I’m sure most of you have heard of The Big Short, the Michael Lewis book that detailed how Michael Burry made massive profits during the Great Financial Crisis (GFC).
The key trade – the one that made Michael Burry’s name – was a short on the mortgages underwritten by New Century Financial Corporation.
New Century was the poster child of subprime mortgage lending to NINJA borrowers (No Income, No Job, No Assets) that characterized the housing bubble of 2003 to 2006.
Burry visited the company, saw what a clown CEO Brad Morrice was – remember all the guys that suddenly went from selling used cars to selling home loans during that time – and figured any loan Brad made was bound to fail.
So he backed up the truck on credit default swaps on New Century’s mortgage-backed securities and waited until it all fell apart.
And it fell apart, netting Burry $725 million when all was said and done.
But, the New Century failure that followed wasn’t a result of the GFC. It filed for bankruptcy in April of 2007. Bear Stearns didn’t collapse for another year, and Lehman a few months later still.
No, New Century was a herald just like the recent bank failures are sounding the alarm of the massive economic crisis heading our way soon.
It could take a year. But until then, just like in 2007, you can expect reassuring statements for politicians, their advisors, Federal Reserve officials, etc. You can also expect a lot of pollyannaish talk from financial industry CEOs convincing you to keep your money in stocks.
At least right up until they panic publicly with who knows what kind of emergency bailout response.
So, don’t get lulled to sleep.
The lack of action on the surface doesn’t mean that bombs aren’t ticking away below.
And you might want to back up the truck and dump any stocks you don’t want to be stuck with for the next few years.
Take What the Markets Give You.