$TLT - Michael Burry's bet on inflationAs many traders have been made aware due to the 13F filings, Michael Burry is short on a lot of things. With over half of a billion dollars in TSLA puts, one might assume he wants the EV manufacturer burn but there's more to it than just that. Over 2020, to stimulate growth in the market and in the economy, the fed dropped interest rates to 0. While they didn't stay at 0 for long, the low rates were incredibly bullish for these growth centric companies. Think TSLA, ROKU, SQ, ZM, Cathie Wood, etc. Companies that are traditionally very OVER valued when looking at their P/E. These low rates enabled investors to price in years and years of growth ahead of schedule. Now, in 2021 the headline of the year has been INFLATION. Everywhere you look you see tech (with their inflated P/E ratios) crumbling, value stocks climbing, fear of dollars becoming worthless and pouring into commodities whether that's oil, lumber, crypto or metals.
Michael Burry's true portfolio is not one directed at Tesla specifically, but one betting on inflation to catch up with us. While TSLA makes up a large portion of this position, he also has 170M in TLT puts and 55M in TBT Calls. Bringing his portfolio to a net position of roughly 760M in derivatives betting on inflation. Most interesting to me anyways is the TLT position. TLT runs inverse of the 10 and 30 year bonds. Last year as rates went to 0 to encourage spending, TLT shot up 18% in a week. This current climate of near 0 rates are fantastic for financing (because if you can lock in a 30yr mortgage for 3% and inflation is 3%, that's essentially borrowing money for free. For 30 years. While an asset appreciates), but the spending is not beneficial for the valuation of the dollar.
As of December 2020, nearly 35% of all US dollars in existence were printed in the 10 months prior. There are two ways in which a functioning market would pay for this, one would be increased taxes which have been proposed but not passed. The other is through inflation devaluing dollars and increasing relative cost of goods. The latter is much more expensive but generally goes under the radar. At some point the Federal Reserve will need to SLOW DOWN the the economy. The most likely way for this to happen is to raise interest rates making borrowing money more expensive.
From a technical point of view the US 10 year bond is bull flagging on a larger time frame, this is probably the most consistent bullish pattern and is line with the point of view of the Federal Reserve raising rates ahead of schedule. Conversely, TLT is bear flagging on the weekly, so there's no divergence there which is great for Michael Burry's analysis. In addition to TLT's bear flag, it's on the verge of breaking below a decade long support line it's followed and is on it's 200 day moving average.
Jerome Powell has stayed true to his word thus far and has, honestly, done quite well in keeping the market afloat and strong over the last 14 months or so. The real question is whether or not he was wrong in his assumption that rates can stay low for as long as he's promised and if inflation is truly under their control.
Warwick, OptionsSwing Analyst
