Tuesday, December 29, 2015

A Few Words From Michael Burry

I will spare you my comments here since most of this is beyond my area of competence. But, we should pay attention to Michael Burry’s views on America’s current economic conditions, just because he is Michael Burry.

You recall Michael Burry? He was a leading character in the Michael Lewis book (now a major motion picture) called The Big Short. Way back before the crash of 2008 Burry found a way to short mortgage backed securities. He made a fortune in the crash, so he is worth reading… whether he is right or wrong.

How does he see the financial crisis now? He had hoped that the players in the government and business would have taken personal responsibility for what happened. And yet, they simply shifted the blame. It’s an important theme around here, so it is interesting to see how Burry explains what happened:

The biggest hope I had was that we would enter a new era of personal responsibility. Instead, we doubled down on blaming others, and this is long-term tragic. Too, the crisis, incredibly, made the biggest banks bigger. And it made the Federal Reserve, an unelected body, even more powerful and therefore more relevant. The major reform legislation, Dodd-Frank, was named after two guys bought and sold by special interests, and one of them should be shouldering a good amount of blame for the crisis. Banks were forced, by the government, to save some of the worst lenders in the housing bubble, then the government turned around and pilloried the banks for the crimes of the companies they were forced to acquire. The zero interest-rate policy broke the social contract for generations of hardworking Americans who saved for retirement, only to find their savings are not nearly enough. And the interest the Federal Reserve pays on the excess reserves of lending institutions broke the money multiplier and handcuffed lending to small and midsized enterprises, where the majority of job creation and upward mobility in wages occurs. Government policies and regulations in the postcrisis era have aided the hollowing-out of middle America far more than anything the private sector has done. These changes even expanded the wealth gap by making asset owners richer at the expense of renters. Maybe there are some positive changes in there, but it seems I fail to see beyond the absurdity.

And Burry points out that those who borrowed money at zero interest rates are also to blame. It recalls a remark I made recently about affirmative action programs. Just because you can get into Harvard or Yale under an affirmative action program does not mean that you have to go to Harvard or Yale.

In Burry’s words:

If a lender offers me free money, I do not have to take it. And if I take it, I better understand all the terms, because there is no such thing as free money. That is just basic personal responsibility and common sense. The enablers for this crisis were varied, and it starts not with the bank but with decisions by individuals to borrow to finance a better life, and that is one very loaded decision. This crisis was such a bona fide 100-year flood that the entire world is still trying to dig out of the mud seven years later. Yet so few took responsibility for having any part in it, and the reason is simple: All these people found others to blame, and to that extent, an unhelpful narrative was created. Whether it’s the one percent or hedge funds or Wall Street, I do not think society is well served by failing to encourage every last American to look within. This crisis truly took a village, and most of the villagers themselves are not without some personal responsibility for the circumstances in which they found themselves. We should be teaching our kids to be better citizens through personal responsibility, not by the example of blame.
The problem, as he sees it, is debt. Because one of these days we will either have to pay it off or default on it. While many politicians believe that we grow our way out of debt, others, like central bankers--and maybe even Paul Krugman-- believe that we can inflate our way out of it.

Burry explains:

 The idea that growth will remedy our debts is so addictive for politicians, but the citizens end up paying the price. The public sector has really stepped up as a consumer of debt. The Federal Reserve’s balance sheet is leveraged 77:1. Like I said, the absurdity, it just befuddles me.


Anonymous said...

The Fed loans the U.S. government as much money as requested. The government ensures the Fed has a monopoly on printing money. The dollar is supported by the Saudis who agree to price all oil only in dollars, assuring continued use of the dollar. The US government agrees to protect Saudi Arabia will the U.S. military. The US consumer loses purchasing power as the dollar is inflated. Now Obama is using the U.S. military to destabilize Syria so a gas pipeline can be built from Saudi Arabia to Turkey. In doing so, Obama is working for the Fed indirect. On the bright side, the U.S. citizen has benefitted greatly from deficit spending.

Sam L. said...

I see Anon's last line as something like saying we'd benefit greatly from shooting up heroin. The bill WILL come due, and we'll go Cold Turkey to pay it.

Ares Olympus said...

I saw "The Big Short" last Saturday, surprised a packed theater, but perhaps the average age in the theater was over 50, partly aided by the downtown retirement condos I expect.

I hadn't read the book, but the guy sitting next to me had, and he worked for a brokerage firm, and he (and others) laughed at many scene conversations that I apparently didn't have the context to understand.

And I also didn't know how it was going to end. Some skeptical part of me really doesn't believe you can bet against the system and win. And it is interesting to consider "the whole system is corrupt" while at least there is law and order to defend the corruption, so even if you bet against it, you can still get your payout.

I had been curious also on my assumption that "nothing has been fixed", while the "total household wealth" has not only recovered, but added another 20+ trillion of assets into the system, somewhere. So it makes sense that most of this is "funny money", assets that are only worth what we think they are until everyone wants to sell at the same time.

So if Michael Burry says he's worried, I believe him, but if he wasn't worried, I'd not believe him, so I guess I've already made my bet where we're headed.

Its interesting to consider the morality of betting against your own country, and so you do have to consider that many of the world's billionaires have connections all around the world, so they can safely made a bet against anywhere they want, knowing it it erupts into civil war, they're properly diversified and they can just go somewhere else.

But most of us are not going to move for financial reasons, or we'll be the next refugees if we do finally decide to move. So WE are the suckers when we let distant investors control our destiny.

OTOH, if you live in New York City, its a world city I guess, and you don't expect anyone to have any loyalty to place.

Dennis said...



Why it is hard to take Krugman seriously given the hypocrisy and partisanship.

Ares Olympus said...

p.s. After I saw the movie "The Big Short" I listened to a 2011 interview with the book's author, Michael Lewis:

At the end of the interview he was asked whether these contrarians felt any guilt at their bets against the system, and at some level they were doing exactly what markets are supposed to be doing, letting everyone use their best knowledge to predict where the market is going, and use that information to get rich. And ideally that is what Greenspan imagined exists to make markets "self-regulating."

But Lewis said some of the investors in the end saw the predicament of risk. The problem is you can try to evaluate risk based on a single bet, but when others are also betting on the same game, then small risks multiply and explode into chaos when the unexpected happens, whether triggered by a black swan, or just when a critical mass become aware of the real risks.

It is amazing that anyone is willing to invest at all, ANYTHING beyond personal relations, where you can see exactly where your investment is going, and judge if it is serving its expected purpose. But somehow we've entered a world where all investments are abstract, and diversified to the point that no one knows what they have, and its all just bits in computer memories, shifting around like a game of musical chairs, and no one knows if a chair will be close to them when the music stops.

My view is that this insane system arose because of a historically unusual period of continued growth from expanding markets and access to ever cheaper resources and energy. But this expansion phase can't last, and our money systems that work well in times of expansion can't work at all in times of contraction.

It makes sense to me that successful investments in 15-30 years (the period after the next big crash) are going to all be closer to home, and probably "capitalism" as we know it would seem to me to be dead, the idea than millions of people are going to trust their hard earned savings in the hands of distant investments they don't care about.

Nicole Foss of the Automatic Earth blog says the "trust horizon" will be shrinking, and that seems a good analogy. Thomas Friedman says the "The world is flat" because of digitalization of communication, but a loss of trust reverses all of that.

It'll be interesting to see how things change, and if you're a happy Martian viewing from a distance with no skin in the game, it will all make for a good movie.

Oh, on Krugman's belief that we can "inflate" our way out of debt, I don't think he has a choice. There is no alternative system right now for us. Every alternative system or tweak that is more "sustainable" just guarantees everything we have now crashes sooner. The only serious question is how to achieve a "soft landing", and avoid triggering an extended panic crash that destroys things too quickly to salvage the losses. So deception to avoid panic is an honorable lie.

Myself, I consider 2008 as a wake up call, and the last 7 years have been the eye of the hurricane. And anyone who still has money now in any pension or retirement fund or more active investment they can't physically touch has allowed themselves to be deceived.

Ares Olympus said...

p.s. Here's a (3 minute) 2010 interview with Burry saying the same thing.
https://www.youtube.com/watch?v=bOP4Pt9jEXs Burry Says No One's Accepting Blame for Financial Crisis: Video

He sounds like a man with a wounded conscience at his success. Strangely he says "it is damaging to do as a country, to blame a narrow set, and not look within ourselves to see what we did or did not do." He was worried then that a few big bankers would be scapegoated, so he'd rather no one get punished and we all have to feel bad for our participation?!

So that's similar to his new quote "If a lender offers me free money, I do not have to take it. And if I take it, I better understand all the terms, because there is no such thing as free money. That is just basic personal responsibility and common sense."

I admit I don't like his framing, and its unclear what "free money" means. I assume what he means is people who buy a house that costs 10 times their annual income with 0% down, or worse a balloon payment due in 5 years, assuming you can easily refinance with new equity on an assumed always rising value. So that's all "bubble" logic, but not everyone are "numbers" people, and most of us are too trusting when someone says "You can buy a $500k house with $1200/month payments", that's as far as their math abilities go.

But the ANSWER to all of that isn't "personal responsibility" but proper advocates who can analyze bad business practices and shut them down, something like Elizabeth Warren's Consumer Protection Bureau.

But if you're someone making millions of dollars scamming people, and transfering the risks onto others who are too stupid to understand what you're selling, you don't like Warren, and you say "The free market will take care of itself if the government just gets out of the way, and by the way, please let's privatize social security and allow people with 30 year mortgages invest in our securies made of imaginary AAA sliced and diced mortgages of people more stupid than you."