Why the 2008 Crash Predictor Just Sold Half His Stock Holdings.

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Michael Burry, the legendary investor who predicted the 2008 housing crash and invested in GameStop before it became a meme stock, has just decreased his stock holdings from $102 million to $53 million in the third quarter of 2024, according to Bloomberg data. In his latest 13F filing, Burry revealed that he’s been offloading some of his largest holdings. One of his biggest sales was his position in banking stocks, which he’s cut by 90%.

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Now, while Burry did make a few new entries, one thing is clear: the third quarter of 2024 marks a major turning point in Burry’s investment strategy and reveals a big shift in his outlook for the U.S. economy. When we look at the largest reductions that Michael Burry has made in the third quarter, we see that five of these were U.S. stocks. Together, these made up 37% of his portfolio, and he sold about $38 million worth of them. So, is Dr. Burry all of a sudden flipping bearish on the U.S. stock market? Well, there’s growing talk of a potential recession in the United States, with many economists suggesting it is becoming a real possibility.

Unfortunately, 13F filings don’t mention the reasons for why a certain transaction was made, and Michael Burry himself hasn’t specifically mentioned that recession risks were a factor behind his decisions. But we can get a clear understanding of his rationale by looking at the sectors of the economy that he reduced the most aggressively. This is what his portfolio looked like at the end of the first quarter of 2024 before his big changes. He had a big allocation to consumer discretionary — these are stocks that sell non-essential goods and services — financials, banking stocks, energy, and industrial stocks.

These are all parts of the economy that are very sensitive to the business cycle. Consumer discretionary companies need a strong consumer — if the economy is getting weaker, people don’t tend to buy non-essential goods. Banking stocks are sensitive to financial stress — if the economy is getting weaker, that usually means more people and businesses are defaulting on loans, which isn’t very good for the banking sector. Energy and industrial stocks also need a strong economic environment because these are companies that thrive when lots of goods are being produced and transported.

So, given his high allocation to these sectors in the first quarter, we can say that Michael Burry was pretty constructive on the U.S. economic outlook. Now, in the second quarter of 2024, we see that he reduced his allocation to consumer discretionary by about 30%, financials by 90%, and he completely cut out his allocation to energy and industrials. Instead, he started building a position in consumer staple stocks, which are notorious for being a defensive sector and less sensitive to the business cycle. He kept a good exposure to communications and technology stocks, which are also less sensitive to the business cycle.

So, we notice a clear shift away from the sectors that are sensitive to the economy towards sectors that are not sensitive. We also see that his total stock allocation in the first quarter was about $102 million. As of the third quarter, it stands at $53 million. Now, again, Burry himself hasn’t spoken specifically about this reduction in his portfolio allocation, but typically selling half of your portfolio doesn’t mean you’re getting very optimistic on markets.

Something important to note, however, is that Michael Burry isn’t going short on the market today like he was heading into the 2008 financial crisis. Overall, his portfolio remains positioned to the long side today, meaning he is still betting that stocks can move up. And most of this long exposure is in China. Michael Burry went on a buying spree of Chinese tech stocks recently, and as of the third quarter of 2024, three of his biggest holdings are Chinese tech stocks, together representing a massive 46% of his portfolio. He increased his Alibaba Group holdings by 24%, adding 30,000 shares, and he also boosted his stake in Baidu by 87.5%.

Baidu is a major player in AI and internet services in China. One of the reasons he may be doing this is that Chinese stocks are much cheaper than U.S. stocks. This chart shows that Chinese stocks are at their lowest price compared to U.S. stocks in over 15 years. Many people are worried about China’s economy because of government crackdowns, global tensions, and slower growth, but arguably, a lot of this pessimism could already be reflected in the cheaper valuations of Chinese stocks. Clearly, Michael Burry believes these low prices are a great buying opportunity and probably believes that this pessimism is overdone. Indeed, if China’s economy improves or stabilizes, valuations could revert back to more reasonable levels, which could cause these stocks to rise sharply.

Making bets that few other investors agree with is a core part of Michael Burry’s investment strategy — this is what you call contrarian investing. It’s well-known that heading into the 2008 financial crisis, his short bet on the housing market was not considered to be a very wise investment. The risk with this strategy is that these cheap stocks stay cheap or, worse, become even cheaper. That’s what you call “value traps” — companies that are cheap because they have very weak growth and that end up staying cheap because their growth never picks up. Companies like Alibaba and Baidu are leaders in e-commerce, cloud computing, and artificial intelligence, areas with strong growth potential.

The real problem with these stocks is the Chinese economy, which is currently experiencing a real estate crisis. If the U.S. is any example, China could witness a pretty strong recovery, like U.S. stocks did after the 2008 financial crisis. But if China follows the footsteps of Japan instead, it could be decades before China sees a durable recovery.

Now, Michael Burry has made one very surprising shift in his portfolio. He sold his allocation to gold. Up until last quarter, about 7% of his portfolio was invested in the Sprott Physical Gold Trust, which provides direct exposure to the price of gold. Gold is known as a safe-haven asset because it tends to keep or even gain value when markets are volatile and economies are shaky. Selling out of gold suggests that Burry may not be as worried about an immediate economic collapse or severe market downturn.

So, what’s the big picture here? Michael Burry has sold off a big chunk of his stock holdings and is shifting his money away from expensive U.S. stocks and into undervalued areas, especially in China, sectors that he believes are undervalued and offer better returns in the current environment. He’s not going short on stocks like he was in 2008, and he also sold his gold position, which doesn’t necessarily reflect that he’s expecting a major crisis. Overall, we can probably conclude by saying that Michael Burry has become cautious but not outright bearish.