⚠️ Cathie Wood: WARNING to Michael Burry for Shorting Tesla Stock & ARKK

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Whether you're a fan of ARK Invest's thematic funds focusing on disruptive innovation
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or you're someone who tracks the moves of incredible value investors like Warren Buffett,
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you're probably aware of the on-going clash between Michael Burry and Cathie Wood. In case
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you're not, here's the short and sweet version. Earlier this summer, Michael Burry tweeted that we
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are in the greatest speculative bubble of all time in all things by two orders of magnitude. If true,
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that would be quite the bummer. Around that time, the SEC filings of Burry's hedge fund, Scion Asset
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Management, revealed that he has a $530 million dollar bet against Tesla. Tesla is, of course,
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Cathie Wood's largest position in three separate ARK Invest funds and is ARK Invest's biggest
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investment overall. Cathie Wood has well over $3 billion dollars invested in Tesla. The LATEST SEC
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filings for Scion Asset Management revealed that Michael Burry now also has 30 million dollars in
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put options betting directly against ARKK, ARK Invest's massive flagship innovation fund. He
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also increased his short position on Tesla to over $700 million dollars. Cathie Wood responded to
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that with a series of tweets addressing inflation versus deflation, bubbles versus strong markets,
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and growth opportunities versus value traps, ending her twitter thread with this. To his
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credit, Michael Burry made a great call based on fundamentals and recognized the calamity brewing
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in the housing and mortgage market. I do not believe that he understands the fundamentals
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that are creating explosive growth and investment opportunities in the innovation space. It's easy
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to take everything I just shared with you and run with the narrative of bear versus bull, value
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versus speculation, inflation versus deflation, bubble versus real exponential market growth.
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The truth is, this is a battle of short-term versus long-term and in my opinion, all of those
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other arguments are just symptoms of the time frames that Michael Burry and Cathie Wood are
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operating on. Let me explain. It's currently September 2021 and unless Michael Burry has
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access to special options, his options will expire in less than 2 years from now,
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even sooner for some of his earlier options contracts. Over 500 million dollars of his 700
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million dollar bet against Tesla was made in the first quarter of this year, when Tesla was trading
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close to 900 dollars per share after rallying by something like eight hundred percent. It wouldn't
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be surprising to find out that Michael Burry is already in the money with his short position on
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Tesla, just like it won't be surprising that Cathie Wood will continue to make a lot of
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money on her long position on Tesla over the next 5 years. In my opinion, