The Big Short trader betting against AI – and all the times

The Big Short trader betting against AI and all the times hes been wrong

Ten years after finding fame in Hollywood, Michael Burry is rediscovering his taste for drama.

The celebrated investor, whose $1bn (760m) bet against the US housing bubble was portrayed in the filmThe Big Short, has identified a new target: artificial intelligence (AI) stocks.

It was barely a fortnight ago that Burry returned to social media after a long absence to declare: Sometimes, we see bubbles.

Since then, it has emerged that the short-seller has taken out positions against two of the biggest AI companies in the world, and claimed that others have artificially inflated their earnings.

To set tongues wagging further, he recentlywound up his $1.bn hedge fundScion Asset Management, meaning it will no longer have to submit regular public filings.

He said the decision was because he is no longer in sync with volatile markets, but others said it would enable him to open a family office and make bigger bets away from wider scrutiny.

On to much better things Nov 25th, he wrote in a cryptic message on X.

Given his reputation as the man behindThe Big Short, investors were quick to jump on his $1.1bn (840m) bets against Nvidia and Palantir earlier this month, the two flag-bearers of the current AI investment boom.

Nvidia last month became the worlds first $5tn company, while Palantirs shares have shot up nearly 200pc over last year alone.

To his mind, these are prime signals of an AI bubble.

Bold stance provokes backlash

However, despite his credentials, Burry has faced a backlash for taking such a bold stance against the perceived wisdom of the wider market.

Unsurprisingly, his $912m bet against Palantir sparked a fierce response from Alex Karp, the companys chief executive.

Details of Burrys so-called put contract emerged on Nov 3, the same day the US tech giant reported its third-quarter earnings. Shares in Palantir fell by 15pc over the next three days, from a record $207 to $175.

According to Karp, Burrys wager against Palantir was bats--- crazy.

However, the big question among investors now is, does Karp have a point or has Burry seen something everyone else has missed?

While many supporters will take confidence from his successful bet against the US housing market in 2008, others will point to the fact that there have been plenty of times when the short-seller was wrong.

One of the most prominent examples was in December 2020, when he declared on social media that he was shorting Tesla, describing its share price as ridiculous after it had surged more than 740pc that year.

Elon Musks electric carmaker would end 2020 with its shares priced at $235 but by the following April, it had nearly doubled again to $410. Enjoy it while it lasts, Burry had tweeted in January 2021.

Just a month later, Burry was at it again but this time with a different target.

He posted a chart showing the SP 500, the benchmark stock index on Wall Street, alongside soaring levels of margin debt used by traders to ramp up their potential returns.

Burry declared that speculative stock bubbles ultimately see the gamblers take on too much debt.

The market is dancing on a knifes edge, he said in February of that year.

Four months later, he warned that market hype was drawing in retail [investors] before the mother of all crashes. But by the end of 2021, Burry was wrong. The SP 500 had risen by nearly 27pc.

He seemed to make the same mistake again in January 2023 when he created a social media storm after simply tweeting sell.

By March he had changed his mind: I was wrong to say sell.

Over the course of the year, the SP 500 rose by 24pc.

The California-based hedge fund manager has also taken on Bitcoin. In February 2021, he called the digital asset a bubble that poses more risk than opportunity.

At the time, Bitcoin was around $49,500, although it would hit a high of just above $68,000 that year before ending 2021 just north of $47,000. It is now worth just shy of $100,000.

So given some of his past performance, why has Burry broken cover to take on the darlings of AI?

Clearly he is on his side of the trade, says Julien Dauchez, an investors at Natixis, which has $1.4tn of assets under management.

I think he is also hoping that there is a change in risk appetite which is very much what is really driving everything. Possibly he is trying to initiate a snowball effect going in his preferred direction.

While he is no doubt facing an uphill battle, Burry may have momentum on his side.

Nvidia has fallen 6pc since its market cap first touched $5tn.

Stay tuned

Its shares fell again this week when it emerged SoftBank, one of the worlds biggest technology investors, had sold its entire stake in the chipmaker for $5.8bn.

Burry has since broadened his war against AI by accusing the likes of Meta and Oracle of wrongly extending useful life of assets to artificially boost earnings.

By 2028, he said this would over-inflate Oracles earnings by 26.9pc and Metas by 20.8pc.

However, he already indicated that more is to come, promising more information that could well turn AI bubble fears into a frenzy.

But it gets worse, he said on social media. More detail coming November 25th. Stay tuned.

Only then will investors see if Burry is as serious as he suggests.