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Weekend reading: Sub-prime crash winner re-emerges to Burry the optimists

Weekend reading

Good reads from around the Web.

I feel like we’re more than halfway through the financial meltdown. But unfortunately, someone far smarter than me and with a track record in far-sightedness disagrees.

Michael Burry led the tiny band of hedge fund managers who identified the US sub-prime housing disaster before it happened, and made a fortune. In Michael Lewis’ book The Big Short, Burry comes across as someone who gets his edge by thinking the unthinkable, and investing accordingly.

Well, Burry recently said the unspeakable, too, when he returned to his Alma Matter at UCLA to deliver a commencement speech to its keen young graduates.

Such speeches are meant to be rousing and optimistic affairs (Steve Jobs’ is a particularly brilliant example).

But ever the contrarian, Burry warns in his speech that UCLA’s graduates face a grim future, with at least two recessions baked in. And it’s not even their fault:

The speech is a couple of months old, but I’d never seen it before. It was so powerful and unusual to hear the bearish line coming from someone I respect that I had to share.

Michael Burry no longer manages other people’s money, after his investors turned against him when his big bet on against housing stalled before it finally paid off.

So we don’t really know what he’s up to right now.

As of 2010, however, he was buying farmland, gold, and real estate:

Many readers – and most financial bloggers – are much more bearish than me, so perhaps Burry’s continuing fears won’t rattle your cage.

I’m not going to change how I invest on the back of it, either. Like Burry, I try to think for myself.

But I am going to keep it in mind should valuations start to run away.

In particular, where can I buy me a farm?

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

Other articles

Mainstream media money

Highlights from the wall of noise…

Passive investing

  • Does Europe finally look good value [Includes ETF table]FT
  • Swedroe: Active funds are too risky for most investors – CBS

Book of the week: Talking of Michael Burry, if you’ve not read The Big Short, you should. (You could start by reading The Accumulator’s review).

Active investing

  • Junk bonds lose their attractions – FT
  • Going soft on the commodities super-cycle – FT
  • Investment lessons from a mystery tech company – CBS News
  • High-frequency traders screwing the natural gas market – WSJ (& more)

Other stuff worth reading

  • 1987: The year computers began wrecking the market – NY Times
  • Rich Dad, Poor Dad’s bankrupt company – CBS
  • Where next for miners? [Podcast]Motley Fool
  • ‘Real’ assets versus inflation [Academic PDF]SSRN
  • iTunes versus Blinkbox: Which streams better? – The Guardian
  • … though beware – watching TV reduces your life span – NY Times

Product of the week: Tesco has launched a table-topping 1.99% two-year fixed rate mortgage. The Telegraph has reviewed it.

Like these links? Subscribe to get them every week!

{ 18 comments… add one }
  • 1 ermine October 20, 2012, 12:09 pm

    Now that was awesome. I didn’t rate Jobs’ one at all 😉

    I know you’re probably not going that way but farmland has been a good investment from a purely capital appreciation POV even in the UK over the last few years. And the UN is warning about food supply issues though I’d guess this is more about increasing population and distortion by financial instruments 😉

    Eastern Europe seems to be the place to be for quality farmland at reasonable prices, indeed some who want to work the land but can’t afford the capital cost in western Europe are heading that way, there was an investment trust in such land that I read about in a Savilles’ newsletter.

    However, there are some serious questions to be raised because at the moment we farm to maximise the return on capital, rather than the return on land area, and in unsustainable ways. In New York State 3.1m acres of farmland has been abandoned because presumably a return on capital can’t be made. Although some things are different in the Old World the hugely distorting effects of government subsidy make this a tough investment to value.

    Oh and I’m with both him and you. The recession may well be half-way through. But I expect living standards for most people in the West to fall, year after year, ratcheting down for a long time. Much of the living standards we had were illusory and built on debt. We can afford glitter like iPhones and iPads but increasingly not the basics, like buying a house or heating our homes. That’s a rough tradeoff.

    As one of your articles said, that’s why you must get out and stay out of debt; then at least you get to choose which elements of your standard of living you will defend, rather than the repo-man getting to make that call.

  • 2 Curious-Sarah October 20, 2012, 2:41 pm

    That is a scary video. And I thought I was doing the right thing buying safe dividend shares and trackers.

    Perhaps I should be getting an allotment instead!??

  • 3 Alex October 20, 2012, 6:00 pm

    1. I see you’ve highlighted a ‘is it time to buy Europe?’ article – in the ‘FT’. I’ve seen a few of these articles recently. But, equally, I’ve seen a few at the moment asking the same question about Japan. Have you noticed?

