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The famous investor Michael Burry, who predicted the mortgage crisis of 2008, is known for his pessimistic and contrarian statements. His recent warnings shed light on what he considers imminent risks threatening the U.S. stock market, centered on two main points: the AI bubble and the risks of passive investing.
1. AI bubble
Burry believes that the massive rise in AI company stocks represents a speculative bubble similar to the dot-com bubble of the 1990s.
* Historical similarities: He points out that the capital expenditure (Capex) to GDP ratios in the United States have reached levels seen before previous collapses (such as the dot-com crash and the housing crisis).
* Huge spending met with little demand: Burry claims that capital expenditure on technology, especially in AI, is rising at very high rates (such as spending by companies like Nvidia and Meta), while he sees actual end-user demand for these technologies as "ridiculously small."
* Profit inflation: Burry raises concerns about accounting practices that could mislead investors, such as extending the depreciation schedule for AI assets to make profits appear higher than they actually are.
* Actions, not just warnings: Burry emphasizes his seriousness by taking large short positions against companies closely linked to AI, such as Nvidia and Palantir, demonstrating his readiness for a downturn in these stocks.
2. Risks of passive investing
Burry has long warned about the risks of exchange-traded index funds (ETFs) and passive mutual funds, considering them the "next guaranteed debt products (CDOs)" (a reference to the financial instrument that was at the heart of the 2008 crisis).
* Price inflation: He believes that the continuous cash flows into passive index funds artificially inflate the prices of stocks and bonds.
* Liquidity risk: Passive investing creates a significant concentration in a few large stocks, and if a sudden shift in sentiment occurs, attempting to sell these assets simultaneously could lead to a liquidity crisis and a sharp and rapid price collapse.
* Failure of effective pricing: He sees that these massive cash flows mean that stock prices no longer necessarily reflect the true value of companies but rather reflect the flow of money into indices.
💡 Summary
In short, Michael Burry believes that the market is currently supported by a technology bubble driven by AI and massive financial flows into unsustainable passive investment vehicles. This combination creates a highly fragile environment where any catalyst could lead to a "major correction" or "collapse" in the market.
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