The Stock Market Can Stay Irrational Longer than You Can Stay Solvent

Last week, a wool shoe manufacturer named Allbirds announced that it would reinvent its business to become an AI computing infrastructure company, and its stock price rose over 600% afterwards. This is basically the finance dictionary definition of a top signal, and this kind of lunacy only happens in manias when all the math I learned in school ceases to matter and the market values companies solely on vibes. It’s the kind of illogic that can lead a market socialist to quote the dreaded John Meynard Keynes in his title. Over the past several months of America’s AI-induced madness, I have had many people without a finance or economics background ask me how to short the stock market. While I understand the instinct, take it from someone who did that before Trump’s so-called liberation day last year and felt very smart for about two weeks: don’t. Please, please don’t.

The market can stay irrational longer than you can stay solvent. That’s not some cutesy saying from a guy who molded the theoretical economic construct of our present descent into hell, it’s a proven ironclad law of the up-only equity universe we inhabit. Just look at any quarterly chart of the S&P 500 over the past century and the financial crises and recessions embedded within the near-vertical lines will look like short detours from the easiest trade in history. Buy the S&P 500, set up a modest recurring deposit and forget your login to your trading account for 30 years, then beat most active traders and fund managers after fees is basically the tl;dr of my time in finance school. When you short the market, you are tying yourself to train tracks as one approaches and betting that it will get derailed before the inevitable comes your way. Lots of non-finance readers reach the entirely rational conclusion that this AI mania is provably batshit crazy, therefore there is money to be made in betting that the music stops. Besides, we’ve all seen The Big Short and understand mortgage-backed securities thanks to Margot Robbie’s bubble bath explanation now. Why can’t we all be the next Michael Burry?

Because Michael Burry spent a decade trying to be the next Michael Burry and failed. He is famous for betting big against the housing market and making tons of money off the 2008 crash and then being portrayed by Christian Bale in The Big Short. What he is far less famous for among non-finance folks however, is his litany of extremely wrong bets that have cost him and his clients quite a bit of money since 2008.

In 2015, Burry predicted a huge stock market crash, and the S&P 500 was up 11% the following year. Two years later, Burry said a global financial meltdown was near, and the market was up 19% over the following 12 months. In 2019, Burry compared index funds to the subprime mortgage bubble that made him famous, and the S&P500 is up almost 160% since then. In March 2020, after the huge COVID-induced crash, Burry said he made a massive bet shorting the market, and it rallied 72% through the end of the year. In 2021, he revealed that he had a short position against Tesla worth more than half a billion, and since then, Tesla is up over 50%. He also slammed (but did not short) Bitcoin that same year where I made over a million dollars in crypto (and the year before I lost over a million). He was even placing bullish bets and longing Gamestop hard in 2021, then he sold a position worth $100 million, which sounds nice before you learn that it came two weeks before the famed GameStop short squeeze began that would have taken his position to one worth $1.4 billion at its peak.

In August 2023, Burry’s Scion Asset Management had $886 million in put options on the S&P500, and $739 million in put options against the Invesco QQQ trust ETF that tracks the Nasdaq. The market moved up 21% over the next 11 months. In November of last year, Scion disclosed it had bought over $1 billion in put options against Skynet competitor currently trading around 100x sales, Palantir, and the only company in our AI world that matters, Nvidia. That same month, Burry announced the closure of Scion in a letter to investors, writing “My estimation of value in securities is not now, and has not been for some time, in sync with the markets.” Markets could crash 50% tomorrow exactly the way he has been warning for a decade, and Michael Burry’s post-2008 career would still be proof that being early in finance is the same thing as being wrong.

This is not to pick on Burry, but to use him as a warning of how immensely difficult it is to time the market. In 2023, my favorite finance professor who also worked at J.P. Morgan told my class that she thinks “people are eventually just gonna get killed” by a wildly overvalued market as she taught us about the CAPE ratio, and she also has yet to be proven right. If the most famous market shorter of the century and a professional who the University of Colorado trusts to teach this subject to future finance professionals haven’t been able to time the market, what makes you believe that you can?

