“Big Short” Michael Burry sends alarming warning to investors

Investors are worried.

They wonder whether we are in a recession already, or heading right towards one. What will this sharp slowdown in economic activity look like as companies start pausing projects and suspending investments?

These concerns are reflected in the feverishness of the markets.

Investors are thinning their portfolios of tech company stocks, which are seen as growth assets and are often sacrificed when things go wrong.

We've been seeing this for several months with the collapse of e-commerce giant Amazon (AMZN) and electric vehicle manufacturer Tesla (TSLA). Both companies have lost hundreds of billions in market capitalization this year. The rout could continue as uncertainty becomes the new normal.

And it must be said that the Federal Reserve isn't help much.

Just when investors were hoping for a less aggressive rate hike, Fed Chairman Jerome Powell shattered their expectations on December 14 with hawkish statements.

Hawkish Fed, Worried Investors

“We're into restrictive territory,” Fed Chairman Jerome Powell told reporters in Washington. “It's now not so important how fast we go. It's far more important to think what is the ultimate level (and) how long do we remain restrictive.”

“There is a strong view on the committee that we'll need to stay there until we're really confident that inflation is coming down in a sustained way and we think that will be some time,” Powell cautioned.  

The Fed lifted its benchmark lending rate by 50 basis points, capping a year of seven hikes that have added 4.25% to the Fed Funds rate, and stated that further increases would be needed. The central bank also indicated that it will likely take the Fed Funds rate past 5%, implying at least another 0.75% in cumulative hikes, before holding at the level for most of next year. 

Many economists and business leaders believe that this aggressive monetary policy intended to fight inflation, which is at its highest in 40 years, will cause a so-called hard landing, aka recession.

“If the Fed raises rates again next week, the recession will be greatly amplified,” billionaire Elon Musk warned on December 9.

It is in this already highly uncertain context that Michael Burry has just posted a message, which sounds like a big warning to investors.

“I Wasn't Buying WorldCom”

“Early 2002, investors were asking me why i wasn't buying WorldCom,” the legendary investor posted on Twitter. “Feels like that now.”

He didn't provide further details, like giving the names of today “WorldComs.”

On June 25, 2002, the news came as a thunderclap in the telecoms sector: WorldCom, the second largest long-distance operator in the United States, officially admitted having artificially inflated its profits by some $3.8 billion. .

The scandal caused a mini-storm on all the stock exchanges in the world and further depressed the whole sector of new technologies. The cold shower also hit the audit firm Arthur Andersen, already involved in the Enron scandal, which had  the rigged accounts.

Caught in turmoil and overwhelmed by debt, the telecom giant went bankrupt barely a month after the revelation of the accounting manipulations.  In total, more than $7.1 billion was improperly recorded between 1999 and 2002. The scandal, at least as serious as the Enron bankruptcy, dealt a huge blow to the confidence of Americans in the accounts of their companies.

It was the latest of several financial malpractices uncovered within American companies such as Enron, Global Crossing and Iclone.

Burry, who often posts cryptic messages, does not say if he is referring to the recent collapse of cryptocurrency exchange FTX which was valued at $32 billion in February but filed for bankruptcy in just days on November 11. Or if he is thinking of certain tech and crypto companies in particular.

The 2008 financial crisis, one of the biggest financial debacles in history, made Michael Burry a legend. The 2015 film “The Big Short” describes how the investor, who had no particular expertise in finance and real estate, came to understand that the sector had become a sandcastle, with financiers and bankers creating exotic products based on mortgages given to financially fragile households and borrowers with poor credit. 

He, therefore, decided to bet on the collapse of the subprime mortgage market, hence the name “Big Short.” History proved him right.

Originally published on TheStreet.com