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michael bury is famous for his portrayal by christian bale in the big short and he has correctly called every last major stock market crash including the recent drop many tech stocks have seen with some down 40 50 even 60 since last november which happens to perfectly match bury's warnings last november about a bubble in the stock market that reminded him of the dot-com bubble of the early 2000s and he thinks an even bigger crash could be on its way but this isn't the first time burry's been right he successfully shorted the dot-com bubble in the early 2000s he famously predicted and profited from the subprime mortgage crash that kick-started the great recession and he even kick-started the meme-able gamestop rise when he wrote several letters to the board in 2019 about game stops then wasted potential but now burry has issued a new warning on june 30th at 4 17 p.m burrie tweeted out that while the s p 500 was down 25 to 26 and the nasdaq down 34 to 35 that was only the first half of the crash and that we were maybe halfway there to the bottom and this time the crash won't just be limited to tech stocks as the entire economy could be hit by a bull whip effect from the fed over the next several months so in this video we'll be looking back at bury's recent warnings to uncover what exactly he is seeing that indicates a crash is coming talking about how we could move from a surface level price crash in stocks to a full-blown fundamental value crash in the near future and finally we'll go over the best strategy to protect yourself from brewery's predicted market crash so hit the like button if you want and let's start by talking about bury's warnings about the most recent stock market bubble so you may not know this but michael bury was originally planning to become a medical doctor even getting accepted into stanford's residency program but he decided to make the switch to investing first making a name for himself when he correctly predicted and shorted the dot-com bubble in tech stocks in the early 2000's while everyone else's funds were crashing bury returned 16 and 50 in two years resulting in 600 million dollars flowing into his fund scion asset management and giving burri the reputation for calling out hype and speculation in the market whenever he saw it and buries hinted that he sees similarities between today's market and the dot-com crash where many companies lost 99 of their value overnight but that wasn't even buries biggest prediction he later made his famous big short against the housing market betting the entire economy would collapse due to a bubble in real estate and when he turned out to be correct he ended up making his investors 700 million dollars while he himself pocketed 100 million dollars when the housing market ultimately collapsed and more recently bury started issuing warning after warning that the stock market was on the brink of collapse in 2021 and while we have seen a substantial drop in the market since then brewery says that this is only the beginning so we need to start our story early last year when burry started voicing his concerns over the rise of meme stops like gamestop or amc calling for their crash in mid-2021 this is despite the fact that bury himself actually kick-started gamestop's rise after he published several letters to their board about the company's then wasted potential in 2019.
he also called out stocks such as tesla saying enjoy it while it lasts back in early 2021 and more recently in april 2022 he defended short sellers of tesla against elon musk saying elon was only mad at short sellers because he needed tesla stock to buy twitter and this was a pattern throughout the last couple years where it seemed like burry kept getting more and more bold with his predictions and the scale of their potential fallout he quickly expanded to calling out everything from bitcoin to ev stocks to software as a service stocks saying they are like the housing market in 2007 and so far burri has been mostly right with those areas of the economy declining far more than the market in general bitcoin for example is down 60 percent year to date ev high flyer rivian is down 75 meanwhile the broader market is only down around 20 but even though bury's predictions were pretty much spot on not everyone was a fan elon musk called bury a broken clock who was always calling for a crash so eventually he'd be right and there may be some merit to that as burrie has called for previous crashes that still have not materialized like in 2019 when he thought index funds were due for a crash celebrity investor kathy wood similarly had some harsh words for burri saying he doesn't understand the fundamentals that are creating explosive growth and investment opportunities in the innovation space though to be fair he was shorting kathy's flagship arc invest fund at the time but setting aside criticisms that bury is always predicting a crash for now on the surface it seems that burry's warning that we were seeing the greatest speculative bubble of all time in all things by two orders of magnitude which he tweeted last year was actually a correct prediction after all the market has dropped since then which we would expect if there was a bubble but was the recent decline that we've seen really the crash that brewery was referring to if you leave the youtube echo chamber where everyone talks in superlatives and mostly about high-flying tech stocks the overall stock market is only in minor correction territory for the year at down around 20 percent year-to-date which really doesn't seem like it matches the mother of all crashes that bury has been warning about and based on bury's recent tweets he clearly sees another crash coming for the stock market so what is it that burri is seeing that points to potentially an even bigger crash than we saw back in 2008 well there are two main drivers that bury sees that will drive stock prices down which he calls out in a recent tweet the first is multiples compression and the second is earnings compression multiples compression is pretty simple and it's the kind of change that can happen very quickly in the market which is why it's sort of the first wave in the market crash basically every stock is valued based on some multiple of its earnings or how much profit the company produces if you're a private company on a show like shark tank you might get a multiple of four to six times earnings so a company that makes 100 million dollars per year would be worth somewhere between 400 million dollars and 600 million dollars in the private equity market but in public markets like the stock market things can get a little more fluid the average price of a company in the public market is between 13 and 15 times their earnings this is represented by the p e ratio of the stock but during certain times like bull markets sometimes this ratio can go much higher than 15 and in economic contractions it can go a lot lower if we plot the average p e ratio of the s p 500 which is just the 500 largest companies in the us over the past 100 years we get something that looks like this chart which kind of looks like a stock chart now we can clearly see that around 1980 the average p e ratio of the s p started rising which i think is due to the rise of high margin technology businesses like microsoft and apple and later companies like facebook google and netflix that people just valued more than traditional companies but if we zoom way into just the last year or so we can see how the average p e ratio has dropped from around 37 to 19 over the past few years which represents exactly what bury is talking about a contraction