    2. Who knows whether now is the ‘right’ time to buy? Are we investing or trading? Etc. etc. Further, as you know, those articles about Japan have been appearing for years, decades even. One time they’ll be right.

    3. One comment about the ‘FT’ article on Europe and the table you highlight, “Pick of the ‘passives’”. Unfortunately, it omits synthetic ETF XESC, which has a market-leading TER of 0.00% p.a. Strange omission.

    4. Disclaimer: I use XESC for my exposure to Europe.

  • 4 The Accumulator October 20, 2012, 8:03 pm

    A powerful speech. Spelling out in no uncertain terms that the Ninties / Noughties party is over. I just wish I knew it was a party at the time. The best line for me was the one about how the individual can stand aside from the economic misery that sweeps others away. If you commit yourself to asking questions and lifelong learning. I think that spirit is alive and well among the Monevator community. Whether you’re into trackers or allotments, we’re all thinking ahead and fashioning our own personal safety nets.

  • 5 noiseboy October 20, 2012, 8:12 pm

    I’ve been reading the FT down in my allotment shed.. Where does that put me?!

  • 6 ermine October 21, 2012, 12:04 am

    I just wish I knew it was a party at the time.

    That’s the trouble with a really good party, with those you don’t remember what happened or who with, but the headache the day after is a git 🙂

  • 7 JOhn LAw October 21, 2012, 6:12 am

    Dear Monevator,
    Does this mean you have changed your mind on gold and silver as investments?

    I would dearly love to revisit this question in 12-24 months time, as I believe that neglecting the precious metals in favour of equities and government debt in the current climate will prove to be a monumental mistake.

    Will post again after the reset.

    Love and kisses,


  • 8 John Law October 21, 2012, 6:29 am

    PS: Otherwise a great blog which I enjoy reading.

  • 9 The Investor October 21, 2012, 12:32 pm

    Thanks for your comments everyone.

    @John Law — Nice to hear from you, glad you like the blog. If you return to our initial debate, you will find that I said at the time I did own some gold and saw the case for it being a standard part of most asset allocations. My debate was with gold bugs and that gold bug-y attitude. Indeed, at the time you said “gold is not an investment. It is money.” I am glad to see you are now describing it as an investment, which it is — one of many choices. 🙂

    As for Burry holding it, yes, I respect the guy a lot and hearing him does make me think I’d feel better with a slightly higher allocation, albeit perhaps through miners. I waited an age to buy Fresnillo then dithered when it hit £14. I regret it every day I check the quotes! 🙁

    @Ermine — I spent a fair bit of time in Eastern Europe due to a previous partner’s links with the area, and it is amazing. At its best you walk through agricultural field in a fog of perfume from the flowers and herbs growing in the pasture. It’d melt your eyes! Unfortunately there is a tension between the EU wanting them to preserve it, and the EU wanting them to turn it into more agri-industrial farm.

    @Sarah — As above, it’s all a balance. You could add a little gold to your asset allocation (say 1-5%) and have something in the game in a doomsday scenario. You may already own real estate via your own home (I suspect Burry was thinking of a combination of high inflation and by then low prices due to the US crash). You have to realize that when the likes of Burry talk about disaster, they don’t mean the dystopian visions of some of the wild fringes of the Internet. They mean a series of recessions and a perhaps overall flat economy for 20 years, which they know is so far beyond what the West has experienced in the past 60 years that it will feel awful. They’re not generally talking about 30% unemployment and people burning their furniture for fuel, or whatever the fringier elements expect.

    @Alex — I don’t particularly have a view on the ‘rightness’ of these articles, although obviously I have an editorial bias. If I think a region is cheap and under-invested (Europe and Japan both fit this bill) then I’ll often include in an article highlighting that, not because I particularly expect them to recover either way (Japan has been touted like this for 20 years). It’s make your mind up readers time! 🙂 As for the synthetic note, perhaps they excluded it on risk grounds or similar. Plenty don’t like those notes, although obviously some do, as indicated by the fact they trade and, for that matter, that you own some! 🙂

    @TheAccumulator — It was clearly an unsustainable boom, if you were already a financial nerd like yours truly. The irony, if you feel sorry for yourself, is that many of us who did the ‘right’ thing and steered well clear have suffered anyway as low interest rates have bailed out the reckless property buyers of 2007 etc.

