One of the most famous investing movies of all time is called ‘The Big Short’. What happens here is there’s this guy called Michael Burry, who 2008 predicted that the stock market would crash. He shorted stocks & he made a lot of money.
Michael Burry the same guy thinks we are in a similar position to that of 2008 & that there is a good chance of a stock market crash.
“Passive investments are inflating stock & bond prices in a similar way that collateralized debt obligations (CDSs) did for subprime mortgages more than 10 years ago”.
“Like most bubbles, the longer it goes on, the worse the crash will be”.
Michael Burry
Let’s go over the situation in 2008, what caused this stock market crash?
What Happened in 2008 & Why Is It Similar In Late 2024?
There are some key parallels you need to pay attention to.
- To buy houses most people have to borrow money. This is called getting a mortgage. You normally get a mortgage from a bank. What the banks do with these mortgages with these loans is they rate them based on how risky they are. AAA being the least risky, then they sell these loans on to other investors. But this is where the first part of things start to come along the same thing happened now & it’s called greed.
- Banks got greedy & they started issuing loans to anyone who wanted them & they would sell them on to investors who were also greedy in one said high-interest returns.
Lack of Understanding
- Investors buying these subprime mortgages did not understand the value & risk of what they were buying into. So, they used their emotions, they saw high interest rates & they got greedy but they didn’t understand the value of what they were getting into.
- It means anyone who wants to get a loan & buy a house could buy one. What did this to house prices, it created a bubble. It started with greed combined with a lack of understanding which caused the bubble & bubble pop.
How Does This Relate to What is Going on in Today’s Stock Market
- What we’ve had for the last 15 years is a massive bull market. Stocks so up almost 500% & you know one of the factors that caused this market to go up by so much is something called passive investing. You are investing in things like index funds.
As Michael Burry pointed out,
“Trillions of dollars in assets globally are indexed to these stocks”
Michael Burry
- You’ve got more people investing in index funds & they start to get greedy. They see the investments going up. So, they buy more & everyone around them does the same. None of them really understand the value of the stocks they buy. Because they’re all in index funds.
- There are groups of stocks you’re not analyzing the individual stocks. When greed & lack of understanding meet a bubble starts to form.
