventually forced to unwind his “big short” position at an estimated 40% loss.

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He also made another contrarian move in Q3, shorting semiconductor stocks just as the sector was rebounding from a downturn. Yet chip stocks like the SMH ETF have continued powering to fresh all-time highs, suggesting this pessimistic bet has also soured.

Overall, reality has diverged sharply from Burry’s apparent market outlook as inferred through his largest trades this year. His reputation as an oracle of doom did not hold up in 2023.

Why Did Burry’s Bets Go Wrong?

Michael Burry’s iconoclastic and doom-mongering image seems to have failed him in 2023, much like his misfires during the bull run of the 2010s post the financial crisis. So why do his celebrated contrarian instincts seem to struggle during benign markets and economic cycles?

Some posit that years of profiting from crisis-trading has potentially warped Burry’s objectivity about the prevailing fundamentals during stronger cyclical upturns. His permanent bearish bias leads to repeatedly betting against irrational market optimism, often unsuccessfully when animal spirits override rational concerns for longer than expected.

There is also the risk that Burry’s mythos as an oracle of doom clouds investors’ ability to judge his predictions dispassionately – leading to excessive credence in forecasts that may be no more reliable than average. The genius moniker from his “Big Short” fame may imbue his views with an almost mythical, infallible quality – a dangerous cognitive bias.

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Finally, the very public nature of his bets and fame means detaching his market outlook from the real positions and sizing decided by his fund for risk management reasons is fraught. The delivered performance often diverges from the narrative.

Burry Still Commands Cult Status

Even as Michael Burry’s 2023 forecasts and trades have largely been a bust, he still retains a feverishly devoted following amongst value investors and market contrarians. This is unlikely to dissipate overnight despite another year of predictions not quite meeting reality.

His status as the patron saint of crisis investing persists – with believers confident that another market panic or economic cataclysm could yet prove his unflinching bearish tilt right once more. For now, the oracle has been fallible. But to the prophet of doom’s cult, he shall rise again when the next crisis strikes.

Mezhar Alee
Mezhar Alee
Mezhar Alee is a prolific author who provides commentary and analysis on business, finance, politics, sports, and current events on his website Opportuneist. With over a decade of experience in journalism and blogging, Mezhar aims to deliver well-researched insights and thought-provoking perspectives on important local and global issues in society.

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