The Big Short is one of my favorite movies (and books).
It's a powerful story of investors who bet against the housing bubble, persevered through adversity, and won big.
The story focuses on Michael J. Burry, a small but successful hedge fund manager in California. In the movie, Burry is played by actor Christian Bale. There are others featured in The Big Short who bet against the housing market, but today we're going to focus on Burry and his new AI short.
First, however, some background is in order.
Back around 2004-2005, Burry discovered that lenders were giving huge loans to borrowers with bad credit, and as a topper, many of these mortgages were teasers with adjustable rates. The first few years were artificially cheap, then payments would balloon.
Burry dissected the data, and discovered a great way to bet against housing using credit default swaps (CDS) on mortgage bonds.
Many of Burry's hedge fund clients thought he was insane. Betting so much of the fund's capital against housing seemed ludicrous. Burry was forced to restrict fund redemptions, so his investors had no choice but to ride along with him.
When the bubble finally burst, Burry's fund made a killing. After fees, his big short returned almost 500% to investors.
Burry had beat the big banks at their own game.
But be warned. This story has inspired countless traders to attempt their own big shorts, with mixed results. At best...
Michael J. Burry is a reclusive fellow. He keeps a low profile, but occasionally resurfaces on X (Twitter).
On X, Burry goes by the handle "Cassandra". Cassandra was an ancient Trojan priestess dedicated to the god Apollo. She was cursed with the ability to predict the future, but never be believed.
The last time Burry reappeared was in January of 2023, when he posted a simple message: Sell.
Via ZeroHedge
Since then, the market has soared 69% higher. Burry got burnt on that big short.
Shortly after, Burry deleted all his X posts and deactivated his account.
But now Cassandra has finally returned to X. Just as 13F SEC filings disclosed his hedge fund, Scion Capital, took big short positions on Palantir (PLTR) and NVIDIA (NVDA).
As of September 30th (these filings have a delay), Burry's hedge fund held puts worth $912 million in Palantir and $186 million in NVIDIA (notional).
Burry has seemingly initiated a new 'Big Short' on AI.
It isn't surprising to me that Burry is betting big against Palantir. It might be the most overvalued large-cap stock I've ever seen.
The chart shows just how unusual Palantir's valuation is.
To be clear, Palantir is growing fast and appears to have tech which nobody else does. But it still looks way overpriced. Its current price-to-sales ratio is an incredible 126x. The company is valued at $491 billion and only produced $3.9 billion of revenue over the past year.
Even during the dotcom bubble, no large company ever reached such lofty heights.
Burry followed up his big AI short disclosure with some charts showing how AI bubble spending is similar to the dotcom era:
We should remember that these filings have a delay, so these were Scion's positions as of September 30th. Since then both NVDA and PLTR have risen, which means that thus far, Burry's bet is down. He could have sold out of these positions, or added to them. We don't know.
Attempting to nail the top on red-hot stocks like these is extremely difficult. Even when he made the housing bubble bet, Burry had to wait years for it to pay off. In the meantime, he had to pay significant premiums on the CDS (his short instrument). For a while, it looked like his housing bet might fail.
But eventually the housing bubble did pop, and Burry came out way ahead.
We'll have to wait and see whether he'll be proven correct with this latest AI short. It's easy to see that certain AI stocks are overvalued. Timing the short, however, is the tricky part.
Today Palantir is down almost 7% today after reporting earnings yesterday.
Palantir CEO and co-founder Alex Karp isn't happy about Burry's short position, calling it "market manipulation". He told CNBC the following this morning:
"The two companies he's shorting are the ones making all the money, which is super weird. The idea that chips and ontology is what you want to short is bats**t crazy.
... I do think this behavior is egregious and I'm going to be dancing around when it's proven wrong."
Is this the beginning of the crash? Or just a correction after a parabolic move, and there's more upside ahead? I'm not taking a bet either way, for now.
My advice: don't bet the house on an AI collapse. As Keynes famously said, the market can stay irrational longer than you can stay solvent.
We'll be keeping a close eye on this story.
The Daily Reckoning