The Biggest Short

''Watch, it will pay. I may have been early, but I'm not wrong.'' - Dr. Michael Burry, The Big Short (2015)

The upcoming global economic crisis that is going to send tremors through the world between 2017 and 2020, by now is not news, as several respected economists, such as James Rickards and Harry Dent, have not only been warning us of the looming collapse, but they have also suggested that with an out-of-the-box approach, one could even gain from this predicament, says Oliver Taylor.

All of the conditions for the collapse have been met and at this point it is simply a question of time – we are waiting for a trigger, whether it be the failure of a major bank, the loss of currency value and the inability to back it up with gold, a natural disaster or a war, the crisis is ineludible and investors must make ready for it. Considering that after the crisis of 2008 the magnitude of the financial system has greatly increased via bigger banks, bigger derivatives and new debt up to $70 trillion, the upcoming collapse will be unlike any other. Conversely, the opportunity to profit from it is also especially promising.
 

There is much to be learned from the way Michael J. Burry, American investor and hedge fund manager, has handled the financial crisis of 2008 and managed to make a profit whilst most of the economy descended into ruin. Starring Christian Bale as Burry, the 2015 biographical drama film “The Big Short” – based on Michael Lewis’ 2010 book of the same name, depicts the strategy employed by Burry to capitalise on the financial crisis that stemmed from the United States housing bubble.
 

Prior to the 2008 collapse, Burry had already made a reputation for himself with successful stock picks in value investing as early as 1996, attracting the attention of such major companies as White Mountains Insurance Group and Vanguard. In 2000, Burry founded his own company named Scion Capital; continuously beating the market since its inception, Scion was up 55% while Standard & Poor’s 500 was down 11.88% in 2001, when S&P dropped by 22.1% in 2002, Scion grew by 16%, and even as the stock market climbed up 28.69% in 2003, Burry’s company still came out on top with a rise of 50%. By 2004, he handled up to $600 million.
 

In 2005, Michael Burry shifted his emphasis on the market of subprime lending and, having studied the mortgage lending tendencies of the previous couple of years, he was able to successfully previse the collapse of the real estate bubble for 2007. His analysis of the residential real estate values suggested that bonds based on subprime mortgages, particularly those with introductory rates, would see their value decline when the original rates were going to reset. Burry convinced Goldman Sachs to let him purchase their credit default swaps against deals that he deemed likely to to fail. The credit default swap agreement had Burry make several payments of CDS fees as the buyer, however in the event of a loan default, the seller had to compensate him with a substantial payoff.

​

SHORTING FIAT CURRENCIES

Burry was able to short the market; the practice of a profitable short sale consists of selling financial instruments, such as mortgage-backed securities in Burry’s case, then buying them back when their price temporarily declines and the cost of repurchase has considerably decreased. Even as some investors began to doubt Burry’s approach and removed their investments from Scion Capital’s hedge fund before Burry’s forecast could prove its profitability, his earnings amounted to $100 million and his investors received over $700 million at the end of Burry’s lucrative gamble. Between 2000 and 2008, Scion’s recorded returns were of 489.34% against the S&P 500 that barely managed to scrape up 3%. 
 

Now, as the imminent global financial collapse of unprecedented proportions is almost up on our doorstep, nimble, enterprising investors will find themselves presented with the opportunity to apply Michael Burry’s approach to the forthcoming crisis. In this case, investors will have a unique occasion to hedge against all collapsing fiat currencies by purchasing precious metals. Out of all the assets dealt in by mankind, no other has a history that could possibly outclass the importance of gold and the millennia that account for its value. The return of the gold bar is a powerful hedge against inflation that surpasses almost all other liquidities. Investors tend to purchase gold in order to diversify risk through derivatives and futures. Whilst the gold market is not immune to volatility and speculation, it is by far the most efficacious safe harbour amongst all and its hedging properties are well proven. Alternatively, investors also choose to venture into precious metal equities. 
 

THE NIXON SHOCK OF 1971

The issue that we are facing today, the issue that will indubitably culminate in the next global financial crisis, is that money is no longer money; currency has lost its value since the dollar, the worldwide currency as we know it, has stopped being money in 1971 and became debt instead. As the practice of deliberately creating currency has spread all over the world once the gold standard was abolished by U.S. President Richard Nixon in 1971, the dollar has lost 95% of its value, thus perpetual inflation and the loss of purchasing power became an inevitable reality. In order to be sustainable, money has to preserve its value for a prolonged duration, which is no longer true for the currency of today. Throughout history, paper currency has been attempted numerous times and the result of it has always been the same – prices ultimately increase; meanwhile precious metals, namely gold and silver, await the denouement of currency as it grows and multiplies, swelling inflation until it can no longer be sustained by the society. At last, the outcome is well known – the true value of money rebounds back to the precious metals. A similar scenario shall be observed in the United States, as its economic growth intrinsically erodes due to a currency that is rooted in debt. When the S&P 500 index fell 50% between 2000 and 2002, and 57% from 2007 to 2009, gold had offered portfolio protection where U.S. financial assets fell flat. 

 

DIVERSIFY YOUR PORTFOLIO

The U.S. dollar constitutes over 70% of the worldwide currency and if it falls, it will drag everything else down with it; all currencies in the world now face the strong probability of their demise. Once the schemes and manipulations of central banks, financial institutions and governments finally destabilise the system, once the stock markets collapse, credit markets shut down or the dollar crashes, the availability of personal assets will be substantially constricted. Private wealth is at risk and such an outcome is not outside the realm of possibility – a mere look at the European Union, where bank failures were remedied by the confiscation of personal funds from depositors’ accounts, should be enough to dispel any doubt on the matter. The United States government did shut down stock markets for a whole week after 9/11 and it still has the ability to exercise that power today. 
 

And yet the conventional wisdom remains that gold is not a great investment. The average broker will tell you that it is a thing of the past and it is silly to invest in it, because the economy is recovering. So skeptical, so afraid of change, investors will view the notion of buying precious metals to short against a collapsing currency as something outlandish, if not downright insane. However, in extreme situations, one must look out of the box to find opportunity where the rest will see nothing but ruin. Just like Michael Burry, who saw the potential of turning the tables on the crisis of 2008, precious metals investors of today view the looming collapse of the fiat currency not as a tribulation, but as a chance to increase their profits.
 

Ask yourself. What may be the possibilities when the short sellers redefine the market after the currencies collapse? Will gold have to be revalued to $50,000 per ounce in order to back a new currency after the U.S. dollar bites the dust? Will real estate, plant and equipment and everything else that is physical, bear written losses of up to 60-80%, creating a massive buying opportunity when there is blood in the streets and homes are repossessed? Will history repeat itself, will we have another Depression where prices generally decline and metals retain value?
 

All indicators point towards the ultimate finale of the current financial system: fiat currency will fall and if what history has taught is true, gold and silver will once again take their place at the forefront of monetary worth. It is only logical to prepare for it by diversifying your portfolio and taking in consideration the role that precious metals will play once the system of debt collapses in on itself.   EG