Michael Burry Speaks

Pushkin. I'm Lidia Dean caught, I'm Michael Lewis.

And surprise, we're here for an extra episode of The Big Short companion series one.

We weren't expecting that's.

Right, Yeah, because we got the hedge fund manager Michael Berry to be on the podcast.

We didn't really get him to be on the podcast. It's funny. What happened.

Well, first we should say how Michael Berry is.

Michael Berry is one of the three main characters in both the book and the movie of The Big Short, and he was a really important character to me.

And in the movie he's played by Christian.

Bale and in the movie he's played by Christian Bale.

He doesn't do interviews, and we've asked him to be on the podcast earlier and he said no. So yeah, So what happened.

First he said, you know, I'd like to help, and then he said I don't, I wouldn't like to help. And then what happened was his trading activity got released to the public, which it does. He has to file a thirteen F four with the SEC saying what his positions are. And as though it's not a perfect picture of what he's doing, it did say that he had put on big short positions against U Palanteer and Nvidia, so he was betting against the AI bubble.

All he did was file what his positions were.

He didn't go on he doesn't do media, he doesn't do interviews, and it exploded like it was on Twitter on CNBC, people were both attacking him and praising him, and his reasoning for not coming on the podcast was he wanted to lay low and he was trending on Twitter for forty eight hours, so it was like, what's the point? Yeah, he can't lay low. Yeah, And as he tells us, he says like this only happens to me. But I was really glad to have him on because I felt like we were missing somebody.

Yeah, no, same, and also because people were asking. I was getting messages and being like, are you guys gonna have Michael Berry?

There's something also nice about subjects who does just who aren't promiscuous, who don't just talk to.

Everybody, because that makes you feel special, or it makes you.

Feel special, makes it makes your audience feel special, and the reader feels special like nobody else has this story.

And one thing I wanted you to explain it is he was one of the first people, one of the early people right to bet on the subprime mortgage crisis. And when he was trying to do it, there weren't any financial instruments to do that right.

You had to It was how to do it in a way where if the madness just kept going and going, you weren't going to be bankrupt quickly. So you could have done things like bet against mortgage companies in the stock market. You could have shortened their stock, but you know that's a it's a beth. It's hard to hold for.

A long time, and so you have to your timing has to be exquisite.

What he did was basically invent, or have Wall Street firms invent for him, the credit default swap on subprime mortgage bonds, which is essentially an insurance policy on bonds backed by some prime loans. So if the loans go bad and the bonds go bad, you get paid off on this insurance policy. Think of it like I get to buy insurance on your house and fire insurance and if it burns down, I get paid. So there's something a little goofy about it. I mean, it used to

This obviously creates a very bad incentive murder. Yes, yes, exactly.

But you can do this in the financial markets. You can buy insurance policies on other people's bonds and if they the bonds go bad, you get paid. You couldn't when Michael Barry started to think about this situation, you couldn't buy an insurance policy on a subprime mortgage bond. So he had to go help Wall Street create it for him, and then all the other characters in the story are then using that thing he creates to make the same bed.

Is there anything else you wanted to say related to Michael Berry?

I would say that the one other thing that's interesting about him is that he so let me into his life.

He just doesn't really do that usually.

It created an intimacy, Like I just really got to know him and really enjoyed like just hearing what he had to say, Like I just learned stuff from him. Even when he doesn't make money on what everybody he's making, it's really interesting to hear what he's thinking and just like have that as part of the furniture.

In your mind.

Michael Lewis's conversation with Michael Berry is coming up. It really is a very fun listen.

I remember you handing me your emails, and like.

You had, like thousands of you had communicated with the world, your whole trading life for years through email, and so it was a real time account of your thoughts of Wall Street's response to your thoughts of how the market moved. It was unbelievably valuable. It was so different from like everybody reminiscing. Do you remember that?

I remember that, and those emails I think were the main reason I didn't get sued by my investors, Because if I had been a skilled orator or somebody who loved giving conference calls, I would have done conference calls with my investors and then maybe they wouldn't have been recorded. And but here I had emails with everybody on everything, and so it was very clear where we stood with everybody.

