Investor Michael Burry, famous for betting against the housing bubble, says the federal government may be in no shape to rescue markets the next time a bubble bursts.
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In a recent post on his Substack, "Cassandra Unchained", Burry argued Washington has used real crises as cover to abandon fiscal caution and then kept it abandoned. The result, in his view, leaves policymakers in a weak position to support what he describes as a private debt bubble once it breaks.
He called the decision to take on so much debt while repeatedly cutting short the market’s natural recovery process "unconscionable."
Consequences will follow, he wrote. They may have started already.
Breadth Flashing Red
The warning capped a lengthy study of market breadth built on decades of historical index membership data.
Burry tracked what he calls the Bear Market Ratio, the share of S&P 500 members trading more than 20% below their 10-year highs. When the index, tracked by the SPDR S&P 500 ETF (NYSE:SPY), closed at a record on Oct. 6, the ratio stood at 55%. At the Aug. 13 record, it was 47%.
Only one record high in four decades came with a worse reading. In March 2000, at the peak of the dot-com bubble, 71.2% of index members sat in their own bear markets. Ordinary market tops since 1985 registered between roughly 20% and 31%.
Thin Leadership
Other measures look thin as well. Just 15 S&P 500 stocks closed at a new high alongside the index on Oct. 6, and only 97 traded within 10% of one. In March 2000, the figures were 15 and 87.
The median stock in the index now sits 22% below its high. At the 2000 peak, the median was 31% below.
Burry also built a narrower gauge, the Fresh Drawdown Ratio, to filter out stocks still weighed down by peaks from years earlier. Ordinary tops produced readings between 6% and 13%. The current reading is 27%, about half the 2000 level.
"More like 2000 than any time since, but not 2000 yet," he wrote.
A Slow Grind Lower
His base case calls for a market decline in which the leaders fall while the median beaten-down stock rises, a pattern seen only after the 2000 top. Burry does not necessarily expect one big crash. He sees stocks drifting lower, at times violently, as weak fundamental news works its way into the artificial intelligence story.
Burry credited the “plunge protection team” with skill at handling sudden selloffs. A market deteriorating on both fundamental and technical grounds, with shrinking participation, poses a harder problem. Cheerleading will not fix it, he suggested.
Burry has questioned AI spending for weeks. In an earlier post, he wrote the largest tech companies, with the exception of Apple Inc. (NASDAQ:AAPL), are spending as if their survival depended on it.
"Denial is a hell of a drug," he wrote, "and I will be watching."
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