Michael Burry Goes Back on Advice to ‘Sell.’ Here’s Why.

Earlier this morning, hedge-fund manager Michael Burry — best known for his depiction in the film The Big Short — got social media buzzing again. This time around, Burry went back on his cryptic, one-word recommendation to sell. Instead, he recognized that generational behavioral patterns associated with negative securities and asset pricing dynamics shifted. Nevertheless, investors should conduct their own research before reacting to high-profile influencers.

In a succinct tweet, Michael Burry declared, “I was wrong to say sell.” Minutes later, the often-contrarian investor had the following message: “Going back to the 1920s, there has been no BTFD generation like you. Congratulations.” BTFD represents an acronym for “buy the [expletive] dip.”

Notably, Michael Burry included a chart from Bloomberg, which displayed the average return of the S&P 500 index following down days by year. According to the research, 2023 is “…shaping up to be the second-best year for the dip-buying strategy.”

Though it’s challenging to precisely decipher the hedge-fund manager’s thought processes, he may have signaled a pivot toward a more optimistic framework. Recall that just a little over two weeks ago, The Big Short protagonist downplayed the risk of serious danger regarding the recent bank failures in a series of tweets.

Specifically referencing the bank runs known as the Panic of 1907, Michael Burry stated that rather than wait, government authorities implemented the lessons learned and took immediate action. In theory, this decisiveness should calm the market.

Michael Burry Appears Correct (for Now)

Almost on cue, CNBC reported that the S&P 500 rose to a three-week high as investors anticipated that the regional banking sector has finally stabilized. Conspicuously, the CBOE Volatility Index, Wall Street’s preferred forward-looking predictor of turbulence, pulled back to levels seen when the month began. Overall, then, Michael Burry appears correct for pivoting his investment framework.

Nevertheless, investors must conduct their own research before responding to any influencer or catalyst. An excellent starting point centers on a research paper by the Federal Deposit Insurance Corporation (FDIC) and the Center for Financial Research (CFR) regarding systemic risks associated with bank failures. Published in April 2009, the agencies stated in part the following:

“Using both VAR [value-at-risk] and a difference-in-difference methodology that exploits the reactions of the New York and Connecticut economies to the Panic of 1907, we estimate the effect of bank failures on economic activity. The results indicate that bank failures reduce subsequent economic growth. Over this period, a 0.14 percent (1 standard deviation) increase from the mean value of the liabilities of the failed depository institutions results in a reduction of 17 percentage points in the growth rate of industrial production and a 4 percentage point decline in real GNP growth.”

Critically, the authors acknowledge that in modern times, “…fiscal and monetary policies are now actively employed to offset losses that may be generated by banking sector distress.” However, such policies may also “…encourage moral hazard and additional bank risk-taking.”

Why It Matters

Fundamentally, the governmental backstopping of the recent bank failures contradicts the Federal Reserve’s efforts to contain inflation through interest rate hikes.

Essentially, the government must cover real losses with real money. As the stimulus programs associated with the pandemic demonstrated, every action has a reaction.

Therefore, the original warnings of Michael Burry may still ring true eventually.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

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