You were like for me, you know, people came to the right answer in different ways, and you came to the right answer in such a satisfying way, because not only did you see that the irresponsibilities in the subprime mortgage market, but you actually had a theory about the timing of it when it was all going to come unraveled. And the problem with these positions like with oh, there's a lot of insanity and X or Y is that, yeah, you can be right, but you can be wrong for long.

Enough that the market just takes you out of your positions.

I think that's right. This is why this is the Big Short. It's the once in the century opportunity to actually say, I know when this is going to happen, right, you know, I've compared this to the nineteen nineties bubble, and the reality is there was no telling.

When that would end.

Right.

In most situations like this, there's no good way to time it, and shorting it is just a high risk endeavor.

Well, we're going to get to today, but I wanted to just revisit the Big Short just a little bit. And I'm curious what effect it had on your life. I mean, there was the trade, there was the book, and then there was the movie. You did let Christian Bale come and hang with you for a day, but you were remarkably chill about the whole thing. And I don't think I've ever felt like I've really recapped with you, like, what effect this thing had on you?

If any I think I didn't know? I you're right.

I mean, I'm on the autism spectrum. So I'm pretty good in my own head and I'm pretty good at blocking out stuff. And so even this movie, I saw it at the premiere. I haven't watched it since the book. I read it when it came out, and I haven't read it since. That's how I felt about it. We just I just move on and so kind of took it as it came. I went to the premiere because my whole my family wanted to go to the premiere.

You didn't feel it puts you in the position of oracle that all of a sudden, people are expecting you to predict the next thing.

It was, as we mentioned, it is a very unique circumstance. It was a once in a century type trade. People say one, you know, once in a century, flood, once in a century, this one, and it's not really true, it happens every ten years. But this was that opportunity was very unique. And I've basically told everybody I can it ever since that that that's not going to happen

Pull the caper off.

There are three things I want to talk about at the back end of the big of your story in the big short, and then I want to move on to the present. But the first is, you have this terrific win, your investors make a lot of money, and you end up closing your fund.

You remind me why you closed your fund.

My investors were generally mad at me, and they were generally mad at me even when things went well, and I didn't feel at the time I had goodwill with anybody.

I didn't.

There was only one investor I shouldn't say his name, but love him. He is the only guy that invested with me that last year and a half or so. Nobody came to me, nobody, nobody wanted to invest with huh. And even when we made the money, it was who We don't want to go through that again.

Did anybody ever call after the book, after the movie, after they got their money back and a lot more?

Did anybody ever call you to apologize? No? No, no, no, Kit. It's kind of an amazing I did. I didn't expect it.

I know you didn't expect it, But this sort of like at some point when there was cooling off and they looked at they looked at their winnings. I would have thought someone would have called and said, you know, sorry, I got so angry at you for doing this trade.

No nobody did, okay, and I didn't expect it. It's Wall Street. When did you reopen twenty thirteen? And since then?

How have you done?

Done? All?

Right?

I think it's all been the same since. So I remember when I opened again. I didn't want investors I didn't know. I didn't want to be above the SEC threshold for registering as an investment advisor. I wanted to keep it small. So I just went to people I knew and some of my own money, and we created a fund. It was probably a situation where if I wanted to, I could have raised billions, but that wasn't my intention.

You didn't want to relive the experience you'd already had.

I didn't want to deal with Wall Street. I didn't want to deal with those kinds of investors. I knew who my good investors were from the prior time, and those were the only people I wanted to deal right, And so it just was a small operation. And I kept trying to keep it small, and I didn't really market it. I didn't market it at all other than

I have not paid that close attention. All I see is every now and then there's some explosion on Twitter about you.

And it's wrong.

They're all wrong.

We're going to take a quick break, and when we return, I asked Michael Burry about why he placed bets recently against two large tech stocks, Talenteer and Nvidia. So let's talk about this. Explain to me you have this very small operation with just a handful of investors. What are the filing requirements? What do you have to hand in so that people can see what you're doing.

They get to see US securities traded in the US that are stocks. They get to see stocks, and they get an incredibly bastardized version of options.

Okay, how is it bastardized?

Because say I buy fifty thousand put options on Pallenteer, and that's fifty thousand times one hundred, and so I'm short strike fifty way out of the money. It's like a it's two hundred dollar stock. Now I struck, but I think it's worth thirty or less, so I buy them way out of the money. Two years out, you're betting the pontaive is going to drop by a lot a lot in two years, but over a long period of time.

