'The Big Short' Michael Burry Says Sell, Inflation Is Not Over

seekingalpha2023-02-04

Astrid Stawiarz Michael Burry is one of the most successful short sellers of all time. Most people know him for his bold bet against the housing market leading up to the great financial crisis. They ...

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2023-02-05
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Most people know him for his bold bet against the housing market leading up to the great financial crisis. 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Most people know him for his bold bet against the housing market leading up to the great financial crisis. They even made a movie about it, The Big Short (2015). In hindsight, we know that his prediction was hugely profitable. His hedge fund earned about 150x the returns of the S&P 500 (SP500) since its inception until it closed down in 2008. Most active investors are happy if they can beat the S&P by 1-2% per year, and so this is why Michael Burry is considered to be one of the best investors of our time. From there on, he has been mainly managing his own personal fortune. Among some of his other famous calls:  He successfully shorted Tesla (TSLA) and ARK Innovation ETF (ARKK) when they were priced at very expensive valuations.  He invested in GameStop (GME) before it even became a meme stock. He went mostly into cash at one point in 2022 just as the market began to sell off. He sold positions in Meta Platforms (META) and Bristol Myers (BMY) shortly before they sold off. He predicted the high inflation and shifted his portfolio into real asset-heavy stocks.  So needless to say that when he talks, Michael Burry is someone worth listening to! And recently, he has been particularly active on Twitter. It is tough to be one of his followers because he typically deletes his tweets shortly after posting them, but fortunately, I have some friends who sent me screenshots of his latest tweets. I also found a Twitter page that keeps an archive of his deleted tweets. So here are the recent highlights: In late December, he warned that the recent rally reminds him of early 2002, when people were buying stupid tech businesses just because they appeared cheap relative to their previous peak: Twitter Then, a couple of weeks ago, he reaffirmed this thought by posting a chart of the temporary rally that happened in 2001/2002. The market then sold off shortly after. He seems to be implying that we are headed for another correction: Twitter After that, he also posted a letter, seemingly written by him when he was a kid, and it implies that the U.S. is broke. We have taken too much debt: Twitter Now comes the most recent one. Just a couple of days ago, he tweeted:  \"Sell.\"  Twitter So clearly, Burry isn't very optimistic about the market's future. He thinks that the recent rally will be short-lived and he seems to be shorting the market. Another billionaire short-seller also appears to agree with him. Jim Chanos recently went on CNBC and said that stocks aren't cheap. He explains that the forward P/E of the S&P 500 (SPY) is at 18x, but with profit margins at all-time highs, he expects earnings to revert to the mean and valuations to deflate. Inflation remains too high, interest rates have surged like rarely before, and there is still too much optimism. What should you do? After reading this, many of you will likely have the natural instinct to go into cash, or at least, raise cash levels. But it is important to note that this is not necessarily the right move. Just because Michael Burry is bearish on regular stocks does not mean that he is 100% in cash. On the contrary, Burry has repeatedly said that he worries about inflation and cash offers no protection. Earlier this year, he also sent a warning that we haven't seen the last peak of this inflationary cycle. Since the most recent peak was nearly at double-digit levels, he seems to imply that we could still see a double-digit inflation rate in the near future: Twitter So, he is not just sitting in cash waiting for the market to crash. He, of course, holds some cash, but he is also investing in recession-proof, real asset-heavy stocks that should perform well even if the economy suffers and inflation remains high. Over half of his fund is invested in just two stocks:  GEO Group (GEO) CoreCivic (CXW).  These are former REITs (Real Estate Investment Trusts) (VNQ) that recently converted to C-corps to retain more capital for deleveraging. They own private prisons, which are by nature recession-proof. Crime may even go up in a recession! And since their assets are essential to our society, they are also resilient to inflation. Building new properties is a lot more expensive, and the rising replacement costs increase the value of this existing infrastructure. Moreover, another large position in his Top 5 is Charter Communications (CHTR), which owns cable and fiber infrastructure. Again, this is a recession- and inflation-resistant real asset-heavy business. So based on the latest information that we have, Burry has invested about 60% of his portfolio in just 3 real asset-heavy stocks. The real asset exposure could be even higher, but I am not familiar with his other holdings. Jussi Askola / Valuesider And that's not all. Burry has previously also explained that he invests most of his personal fortune into farmland, which is another real asset that's recession- and inflation-resistant. Farmland Partners In a previous interview, he explained that (emphasis added): \"I believe that Agriculture land with water on site will be very valuable in the future and I've put a good amount of money into that. So I am investing in alternative investments... I don't want to disclose... but it is a significant amount.\" Moreover, the end of \"The Big Short\" movie, the Burry character opines (on a placard) that \"Michael Burry is focusing all of his trading on one commodity: Water.\" Burry himself has since clarified that by water, he really means farmland. So I think that it is fair to say that Michael Burry is bullish on real assets. Not all of them. But those that are recession- and inflation-resistant such as farmland, private prisons, and communication infrastructure. Today, it is easier than ever before to invest in such assets. There are over 200 REITs in the U.S. alone, and many more REIT-like entities. There are also REITs in over 20 other countries, providing lots of opportunities for you to consider. I have structured my portfolio in a similar way as Burry. I am mostly invested in the REITs that we highlight at High Yield Landlord. They make up about 50% of my net worth at the moment: High Yield Landlord But my picks are a bit different. Burry does not seem to care about dividend income. This might be because he is wealthy and holds plenty of cash. But I like to earn dividend income, and so my REIT selection focuses on income generation. My largest allocations are net lease properties, multifamily, and healthcare facilities: High Yield Landlord Just to give you a few examples:  Global Medical REIT (GMRE) owns a diversified portfolio of medical office buildings. These properties are essential, whether we go into a recession or not, and they are resilient to inflation because their replacement cost is rising and so are their rents. Moreover, its debt is also getting inflated away. The company is well-managed and capitalized, but it is currently priced at an 8% dividend yield. I believe that it will deliver 12-15% annual returns in the long run once you include the appreciation. Global Medical REIT  Vonovia (OTCPK:VONOY / VNA) is the biggest apartment landlord in Europe. It is similar to Camden Property Trust (CPT) and AvalonBay (AVB) in the U.S., but even bigger, owning about €100 billion worth of properties. It mainly focuses on affordable housing and it is recession-resistant because of how rents are regulated in Europe. Construction costs are so high right now that new developments have been put on pause, resulting in a housing crisis and rising rents. But because the market is today fearful (rising rates & war in Ukraine), Vonovia's stock is currently priced at less than half of the fair market value of its properties. While you wait for the upside, you earn a 6.5% dividend yield. Vonovia I currently own 22 similar real-asset stocks that offer:  High income Recession resilience Inflation protection Upside potential & Diversification.   Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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