Especially these days when the stock market is defined by a “magnificent seven” stocks that have mindlessly dragged the market upwards thanks to their gargantuan size (that now is creating concentration risk for index funds—the bundles of stocks you buy to avoid the idiosyncratic risk that individual stocks present). Inequality and the K-shaped economy isn’t just for us common folk working salary jobs, the bourgeoisie understand that this dynamic extends to their assets in the stock market too. Tesla hasn’t reported any quarterly or annual profits that remotely justify its valuation since before the pandemic shock of 2020, but that hasn’t cost Elon Musk his spot in the seven cool kids club yet. Tesla is a carbon credits company that sells a couple of cars and has pivoted to new bullshit promises about robotics. Anyone with half a brain in their head can see this is no way to run a business and it cannot survive forever like this, and yet, as I write this, TSLA sits roughly 25% away from its all-time high.

The stock market is not rational. It literally buys what Elon Musk is selling. It has become a hopium addict. A market so unserious and dependent on leverage that a Reddit thread can destroy a hedge fund with a meme. It is a short-term game of FOMO telephone where not being in the market before Trump inevitably ends this stupid war of choice with Iran is viewed with more fear than the mounting likelihood that Iran really does have president deals’ balls in a vice grip and there is no painless way out of this. It’s basically a Pavlovian reflex to buy every dip for retail traders at this point, no matter the cause of the dip.

As stupid as this all sounds, all the people we’re calling idiots on r/WallStreetBets are making far better returns than you and I and maybe even my potentially sidelined finance professor. There is a rationality to the irrationality of the market just due to the wisdom of crowds and the fundamental dynamics powering financial markets. Doomers on Wall Street can always be found in opinion pages and on TV hawking their books—it’s a cottage industry—but you can also find their blood covering every inch of the S&P500’s train tracks as the YOLO crowd steamrolls over them to new all-time highs. It is frankly, delusional for us stock market bears to assert that we can pinpoint the exact moment a once-in-a-decade or a once-in-a-century event will take place. 

I have written how I believe ‘ol Donny has finally found something he can’t wriggle out of with the ongoing largest energy shock in history and how my tepid economic optimism has shifted to a bearish belief in our near-to-medium-term future, but oil shocks take time to take root, and they must be sustained to create inflation that wreaks serious havoc. I could easily be wrong and miss out on the next bull market by over-complicating what has become a pretty simple strategy of shutting your brain off and buying shoe companies pivoting to AI. Duh.

Crises are crises because they are definitionally a surprise, and things unravel when the world’s big financial players are not positioned to deal with them. We all can point to a litany of potential catalysts that could lead to a crisis—wildly over-valued AI companies sparking a huge stock-market drawdown by simply coming back down towards something resembling fair value in a market getting more jittery about AI’s tail risks, or perhaps the opacity of private credit prophetically giving everyone the 2008 heebie jeebies, or maybe just everything buckles under the weight of Trump doing his best to bring back all the worst ideas of the 1970s and the 1930s—but big money is already positioned to absorb all these obvious tail risks. I’ve been writing about Wall Street betting on stagflationary dynamics ever since Joe Biden’s brain fell out of his head on TV two years ago. News has spread of all the big hedge funds and financial players hedging their AI bets for at least a year now. If you’re reading about any kind of economic concern on the internet, the big money who can blow everything up has already known for months at minimum.

The lesson of Lehman Brothers is that if you would have said in 2007 that Lehman Brothers at a $60 billion market cap would cease to exist a year later, someone would likely ask you what substance you’re abusing or if you had a recent traumatic brain injury. It takes a lot more to sober up the stock market than just gargantuan valuations becoming less so, or reason entering the conversation. History tells us that it likely isn’t until the shit hits the fan in a way that few people see coming that this AI mania will then approach something resembling rationality.