The visionary who predicted the 2008 crisis and is now betting against the AI bubble

BarcelonaMichael Burry tweets infrequently, speaks even less, and is rarely seen in public, but when he does, it's for a reason. And this week he decided to make his stance against artificial intelligence public.

Burry is no ordinary investor. The founder and CEO of Scion Capital—based in Saratoga, California, in Silicon Valley—rose to fame in 2015 when British actor Christian Bale portrayed him on the big screen in the movie The big shortin which he explains how he and other investors accurately predicted the 2008 financial crisis. Following the film—based on the book of the same name by Michael Lewis—the American financier has acquired a visionary status that grants him a persuasive power over the markets that most fund managers lack.

Burry's status does not stem from being portrayed in The big shortbut precisely what the film shows: in the years leading up to the financial and real estate crisis, when the American economy was in the midst of a mortgage frenzy, the American investor—a doctor by training—was able to see, amidst the general euphoria and after an exhaustive study of the market, that the loans that banks call subprime They were, in essence—according to the description in the film—"dog shit." And all the complicated financial products that were based on these cheap loans were "dog shit wrapped in cat shit." Burry took the money he had available at Scion and, despite strong opposition from the company's partners, bet big against the housing and financial bubble.

A few years later, the US housing market had collapsed, and the banking sector had to be bailed out by the government to prevent the collapse of the world economy. Naturally, Burry made a fortune.

The AI Bubble

Despite making a fortune in 2008, Burry remains at the helm of Scion while enjoying his guru aura. His X account, which isn't even verified, is called Cassandra Unchained. So far, things haven't gone badly for him. In 2021, for example, he made a tidy profit by doing the opposite of what he did during the financial crisis: he bet on the strength of GameStop's stock, which their stock prices temporarily spiked.

That's why alarm bells have rung in the financial world this week when Burry revealed he has several short positions against two companies in the artificial intelligence sector: the microchip manufacturer Nvidia and the company of software Palantir Technologies. Short positions are investments that profit if the price of an asset—a stock, a commodity, a property—decreases. It's worth noting that the fact that the founder of Scion had the fortitude to make the bet public just one week after... Nvidia became the first company in history to reach a market capitalization of five trillion –five million million– dollars.

Specifically, Scion has made the bearish investment through puts regarding the shares of both companies, fairly common financial products. put It is based on an exchange between two parties: one that has the right to sell the shares at a certain price and the other that has the obligation to buy them at that price. In other words, with this putBurry is protecting himself in case the share price of these companies plummets, as he secures the right to sell them at a minimum value. According to data submitted by the fund to the regulator, Scion has five million puts on Palantir stock and one million on Nvidia stock, two positions valued at $912 million and $186 million, respectively.

The investor's announcement came as a shock to a sector that has long felt the effects of talk of a "bubble." Outraged, Palantir CEO Alex Karp appeared on the American channel CNBC to discredit Burry's position: "Both companies he's investing against are the ones making all the money, which is super weird. The idea that chips and ontology [the conceptual frameworks of AI] are against AI" is...

"I think it's appalling behavior, and I'll be dancing when he's proven wrong," Karp added before accusing Burry of "manipulating the market." This week, Palantir shares fell 16% and Nvidia shares fell 12%.

Why now?

Why has Burry decided to make his investment against AI public? "All fund managers, when they have a position, want to make it known, so it's visible," explains Xavier Brun, academic co-director of the Master's in Finance and Banking at the UPF Barcelona School of Management and head of securities at the fund manager Trea AM. The goal, then, is for other investors to realize that his investment is sound and, therefore, follow suit, creating the downward trend he seeks.

For now, although it's probably unrelated to Scion's decision, Deutsche Bank is also exploring options for hedging (alternatives to minimize losses in case an investment goes wrong) to its exposure to AI companies, as reported on Thursday by Financial TimesAccording to the British newspaper, the German bank has not disclosed how much money it has invested in the sector, but between loans to companies and direct investments, it is estimated to be in the billions of euros.

But Scion and Deutsche Bank's positions don't convince everyone. In fact, Brun points out that the danger of an AI bubble has been circulating for some time: "People are saying there might be a bubble of talking about the bubble," he adds. Furthermore, the figures speak for themselves, and Burry himself mentioned them in a couple of messages to X, showing how two multinationals, Nvidia and OpenAI, are funding a cycle of loans and investments throughout the industry. "I think Burry is right," says Brun, who—like the American investor in his message to X—sees parallels in the stock market's growth patterns in the late 1990s, when the technology sector already experienced the so-called dot-com bubble caused by the widespread use of another disruptive technology: the Internet.