Michael Burry, the well-known investor and fund manager who predicted the 2008 financial crisis, has recently shown his bearish positions against NVIDIA and Palantir just after issuing a warning on social networks about excessive optimism in the market. Warning which Bloomberg has described as ‘cryptic’, for several reasons. The moves, disclosed in regulatory filings filed Monday, have reopened the debate over whether artificial intelligence is fueling a speculative bubble.
What exactly has Burry done. His investment fund, Scion Asset Management, has purchased $186.5 million worth of puts against NVIDIA and $912.1 million against Palantir, according to mandatory SEC filings. These options benefit if the stock Price falls. Burry also took bullish positions (calls) in Pfizer and Halliburton, two stocks that have underperformed the market this year.
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Why does it matter? Burry is not just any investor. His history is marked by having bet short against the US real estate market two years before the 2008 collapse, enduring criticism from his investors until Lehman Brothers went bankrupt and his fund multiplied its profits. His story inspired the film ‘The Big Bet’. Having gained that fame, when Burry bets against something, the markets pay attention, although his track record is not infallible, as he has been wrong in the past with other bubble predictions.
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The context of their movements. Days before these positions were known, Burry broke two years of silence on social networks with a disturbing message: “Sometimes we see bubbles. Sometimes you can do something about it. Sometimes the only winning play is not to play”, accompanied by an image of his character in the film. On Monday night he posted again, this time sharing a Bloomberg chart about concerns over circular funding between OpenAI, NVIDIA and other AI companies.
Market reactions. Palantir shares fell more than 10% following the news, even though the company had just raised its annual revenue guidance. NVIDIA also fell by up to 2.9%. Palantir CEO Alex Karp responded in an interview with CNBC by calling the idea of shorting against companies like Palantir and NVIDIA, which he says are doing “noble tasks,” “crazy.”
The bubble debate. For months, many investors have expressed concern about whether the AI boom is being artificially sustained. Ray Dalio, founder of Bridgewater Associates, recently warned CNBC that “there are a lot of things that look like bubbles,” although he clarified that bubbles usually don’t burst until the Federal Reserve tightens its monetary policy. According to its “bubble indicator”, approximately 80% of market gains are concentrated in large AI-related technology companies.
An important nuance. It’s not entirely clear whether Burry is betting directly on the downside or whether these options are part of a more complex strategy to protect other investments. And as Bloomberg shares, the regulatory documents only reflect long positions, so if he were using these puts as a hedge for other investments, we would not know. The curious thing is that its first quarter presentation did include a note explaining that puts “could be used to cover long positions”, but the third quarter presentation does not say anything about it.
Scion’s recent history. This is not the first time Burry has bet against NVIDIA. During the first quarter it already liquidated almost its entire portfolio of listed stocks and bought put options against the chip maker. However, it has also achieved success: in the third quarter it closed positions in Alibaba (with a 36.5% profit), Estée Lauder (27%), ASML Holdings (45.7%) and Regeneron Pharmaceuticals (10.8%).
Canary in the mine or false alarm? The question on Wall Street is whether Burry is once again detecting a bubble before anyone else or if he is wrong this time. NVIDIA is up 54% this year to reach a capitalization of $5 trillion, while Palantir has soared 173% thanks to its expansion into AI-related businesses. Valuations are high, but both companies continue to grow and expand their business. Be that as it may, if there is a bubble, we will find out in the worst possible way: when it bursts.
Cover image | Solen Feyissa and ‘The Big Short’
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