The showdown between Cathie Wood and Michael Burry has been the talk of the summer on Wall Street. They are two of the most media fund managers in the world and the dispute has not been only in words, since the second has allocated a part of the money that it manages to bet on the devaluation of the fund that the first manages. Wood represents the bullish view of the market, while Burry has made a name for himself as a successful bear investor. Their forecasts, especially in relation to interest rates, are antagonistic.
The doctor and ex-neurologist Michael Burry rose to fame in 2008 when he became a millionaire thanks to investing against subprime mortgages (credits of low credit quality). He was one of the first who saw and denounced this bubble and knew how to take advantage of its burst to enrich himself. His story was made into a movie in The big short (Adam McKay, 2015).
Catherine WoodFor his part, he founded Ark Invest in 2014, with the idea of investing in highly disruptive technology companies through exchange-traded funds (ETFs). Its flagship fund, Ark Innovation, has achieved a stratospheric return: an annual average of 48% during the last five years, investing in companies such as the electric car manufacturer Tesla or the Zoom video calling application. Its star year was 2020, when it went from managing 3,500 million dollars to exceeding 60,000 million (50,000 million euros) thanks to the arrival of new clients.
With the pandemic hitting the planet, many trends that Wood had opted for, such as teleworking, telemedicine or leisure at home, were exacerbated, triggering the valuation of technology companies and the profitability of the funds of the manager.
The main friction points
- Tesla. The electric car maker controlled by Elon Musk is the main bet in the portfolios of Ark Invest, the manager of Cathie Wood. The investor considers that in four years it could multiply its value on the stock market by four, to exceed 3 trillion dollars (2.44 trillion euros). Burry thinks the current valuation is already inflated. In May, it invested $ 535 million in financial derivatives against Tesla.
- Bitcoin. Elon Musk has been a great defender of the cryptocurrency bitcoin, and his company, Tesla, invested in it 1.5 billion dollars of its treasury, linking its evolution, in part, to this digital asset. For Burry, the cryptocurrency boom is creating “the mother of all financial crashes.”
- Robin Hood. At the beginning of 2021 some companies became fashionable and attracted many small investors, despite generating few profits. The most notorious case was that of the GameStop stores. Much of these money flows are channeled through a free stock broker called Robinhood. Catherine Wood has been supportive of these kinds of moves, while Burry has criticized them harshly.
- Types. Burry sees long-term US Treasury rates as going to skyrocket, while Wood believes they will remain low.
Burry, who after his colossal success in 2008 left the investment world for a few years, reopened his fund in 2013. First with investments in water and then with bets on some big technology, such as Alphabet and Facebook. But Burry did not return to the controversy until December 2020, when he opened a bearish position on Tesla. That’s where his interests, and his vision, collided with Wood.
Burry even predicted that Tesla stocks would explode “like subprime mortgages did.” In February, the most famous bearish manager wrote a message on Twitter saying that Wood’s promises of disruptive growth and transformative technologies would not be fulfilled.
A few days ago the second phase of the conflict arrived, when the portfolio of Scion Asset Management (Burry’s fund) was made public, at the end of the first semester. Then revealed to be holding a bearish bet on the Ark Innovation ETF. Although it is not the largest position in his portfolio, it does reveal the consideration he has for Wood. If the Ark Invest founder’s fund does poorly, Burry will do well. And vice versa.
Wood has also given his reply. In a message on the social network Twitter, the manager explained that bearish investors are wrong in predicting that inflation will rise sharply (which would force the Federal Reserve to raise interest rates sharply). Wood believes the equity market “will reward disruptive innovation strategies when headlines about rising inflation and recession fears evaporate.”
The prophecy about the types
One of the points of greatest discrepancy between the two is what will happen with public debt. Burry has made a bearish bet on the evolution of Treasury bonds over 20 years, convinced that they will devalue (which implies a rise in their rates of return). Low interest rates are essential to explain the valuation of many companies. When future cash flows are analyzed, the discount is low, because long-term interest rates are low. Future money is worth only slightly less than present money. But What if long-term interest rates skyrocketed? Then those future cash flows would no longer be as attractive and the current valuation of many companies would plummet. Time will tell if Burry is right again or not.