Report: 'Big Short' Investor Michael Burry Bets $1.6 Billion on Stock Market Crash

Michael Burry, the "Big Short" investor who became famous for correctly predicting the epic collapse of the housing market in 2008, has bet more than $1.6 billion on a Wall Street crash.

Burry is making his bearish bets against the S&P 500 and Nasdaq 100, according to Security Exchange Commission filings released Monday. Burry's fund, Scion Asset Management, bought $866 million in put options (that's the right to sell an asset at a particular price) against a fund that tracks the S&P 500 and $739 million in put options against a fund that tracks the Nasdaq 100.

Burry is using more than 90% of his portfolio to bet on a market downturn, according to the filings.

[...] The S&P 500 and Nasdaq 100 have both notched big gains so far this year. They're up nearly 16% and 38%, respectively.

Warren Buffett's firm Berkshire Hathaway sold a net $8 billion of stock between April and June in a move that suggests the U.S. economy is not out of the doldrums yet, despite consistently slower inflation.

According to Berkshire Hathaway's second-quarter earnings, released earlier this month, the company sold close to $13 billion worth of shares and bought less than $5 billion. The Nebraska-based investor's company spent only $1.4 billion in buybacks—a modest sum for the stock market and much less than the $4 billion it spent in the first quarter.

[...] Buffett "has always acted as a voice of confidence for markets during turbulent times," David Nicholas, president and founder of Nicholas Wealth Management, previously told Newsweek, commenting on Berkshire Hathaway's first-quarter stock sales. "But this marks a significant departure in his tone and positioning towards U.S. equities."

As a result of its stock sales in the second quarter, Berkshire Hathaway fattened its cash pile by 13 percent to reach $147 billion between April and June.

"When a recession is right around the corner, Buffett knows that cash is king, particularly when he can earn a decent rate of interest on it," Steve H. Hanke, a professor of applied economics at Johns Hopkins University, previously told Newsweek.

"Apparently, Buffett anticipates that the U.S. economy is headed for troubled waters. I think he is correct," Hanke, who served on President Ronald Reagan's Council of Economic Advisers, told Newsweek on Wednesday.

"The money supply is fuel for the economy, and it has been contracting over the last year. Now, the rate of contraction is -3.6%/yr., something we have not seen since 1938. Following significant changes in the money supply, the economy changes course with a lag of 6-18 months. At present, the economy is running on fumes and a 2024 recession is inevitable."

[...] So what could Buffett see threatening the U.S. economy that others don't?

In May, Nicholas told Newsweek that "the three big risks for Buffett were China, the U.S. banking sector and commercial real estate. These are very real risks for economic growth and just one would be enough to derail growth, yet we are dealing with all three at the same time."

With mortgage rates firmly above 7%, homeownership has become much more expensive. But will rates go even higher?

Three experts told MarketWatch that if the economy continues to show signs of strength, and the U.S. Federal Reserve hikes its benchmark interest rate once again, rates could go up to 8%.

High rates have already taken a toll on the U.S. housing market. Even home builders, who have in recent months experienced strong demand from homebuyers, are reporting a drop in buyer traffic as those rising rates rattle their customers.

[...] Currently, the spread between the 30-year fixed-rate mortgage and a 10-year Treasury bond is around 300 basis points, which is "elevated and highly unusual," he said.

Historically, the mortgage-rate spread has only been around this level only during periods of financial crisis such as the Great Recession or the early 1980s recession," deRitis added. "The historical average is closer to 175 basis points."

If the 10-year continues to rise — and the U.S. Federal Reserve chooses to interest rates once again — it could go beyond 5%. If the spread stays elevated at 300 basis points, deRitis added, "a mortgage rate of 8% or more is a distinct possibility in the near term."

A regional bank in the U.S., Heartland Tri-State Bank, was closed by the Kansas Office of the State Bank Commissioner on Friday [July 28].

[...] On March 10, Silicon Valley Bank was closed by the California Department of Financial Protection & Innovation. On March 12, Signature Bank was closed by the New York State Department of Financial Services. On May 1, First Republic Bank was closed by the California Department of Financial Protection and Innovation. Moreover, Silvergate Bank announced voluntary liquidation.