Bubbles, overvaluations, bad debts, false balance sheets or risks that shake the foundations of the system… there are many catastrophes capable of causing financial markets to collapse. Like the biblical horsemen of the Apocalypse, each rides a different colored horse, but all raise concerns among investors. Even among those who have been betting on a great crisis for years and waiting for it to arrive to reap succulent fruits.
For months we have been seeing disturbing signs on the market: stratospheric prices of technology companies, huge investments in artificial intelligence with great doubts about their profitability, strong propensity for IPOs (in the USA) of companies that soon see their high returns disappear… all this in a bull market in which stock markets accumulate highs and in which even safe haven assets such as gold record annual returns close to 60%.
With seemingly fertile ground for a possible correction, it is open season for bearish investors, those who bet against a specific asset and profit from its collapse. A strategy which, with the markets at their highest, is causing strong depreciations in the portfolios of these managers this year. It is done through various means, such as borrowing shares, then selling them hoping for their fall and buying them back later, pocketing the difference. But it is more common to do this via derivatives, with put options (Put in jargon) or other types of more sophisticated products.
One of the most famous bass players is Michael Burry, whose ability to predict the mortgage crisis subprime It earned him $700 million. Known on a large scale thanks to the book The big bet by Michael Lewis (and the film of the same name, where he was played by Christian Bale), his name has resurfaced in the last month after it became known that he had launched a large short position against Nvidia and Palantir which he had already closed. Burry, who just deregistered his hedge fund (hedge fund) before the US market regulator (SEC), Scion Asset Management, issued stern warnings about the high valuation of technology companies: “My estimate of the value of securities is not now, nor has it been for some time, in tune with the markets.” Days later, the correction of the Palantir stock began, which for now exceeds 17% despite the tough anti-downside defense advanced in recent weeks by Alex Karp, its executive director.
Steve Eisman, another of the managers who bet against subprime in 2007, and on which the character of Mark Baum is based The big bet continues to make his predictions, now successful podcasts from here he analyzes the debt market or the strong commitment of technology companies to artificial intelligence, which is hiding, in his opinion, the stagnation of US growth. “The American economy, in reality, is barely growing 50 basis points without counting artificial intelligence,” he recently warned.
Jim Chanos even predicted the collapse of Enron, one of the biggest financial scandals in the United States, at the turn of the century. 24 years later, he put the spotlight on Strategy, a small software company that became, through financial engineering, one of the largest accumulators of bitcoin and was worth $122 billion when it fell short of $5,000 in 2023. Chanos’ bet turned out to be correct: the strategy loses more than half of its value. Last week Chanos posted on the social network X that he had finalized his short bet against this company.
In addition to turning obscure financial experts into celebrities, finding the right time and place can be extremely profitable, especially during major crises. John Paulson, now a close friend of President Donald Trump and one of his big donors, made up to $10 million a day with his fund during the worst of the 2008 crisis, proving a theory that predicted a 40% drop in U.S. home prices. He has accumulated insurance for non-payment of junk mortgages, purchased at a bargain price, and above all debts. subprime packaged (CDO in jargon)… A debt that he himself encouraged to create entities such as Bear Stearns, Deutsche Bank or Goldman Sachs. The masterstroke of betting against his own creation earned him profits close to $4,000 million through his hedge fund Paulson and co.
You don’t even need inside information: In February 2020, just before major economies were shut down to protect investors from Covid-19, Bill Ackman and the Pershing Square team took out default insurance to guard against the sharp decline that was coming. They took out a five-year CFD at a cost of $27 million a month, and just a month later canceled it: the bet netted them a profit of $2.7 billion. Chanos, Burry, Paulson or Ackman could see that Enron, the subprime mortgage market or the Covid pandemic were a time bomb that would explode at any moment. But others took it upon themselves to trigger the detonation.
Philanthropist George Soros, who handed over the reins of his businesses to his son Alexandre last year, became a millionaire after breaking the pound. In 1992 he realized every investor’s dream: earning 1 billion dollars in just 24 hours. To do this, he brought the Bank of England itself to its knees. Soros argued that the pound was overvalued and that it would end up leaving the European Monetary System (EMS), which set a fixed exchange rate for currencies, an opinion he made public and which was joined by a multitude of investors who gradually followed his strategy. The Hungarian-born investor sold 10 billion pounds to buy German marks in exchange and caused a sharp depreciation of the British currency that forced the Bank of England to pump billions into the market and raise interest rates to 15% on what was called Black Wednesday.
The list of bass players doesn’t stop there. Companies like Hindenburg Research or Gotham City Research have accumulated successes and failures by betting against specific companies like the Spanish Gowex, Grifols or Viscofan. But the origin of bearish investing is much older. In 1822 Jacob Little made his fortune by betting against his own company, a railroad, which allowed him to avoid the crash of 1837 and go down in posterity as the great bear of Wall Street. Although it was Isaac Le Maire, in 1609, who became the first bearish investor by betting against the East India Company. “I can predict the movement of celestial bodies, not the madness of people,” the scientist Isaac Newton would say a century later, after losing a large sum of money in the South Sea Company. His shares of the company, which had accumulated strong overvaluation, hit rock bottom just like the apple.