Right and the press.

I'm working out and I see on CNBC I have a billion dollars short position against Palenteer.

It's ten million dollars. I saw this too. I couldn't believe it.

So what they do is they take the underlying shares under those options contracts and they they multiply it out by the current stock price. We're so I have a actually it was less than two dollars option, and it was being prices if I owned the two hundreds, so

So maybe you should give more interviews. I asked you, what effect the big short hat on your life? This is an effect the big short hat on your life.

And compliance and my compliance. Since the financial crisis, everything changed and compliance. We have a compliance officer inside the firm, and he just keeps saying, don't talk to anybody, don't talk to anybody, don't respond to him, don't respond to anybody. And so I think since the movie came out and this really started happening, there was a frustration building in me to want to say something yeah, and I couldn't. And so when COVID came about, I had some strong feelings on that.

So I went on Twitter.

But I was only allowed to talk about the that weren't stocks, and so that's fine, I mean, but I had to talk about social things and I got in trouble with that, because everybody gets in trouble with that. So I got off Twitter, but you got back on. I got back on recently because we deregistered. I don't run that pool of money anymore, I'm just going to run my own.

Money in so it's you're just your money now. So mostly, yeah, why did you decide to do that? I think that we're in a bad situation in the stock market. I think the stock market could be in for a number of bad years, and I think it could be a longer bear market, more akin to two thousand. But the structure of industry, the industry has changed. Back then, it

It's a lot.

It's over fifty percent passive money.

There's index funds, less.

Than ten percent of money some say is actively managed by managers who actually thinking about the stocks and in any kind of way that's long term. And so the problem is in the United States. I think when the market goes down, it's not like in two thousand where there was this other bunch of stocks that were being ignored and they'll come up even if the Nasdaq crashes. Now I think the whole thing's just going to come down, and it would be very hard to be in a

Because the fund had to be long in some way.

Well, I didn't want to go through that with investors again, I see, and that makes sense. Of course, I closed the fund and I got I put on all the positions for myself right away the same.

So you're still in the position. So I want to talk about this position. I found it again. I was watching it from a distance. But tell me what I missed. Someone c NBC, whoever gets a hold of your thirteen F on this thirteen F it says Palatiner positions.

Is especially big.

It looks big because it looks big because they're the put ups. Just they're way way out of the money. They were struck at fifty. So, okay, you had to release this information about your fund.

You weren't advertising it to the world in any unusual way.

You weren't going out and talking trash about Palenteer. You just this position gets released, right, and then the next thing I do, I see Alex Karp, who runs Palenteer, like going after you for owning puts on his stock.

And I don't think. I mean during the.

Financial crisis, you will remember that the head of Morgan Stanley at the time, John Max, he blamed short sellars for what was happening to him and they banned short selling of the stocks very I think, briefly.

Right, but it's always a really.

Bad sign when people start going after the short sellers.

It's in the United States, in the United States, and.

I was thinking, oh my god, I guess wouldn't want to be in your shoes like you didn't you just made a trade.

But he's provoked me.

I want to understand your trade. It's about that pollunteer goes way way.

Down, way way down in two years.

What do you understand about their business as the market doesn't huh.

So my belief is that this is a company that had a set of applications that were very expensive to install because you had to hire their consultants, like after you bought the software just to install it, and learning right and Pounteer had this reputation in government government contracts is a nasty business, and I think they figured out how to do it and get some contracts.

How much of their revenues government contracts.

It's fallen off a lot. It was it was almost it was a majority, and now it's like more even because it during this the AI build out, they've basically marketed themselves to corporations. Well, corporations have come to them. C suites of every public corporation have board members CEOs who feel under the gun to AI something. And so there's this scramble and now they're not the only one. They keep saying they're the only ones. But IBM has

And I've never seen that book. Is that what attracted your attention in the first place?

Well, it that was a that's a cute little thing. Was Wow, there's how do they get five billionaires out of that group? And so out of a company that has four billion of revenue and actually, uh stock based compensation basically to weighs almost all their income. They have to pay their people who are doing all this consulting so much in stock that they just use stock based compensation. And then what they do is they buy that back.

You had an argument back in two thousand and eight for when the subprime mortgage bond market was going to start to unravel, when people are going to start a default. Do you have a timing argument for now with Palenteer?