    I’m not saying governments had a choice, or that it would have been better to have had the mother of all recessions by keeping base rates at say 4% in the face of deleveraging, which would mean mortgage rates of 6-7%. It’s a very tough question, and I see arguments either way.

    I mean I should have been smarter — smart enough to foresee that in a democracy governments will always do what they can for the most numerous constituency with any power, and in the UK that mean home buyers and people with debts.

  • 10 Alex October 21, 2012, 3:26 pm


    1. My first thought was the same about the omission of the synthetic ETF, XESC: that the author was only considering physical ETFs.

    2. But he isn’t: his table includes a synthetic from Lyxor and another from db x-trackers. Also, the article doesn’t say anything about ETF replication models. It probably should, as we know. (That’s why I stated explicitly that XESC is a synthetic in my first comment. I remember, too, your distaste for such. 🙂 )

    3. Sorry, I certainly wasn’t criticising you for including the article in your round-up. Rather, I’m intrigued how often the same type of article, ‘is it time to buy X?’, suddenly appears everywhere. Contagion? 🙂

  • 11 gadgetmind October 21, 2012, 4:21 pm

    The “Is it time to buy X?” articles usually appear about 12-18 months after it was actually time to buy X and about at the same time that you ought to be planning when and how you’ll dial down your X exposure.

  • 12 Kelvin October 21, 2012, 6:35 pm

    Why do you consider his UCLA speech bearish? He predicts two recessions for the graduates. One in their twenties and another in their forties. Anyone my age (61) is already living through their 5th since graduation. Namely the recessions of the early seventies, early eighties, early nineties, the internet bubble and crash the early noughties and the 2008 financial crash. Maybe six if the LTCM affair and Russian Debt Default of the late nineties got bad enough to be classed as a recession.
    Two recessions in the next 25 years? They should be so lucky.

  • 13 Alex October 21, 2012, 6:52 pm


    Indeed – contrarian indicator. 🙂

  • 14 The Investor October 21, 2012, 8:49 pm

    @Alex — Thanks for clarifying re: the synthetics, I take your point now. Re(3), no worries, and I did come off a bit defensive there. I do know what you mean, but if you consume as much of this stuff though as I do you stop seeing trends and start seeing a merry-go-around. 😉

    @gadgetmind — Yes, that’s often the case (see the raft of ‘buy equities’ articles that appeared in early 2012) or the gold ones in 2011. In this case though (Europe, Japan) I think a different motivation is at work since neither have any momentum to flog really. A cynic might speculate that a PR is given a fund in a moribund market to promote to get some more money inflowing into it. 😉 Who knows?

    @Kelvin — Yes, that’s true! Still, I think the entire tone of his speech is pretty bearish and he means it that way, but it’s true a couple of recessions would be a good outcome. I think he foresees more a deep recession/depression in the mix, though, with the whole period averaging out to near-stagnation.

  • 15 Alex October 22, 2012, 9:34 am


    I reply only in the spirit of useful discussion: but Europe (excl. UK) has come back e.g. XESC is up nearly 15% this year.

  • 16 The Investor October 22, 2012, 10:33 am

    @Alex — Absolutely. I did end up only tilting a bit more Europe’s way back after this post in May and seeing the recovery since summer I wish I’d done more. (I basically traded the ETF EUE, and sold out far too soon). Nevertheless, despite the bounceback many European markets still look relatively cheap to me on a valuation basis. Even the broad brush comparisons in our private investor roundup suggest that.

    As ever the question for those trying to be clever cloggs is does it deserve to be? Sensible pure passive investor can rebalance and relax. 😉

  • 17 ermine October 22, 2012, 4:23 pm

    EUE looks like a better set of firms to crawl from the twisted wreckage than the FTSE EU ex UK index I’m accumulating in a tracker fund. But I’m just trying to get some exposure to this area at a good price. Don’t have the talent or cojones to trade it 😉

    The image of that twisted european wreckage haunts me though. Ain’t gonna be pretty when that lot blows…

  • 18 SemiPassive October 22, 2012, 8:55 pm

    Agree with Ermine’s first post re: the long process of equalisation between East and West. Only today I read about the 86% increase (since 2009) in working people (many who have iphones!) claiming housing benefit to pay the rent. This ongoing trend of government subsidising wages up to the level of real living costs is as unsustainable as using personal/mortgage debt was over the previous decade.

    But, barring full on global depression, even if the stockmarket flatlines for another decade, it will still yield more than most cash savings accounts or gilts.
    Shares vs property is another dilemma.

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