If Michael Burry Spotted the So-Called Housing “Bubble,” Then We All Did

My parents’ Christmas-tree decorator predicted the so-called “housing bubble.” Or so some might think.

While he moonlighted as a tree and lighting expert at Christmas each year, his day job was as a mortgage broker for a major bank. One night while decorating my parents’ house ahead of Christmas 2007, he expressed worry to my dad about the pressure he was under to issue mortgages. They wanted the money out the door, and fast. This had him worried about the quality of the mortgages…

The bet here is that more than a few reading this either had misgivings like those of the person hanging lights for my parents, or heard similar expressions of worry. In every market of every kind, there are always skeptics.

It’s worth remembering as New York Times columnist Erin Griffith writes of a possible “AI bubble.” About the possibility, Griffith writes that, “Michael Burry, the investor made famous in ‘The Big Short,’ has warned about an artificial intelligence bubble. So has Dean Baker, an economist who identified the U.S. housing bubble ahead of the 2008 financial crisis.”

Of course, what Griffith leaves out about Burry is that to this day, his alleged 2008 call remains his only publicly prescient one. As for Burry and Baker, just what did they predict?

It’s a question worth asking in consideration of the daily commentary about the looming “crash” in this or that market. Just yesterday morning a commentator for one of the many sources of market and economic opinion emailed yours truly to say with certainty that the stock market is headed for a “crash.” Assuming it corrects tomorrow, did he predict the crash? Certainly not. That’s because markets don’t just “crash,” rather new information enters the marketplace that causes an adjustment of prices.

Applied to Burry and Baker, was their skepticism about housing and mortgages unique? Hardly. Lots of people were wondering about the housing market, and about mortgage issuance more broadly. Translated, the opinions of Baker were priced as was Burry’s investment meant to profit from a correction. All before the 2008 event.

Still, no one predicted anything. In Burry’s case, and as evidenced by his track record since what made his name, he didn’t spot a “bubble” as much as the timing of his expression of skepticism was particularly great.

As for Baker, again, just what did he predict? Many predict “crashes” without actually predicting them. Said another way, if they tell you they predicted the so-called “financial crisis,” they’re lying.

Importantly, they’re not lying on purpose as much as they’re unsophisticated. No one predicted the 2008 “financial crisis” simply because it wasn’t financial as much as it was evidence of what happens when governments substitute themselves for markets. That was the crisis in 2008, but few can point to writings ahead of 2008 that foretold the towering ineptitude of people with names like Bush, Bernanke and Geithner.

In short, Baker expressed housing misgivings as so many did in 2008. But that was hardly a vision. Burry profited handsomely from a near-term mortgage correction, but less discussed is the many multiples of Burry’s who invested exactly as he did but not at the right time.

Furthermore, and as stated here routinely as is, “bubbles” are a myth. They imply markets with only “buyers.” In reality, bulls and bears are constantly colliding.

Which means there are never “bubbles,” there’s just new information reaching the marketplace. Neither Burry nor Baker had that in 2008. To suggest they did, and to deify them for “spotting a bubble,” is for Griffith to deify us all.

Originally published on Real Clear Markets.