Well, I think this is the AI, the AI consulting thing. So Pallenteer and Nvidia are the two luckiest companies on the planet. Neither produced a product for AI. No I know, but they're the two poster children for AI.

Yes, in Video was a good computer graphics chip company.

In Video was a computer graphics chip. I actually knew the CFO. We talked in twenty fifteen or sixteen. I went long the stock and I and I said, hey, you're doing a great job. I love how you're buying back stock. Her kids was on my kids basketball team. I think I bought the stock like a year or two later. The stock was up to like it went from twenty to ninety at the time, which is like forty cents now after the splits in video was lucky.

On and they call it AI.

But that's what every company is doing now.

But is there a timing argument for AI? Then?

Yeah, So this gets to what does this bubble look like? This bubble looks an awful lot like the dot com bubble, which is not really a dot com bubble. It was a data transmission bubble. It was a huge build out of fiber, and a huge fiber needed routers, and routers needed fiber and it just blew up. So the market peak was in March tenth of two thousand. Cisco grew fifty five percent that year revenues in two thousand and it grew seventeen percent in two thousand and one because

So you felt two year puts were enough.

I thought two years would be enough. Yes, I think two years would be enough. I think you know, if you're going to buy something now by healthcare stocks, they're really out of favor. If your own something that has been gone up a lot, you've done really really well in it, it's shooting straight up, and you know it's I think it's kind of overvalued, you should I think that's a something you should sell.

I want to ask you one weird question more question about the stock market, and that is you own Berkshire Hathaway and berksh Hathaway just.

Announced that we just was revealed that it bought a big chunk of Google stock.

Did that disappoint you or do you see how they're thinking, we don't know that that is buffet that bought it one two. Google is the value investor's favorite in that group. It's the one that everybody said, well, it's cheaper than all the others, it's got its relative value, and it is Google. But I know that since I got Chat GPT in claude, I don't use Google right, and Google Search. The magic thing about Google Search was how little it

It's it's history.

You know what did Columbus really do?

You know?

It's not monetizable, and so they better not lose a lot of money on that AI changes.

That AI is expensive.

I run queries regularly that I know costs tens of dollars just for my inquiry one inquiry. Google had had those searches down to infinitismal fractions of a cent. So that business is the golden goose and it's really basically all their cash flow. So the other thing about llms is that look back to the dot com boom. That was an amazing telecommunication revolution. If you were alive in the eighties and then you're alive in the two thousand, it's nothing the same. It changed everybody's life in a

But it was it was.

A long time by the financial crisis. But even after the financial custis there was a lot of people in the United States who were not online or were on you know, we're in not really doing it. So back then, as that connectivity came up, there was a lot of things people want to sell. People wanted to sell goods online, they wanted Amazon grew on that. They wanted to socialize online. They want to do these things with lms. Most people are getting what they want out of them right now

From the break, I finally find out why he decided to talk to.

Me for the big short.

How did the Volkswagen Beatle go from being Hitler's dream car to a hippie icon. How did a disgruntled center fielder change the business of sports. I'm Jacob Goldstein and on Business History, my co host Robert Smith, and I dig into the people and companies who created the modern world. Business History is full of innovations and failures and insights into how business works today. At the end of today's episode of Against the Rules, we're going to play a

So I'm going to let you go in a minute.

But there are a couple of other things I want to ask you about because I just want to pick your brain on them.

What trigger is a debt crisis in this country?

Like you, are you paying much attention to our government's finances and how do you feel about them?

And where do you think it's headed.

So predicting this stuff is the problem. I always kind of put it in terms of, you know, waiting for Castro to die. It's not a strategy. The people live a long time. Countries are very powerful and they can do a lot. The United States is the reserve has the reserve currency. Obviously, Trump is bullying around the world right now, so there United States is still a very primary country, and betting that they can't find a way is not something I'd want to do anytime soon. I

So you think the death's just going to keep growing and growing and growing. But you wouldn't want to bet when it breaks.

No, you can't because it's the United States.

How do you feel about FED independence? Do you care?

