What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks and investing over the years. Tesla has been perhaps the greatest ever value creator for individual investors, while at the same time being one of the greatest ever value. Destroyers of short selling hedge funds, since, as early as 2016 short sellers have been piling into tesla stock, saying the company is overvalued and will eventually be overtaken by the legacy. Automakers.

Of course, the opposite has happened and tesla has only increased its dominance in the rapidly growing ev industry and further this lead in full self-driving technology. This has caused the stock price to increase roughly 20-fold over the past two years, putting them into the trillion dollar market cap club, along with only five other companies. This has been a complete disaster for short sellers with jim chanos's hedge fund losing more than 50 of his total assets in 2020 alone. What little money his clients have left in his fund is probably continuing to evaporate, as tesla stock increases even higher in 2021..

Similarly, david einhorn, who is once considered a legendary investor, has seen his 12 billion hedge fund be reduced to almost nothing by his tesla short. You might think that the hedge funds have finally learned their lesson by now. It's pretty clear that the quickest way to incinerate billions of dollars of your capital is to bet against elon musk. But this is not the case.

In the first quarter of 2021 michael berry initiated massive short position in tesla. Brewery is famous for shorting the real estate market before the 2008 financial crisis he bought tesla puts covering 800 000 shares, which, at the time had a notional value of 534 million dollars, puts are a type of option, contract which benefit from the underlying stock decreasing, and Vice versa, this was a single largest position, making up close to 40 percent of his hedge funds assets under management in the few months after he initiated the position it looked like. It was a winner in the beginning of the second quarter, tesla stock declined and traded around the 600 range in may and june. If he closed his position there, he could have been one of the few investors to ever make a profit shorting tesla, unfortunately, for his clients, berry did the exact opposite.

Instead of taking profits, he increased the size of his short position by 34 percent, such that as put contracts covered more than one million tesla shares that gave him a short position, with a notional value of 731 million dollars. Of course, this position ended up being a complete disaster. In late october, car rental company hertz announced a multi-billion dollar deal to buy 100 000 tesla model 3s. That, along with other good news and endless upgrades caused the stock to soar past one thousand one hundred dollars a share, given that berry built his position throughout the first and second quarter of 2021, his cost basis for the short was probably no greater than 750 dollars.

This means that tesla is probably up close to 50, since he initiated his position in an email to cnbc. He said he closed his position around october 15th, which was before the hurts deal was announced so appears like he may have gotten lucky and avoided the majority of the potential losses, but depending on the strike, prices and maturity of his puts, he could have lost tens Or hundreds of millions of dollars, based on the appreciation of tesla's share price as well as theta decay and tesla, isn't the only stock which he thinks is overvalued? As early as december of 2020, he's been saying that margin, debt and passive indexes have pumped up the stock market to unreasonable valuations. In his words, the market is dancing on a knife's edge and is liable to crash at any moment in this video we'll go over. Why burry shorted tesla and whether or not we should give any credence to his market crash predictions michael brewery has been a vocal critic of the federal reserve's easy money policies over the past year.

He thinks the current inflationary pressures are not transitory and supply chain bottlenecks will persist into 2022.. The m2 money supply has increased by more than a third from 15 trillion dollars to 21 trillion dollars since the beginning of 2020.. That dorset, the increases that we saw after the 2008 financial crisis bree thought that all of this new money being printed along with direct fiscal stimulus, will cause inflation to soar and force the fed to increase interest rates. He figured that higher interest rates will hurt high growth tech stocks like tesla tesla's.

Current valuation is not supported by its current cash flows, but instead by its expected cash flows 5 to 10 years down the line. If interest rates rise, the present value of a given future cash flow will decrease, but that will be offset by the fact that tesla will be able to raise its prices in line with inflation. So you have to discount a higher nominal future cash flow by a higher nominal interest rate. If tesla can raise their prices fast enough, this could be enough to offset any negative impact of higher interest rates.

But more importantly, if tesla can continue exceeding expectations, this will trump any academic arguments about inflation or interest rates and push the stock higher and that's exactly what happened on october 21st. They blew past wall, street's estimates for third quarter earnings with revenue growing 57 to almost 14 billion dollars. That is, despite the continued headwinds of the global chip shortage. Also hertz recently agreed to buy 100 000 tesla model 3s at nearly full price.

This opens up a huge opportunity for tesla to sell cars to other rental car companies in the coming years. Brewery didn't understand that tesla was years ahead of the competition and that its brand is probably now one of the most valuable automobile brands in the world. He just simplistically looked at their current financial results and concluded that the company was overvalued. He failed to consider their long-term growth prospects, bury, has long been a deep value investor and he appears to place far more emphasis on current earnings than future growth in 2019.

His two biggest holdings were gamestop and tailored brands, the parent company of suit retailers, men's warehouse and joseph a bank. Both stocks had cheap valuations, as the market was pricing in secular declines in the specialty retail industry. The two positions combined made up almost half of his total portfolio, while gamestop ended up being a winner with the ryan, cohen investment and eventual short squeeze tailored brands. Wasn't so fortunate it filed for bankruptcy in the summer of 2020, as nobody was buying new suits when they worked from home.

