'Big Short' investor Michael Burry says the latest Fed meeting points to trouble in the banking system

• Michael Burry said he thinks the Fed's latest update points to weakness in the US banking system.
• He flagged the Fed's plan to start purchasing short-term Treasurys as a sign of systemic weakness.
• "So I'd say US Banks are getting weaker way too fast," Burry wrote in a post on X.

Michael Burry thinks he's spotted another sign of trouble in the US financial system.

The famed investor of "The Big Short" said he was eyeing one comment in particular that came out the Fed's meeting on Wednesday. That's the mention that the FOMC believes the Fed's reserve balances had declined to "ample levels" — and that the central bank would start making "reserve management purchases."

It's a jargony way of saying the Fed will start purchasing short-term US Treasurys "on an ongoing basis," per the committee's statement Wednesday afternoon.

Purchasing short-term T-bills — which the Fed will start doing on December 12 and total around $40 billion a month — is one way the central bank can boost liquidity in markets and the banking sector. It's slightly different from quantitative easing, which is when the Fed purchases long-term Treasurys to stimulate the economy by keeping a lid on borrowing costs. However, in the short term, it has a similar effect of boosting the amount of money circulating through the financial system, making it easier for banks to meet their reserve requirements.

But the fact that the Fed has to provide that support at all is a worrying sign, in Burry's view. The Fed's reserve balances currently hover around $2.8 trillion, according to the latest weekly data from the central bank.

"I would add if the US banking system can't function without $3+ trillion in reserves/life support from the Fed, that is not a sign of strength but a sign of fragility," Burry wrote in a post on X Wednesday evening. "So I'd say US Banks are getting weaker way too fast."

Stocks surged after the Fed's policy meeting, largely fueled by optimism about the central bank's plan to purchase short-term Treasury bills, JPMorgan's market intelligence team wrote in a note.

The purchase of short-term Treasurys marks the first time the Fed has meaningfully expanded its balance sheet since it ended its quantitative easing prgram in 2022, analysts at Deutsche Bank said.

"Seems that after every crisis now the Fed needs to expand its balance sheet permanently or guarantee a bank funding crisis. No wonder stocks are doing well," Burry said, adding that he was avoiding bank stocks and choosings to keep his money in cash accounts or Treasury money market funds.

"Rip QT; long live 'reserve management purchases,'" he added.

Burry, who correctly called the subprime mortgage crisis, has cemented his reputation as a permabear in recent years. Since returning to social media this year, he has repeatedly sounded the alarm on a stock market bubble, unveiled fresh bets against AI titans like Nvidia, and warned about the huge amounts of spending by the biggest tech companies.