I think I have a different I have a kind of a sick view on this. I think that Trump, when Trump starts running the FED, it might become the end of the FED, because if he's running the FED, then everybody's gonna hate it, not just me, so we'll see. I think the FED is has done a lot of damage over the last one hundred years, or since it's inception in nineteen fourteen, and I feel we don't need the FED. We don't need it unless the FED is going to say, look like, why are they going to

None of this is costless.

And you think you're going to just drop rates, be careful what you wish for, you might drop rates. And because of the debt situation that the curve can steepen.

Did you just say you want to get rid of the FED? Yeah?

I think the FED doesn't do anything very helpful. I think it's the easiest job in the world.

What do you replace it with?

I think the US Treasury could have a department that just makes these decisions. I mean, the FED already's monetizing treasury debt whatever. I mean, they're almost the same department already.

Your institutional pessimism, does it lead you to, like, I don't know, bitcoin or gold or one of these refuges that.

I think that bitcoin at one hundred thousand is the most ridiculous thing that sane people are sitting on TV talking about bitcoin. They' just casually it's one hundred thousand down now it's ninety eight thousand. It's not worth anything. Everybody's accepted it. It's the tulip bulb of our time. It's worse than a tulip bulb because this has enabled so much criminal activity to go deep under under.

So where do you hide with your I have gold.

I've had gold since two thousand and five days.

I'm gonna let you go back the last question I have. Did you I never asked you this question. You let me into your kitchen in a really you made yourself very vulnerable, and you let me tell your story. Do you regret it?

When you showed up, I knew you from Liar's Poker, and I didn't know what you were going to write about me, because you're you're a great author. I knew I knew you from Moneyball and Blindside. But when you deal with Wall Street you tend to be very fairly critical. And so I'm a big hedgshod manager just shorted your house. You approached me. Actually, I got a call from a friend. You talked to think one of my friends in New York and he called me and he said, I just

Yeah, you know.

And your appeal to me was you were and are a fantastic teacher, like a really good explainer of your own thoughts, and your own thoughts can sometimes be peculiar, like just different than what other people are thinking, and you don't mind holding them, you know, you don't mind having views that just would embarrass people who were less sure of themselves to articulate.

Well being on the spectrum. I just moved back into my own head and along.

So it was great seeing you. I'm sorry you're not out here more. And if you were out here, I wish you just let me know because I am down in your old neck of the woods, sum and it'd be fun to go grab dinner.

We're still out there a lot, so I'll look forward to seeing you all right, Miss you, yeah, miss you too.

Thank you, Michael.

Against the Rules The Big Short Companion is hosted by Michael Lewis. It's produced by Me, Ludy jan Kott and Catherine Girardeau. Our editor is Julia Barton. Our theme was composed by Nick Burtel, and our engineer is Hans Dale. She special thanks to Nicole opten Bosch, Jasmine Faustino, Pamela Lawrence and the rest of the Pushkin Audiobooks team. Against

It's Jacob Goldstein. I'm the co host of a new show called Business History. And we're bringing you a clip right now from an episode we did about a mathematician named Jim Simon's. Simons wanted to take human emotions out of investing, and after a few early hiccups, including buying up all the potatoes in Maine, he created one of the greatest money machines in history. I really hope you like the clip, and if you want to hear more,

They were doing what we would call today machine learning.

A machine learning is like, essentially, you build a system in a computer, you feeded a bunch of data and the system sort of builds a map of the relationships in that data, and then with new data it can kind of interpolate or extrapolate and make guesses about.

What should come next.

And of course today we have a exciting, maybe misleading, confounding term for machine learning.

We call it AI.

Exactly right, right, this is still very basic machine learning, and the computer at the time keeps making mistakes that they didn't really understand. So, for instance, once the computer developed a taste for potatoes main potatoes, the system kept buying main potato futures in the state of Maine.

Potato potatoes, big harvest next year or whatever.

Yes, okay, until two thirds of the company's money was in potatoes. They were all in potatoes. And they got a call from the regulators.

The CFT CFPP Commodi Futures Trading Commission.

Right yeah, saying whoa who are you guys, Like, what are you doing over there? You have almost cornered the market on potatoes. You have to sell. And they ended up losing money on the trade because blown out on potatoes, they had stopped the computer or whatever the computer's plan was. But you know, this was just one small weird thing. Simon and Baum were really kind of nervous about this whole thing. They had taken investors' money, they didn't really