In addition to thinking that tesla is overvalued. Michael bree also thinks that the market as a whole is overvalued. He says the low interest rates of the federal reserve have pushed up asset prices as investors reach for yield. Also, investors are taking advantage of cheap margin rates to increase their leverage because they think stocks only go up and finally, passive etfs create inefficiencies in the markets.

As they systematically buy all the stocks in an index, whenever new money is deposited, he says that we are currently in the greatest speculative bubble of all time by two orders of magnitude he's been calling for a market crash ever since the end of 2020.. If you listened to his advice, you would have missed out on a 24 move to the upside year to day. Of course, it's impossible to time a market crash perfectly we'll delve into the substance of his market crash arguments to see if they hold any merit. First brewery calculated the correlation between the nasdaq 100 index for the 15 years, leading up to the 2000 tech bubble in the 15 years leading up to today, the correlation between the two time series is 94 percent.

He uses this as evidence that the market is overvalued and that we are in store for a tech bubble level market crash. However, using an observation of a correlation between two time series is not statistically robust, in fact, with exponential growth as exhibited by bull stock markets. Over long periods of time, one might expect to see high correlations, even between two time series that are completely independent. The predictive power of saying what happens afterwards is flimsy at best.

His second piece of evidence is an academic paper which suggests that one dollar added into the stock market increases total market valuations by five dollars. This is because passively managed index funds will continue to hold stocks regardless of valuation leading to price and elasticity. He used this as evidence of how passive etfs are causing valuations to inflate, causing a bubble, the academic paper he cites as a working paper, which means it has not been published in an academic journal and has not been peer reviewed. They go through a lot of math, which is beyond the scope of this video, but their conclusion is that the stock market is surprisingly inelastic.

This means that if people decide to buy stocks, it will cause a large upward pressure on valuations and vice versa. They stress that their conclusion is just a hypothesis and should not be considered as established economic theory. Importantly, they concluded that the marginal impact of investing one incremental dollar into the stock market would cause aggregate market valuations to increase by five dollars. This does not mean that adding one billion dollars would cause valuations to go up by five billion dollars.

Obviously, when valuations get too ridiculous, people will sell their stocks. It's unreasonable to think that a five to one ratio will hold at any scale. The proportion of the stock market controlled by passively managed, etfs and mutual funds currently stands at about 40 percent. This is roughly double the level from 10 years ago, but 60 percent of the stock market is still controlled by investors, who are actively picking stocks and creating price discovery.

The passive index funds buy stocks in proportion to their market capitalization. The market cap is determined by the active investors who set prices initially. So all the passive funds do is amplify the movements of the active investors, it's quite a stretch to think that they are causing distortions in the market. Michael breese says we are currently in the largest speculative bubble of all time that will be worse than the tech bubble.

Instead of splitting hairs about the academic arguments, let's just look at the current stock valuation to see if we're anywhere near tech bubble levels, we can look at the price to earnings ratio for some of the mega cap tech companies. Today, apple has a price earnings ratio of 26.5. Facebook is 23.6 and google is 27.6 during the dot-com bubble. Most of the internet companies were posting huge losses.

The few that were profitable, traded at insanely high valuations, for example, cisco, had a price to earnings ratio of 120 times in 2000.. If you look at the price and earnings ratio of the s p 500, it looks like its valuation is stretched compared to historical averages. But part of this can be attributed to the fact that tech stocks make up a larger percentage of the index than they have in the past. Also, the current forward p e ratio of 20 gives the s p 500, an earnings yield of 5 percent.

This is much more attractive than the 10-year treasury bonds yield of 1.5, which is not even enough to cover inflation. Given how unattractive bond yields are. It makes sense that investors are putting money into the stock market which will give them at least some earnings yield and protect them from inflation. Michael brewery has been predicting a market crash for more than a year, based on rather unconvincing evidence and he's put his money where his mouth is by shorting tesla, with a large put position which probably ended up costing his investors tens of millions of dollars in losses.

If you look at his hedge fund's portfolio, all of his top positions are puts and calls. These are the types of investments that you'd expect to see on wall street bets not in a hedge fund. That's supposed to be prudently investing money on behalf of its clients. It looks like michael bury may have been a one-hit wonder he got lucky predicting the 2008 financial crisis and his legacy was cemented by the big short movie.

Since then, his investing track record has been hit or miss at best, while seems like his market crash call. Is an overreaction, it is possible that he'll prove us wrong, like he did in 2008, but as the great peter lynch says, historically more money has been lost, preparing for corrections or trying to anticipate corrections that has been lost in the corrections themselves. Alright guys that wraps it up for this video, what do you think about michael breeze market crash prediction? Is it just fear mongering, or is he actually onto something? Let us know in the comments section below as always. Thank you so much for watching and we'll see you in the next one wall, street millennial, signing out.