in multiples that means if i had a public company five years ago making 100 million dollars per year it would have been worth around 3.7 billion on the open market but if i had that exact same company today still making 100 million dollars per year it would only be worth 1.9 billion dollars and that 50 drop represents the market crash that we've seen up until now but that was just a crash in prices the amount of money being generated by the business hasn't dropped yet but that's where the second part of bury's prediction comes in and this part is a lot more worrying to a fundamentals investor like me and by the way if you're finding this valuable please consider subscribing only five percent of people currently watching this video are subscribed and i'm not putting in any sponsors or anything like that all i'm asking is you just take a few seconds to hit that button because it really helps out the channel thanks so the second half of bury's predicted crash will come from earnings compression which he thinks will be around the same size as the drop that we've seen so far if that's true that would take the s p 500 to a price of around 2990 or down 37 from its peak it would bring the nasdaq down 47 in total and it would take tesla down in total 70 from its peak last november and down another 45 from where it is today so it's worth understanding why berry thinks this will happen the biggest factor in bury's prediction seems to be his thoughts on the economy in general suffering from the bullwhip effect of the fed reversing rate hikes where supply chain issues would impact businesses which in turn would affect how much money companies make which would compress the earnings of the businesses dropping their stock value and hitting all of our investment accounts so let's break it down and go over how buri's bull whip theory works in response to rising inflation over the past several months the federal reserve has been under pressure to do something to slow the rate of inflation their response has been to raise interest rates which generally slows down the economy as it becomes harder to borrow money and in turn that slows inflation's rise and that strategy normally works really well but these aren't normal times the global supply chain is only just now recovering from the effects of the pandemic when nobody could get supplies and everything took weeks to ship out because of this during the pandemic many retailers and businesses just started putting huge orders into their supply chains just hoping that something would get through for them to put on their shelves but now those supply chain issues are starting to clear up leaving many businesses with too much supply coming in big retailers like walmart and target are reporting their inventories are up 30 after they drastically overestimated demand and so in an effort to decrease inventories they have started cutting prices at many of their stores which is great if you're looking for a good deal on a make it rain money maker with two and a half stars from target but when we expand that effect to the whole economy we start to see some issues if everyone starts dropping their prices at the same time to clear out inventory we might run into the opposite of inflation called deflation or at least a slowing of inflation called disinflation this means we will see a deflationary pulse from companies clearing out supply which shows up in falling inflation numbers this then leads the fed to reverse its decision to raise rates which in turn restarts inflation which kickstarts the whole cycle all over again and this cycle makes it very difficult for companies to forecast demand and how much they should order leading to excesses and shortages of products which all eventually falls to the bottom line in lost profits so instead of a business making 100 million dollars per year they might only make 50 million dollars per year and their stock price drops by half again as a result ironically this is a similar prediction to one given by celebrity investor kathy wood of arc invest who has had a long history of disagreements with bury which i covered in this video that i posted right before this but okay we understand why burry is predicting another market crash but now let's go over what we can do as investors to maximize our returns in the coming market so first off we should acknowledge that while bury has made some incredible predictions he's also made predictions that never actually came true in a 2015 interview with new york magazine burrie said another crisis was looming going on to say that he thought the whole economy was on unstable ground but that was seven years ago and if you had sold out of the stock market way back in 2015 you would have missed out on around a 75 return in the s p 500 since then even accounting for the recent pullback and you would have missed out on over tripling in value of tech stocks in the nasdaq index but even though bury isn't infallible it's worth at least having a plan for a market downturn so let's turn to the advice of arguably the greatest investor of all time warren buffett buffett is famous for the phrase be fearful when others are greedy and greedy when others are fearful in fact this phrase is so well known that there are entire websites dedicated to showing where we are on the greed versus fear scale this indicator from cnn indicates that we are currently in the extreme fear part of the market with multiple different sub indicators showing different parts of the market are either in extreme fear or are at best neutral interestingly the bitcoin fear and grade index put out by alternatives.me is also showing we are in extreme fear right now so if we trust these two indicators they seem to show that now is the time to be putting money into investments rather than taking it out but there's an even better strategy for most investors and it's espoused by benjamin graham someone who even michael bury himself has said that he studies dollar cost averaging or dca has been shown time and time again to outperform trying to time the market or buying the dip there's this really great article titled even god couldn't beat dollar cost averaging that someone mentioned in a comment which lays out how even if you had perfect market timing and managed to successfully buy each dip in the market but you held money in cash in the meantime you would have underperformed simply investing in an s p 500 index fund every month from 1940 until now and that is assuming you perfectly timed the dips in the market which is already a pretty bold assumption if you were off by just two months in your timing of the bottoms you would have underperformed dollar cost averaging 97 of the time this is simply because you miss out on most of the market gains while you're waiting with cash on the sidelines to buy in at the perfect time during the dip so yes perfect timing will make you money for a few months following your dip purchase but once you exit the market and wait with all your cash on the sideline waiting for the next dip you're missing the run up in the meantime so by simply investing the same amount of money each month into a broad market index fund like vt sacs you will outperform pretty much any investor who tries to time the market bottom and i'm not just saying that this is the strategy that i personally use and i've been steadily putting money into the market every single month this may not be exciting it may not be flashy but it's what warren buffett recommends and it's what every study shows works for most people now if you found this video valuable or entertaining please consider subscribing 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