Michael Burry flags ‘passive investing bubble’ as another market risk

“The Big Short” hedge fund manager Michael Burry cautioned that he sees another significant risk to market stability in the form of a “passive investing bubble” that he expects to burst.

Burry, who has frequently warned that the US economy is in the midst of a major downturn, argued a boom in forms of passive investment, such as ETFs and other index funds, has created a fresh hazard for investors in the current bear market.

“Difference between now and 2000 is the passive investing bubble that inflated steadily over the last decade,” Burry tweeted on Saturday. “All theaters are overcrowded and the only way anyone can get out is by trampling each other. And still the door is only so big.”

Burry, whose bet against the US housing market was made famous in the 2015 film “The Big Short,” often compares current market conditions to those seen during other crashes, such as the Great Recession of 2007 to 2009 and the dotcom bubble of 2000.

The hedge fund chief has since deleted the tweet. He has more than one million Twitter followers.

The Scion Asset Management boss has ripped passive investment on multiple occasions in the past. He first referred to the trend as a bubble in a November 2019 interview with Bloomberg, arguing the passive strategy was causing investors to miss opportunities to do their own research and capitalize on overlooked stocks.

Burry reiterated his concerns on Twitter in February 2021, decrying what he called “passive investing’s IQ drain” that was fueling a speculative bubble in the stock market.

Passive investors buy ETFs and other index funds as a bet that the basket of assets included in those packages will perform well over time. Some critics argue that an uptick in passive investors has made markets more vulnerable to major swings, as Bloomberg reported in July 2021.

Last week, Burry tweeted that he was concerned current market conditions are shaping up to be “worse than 2008,” when the implosion of the US housing market had a cascading effect that tanked the market for years.

Burry reiterated that view in another tweet last Saturday while sharing a chart showing the market’s dismal performance.

“13.48% stocks closed above their 200 day moving average yesterday. Bottom in 2009 was 1.2%. Bottom in 2020 was 2.8%. Currently at December 2007 levels,” he tweeted.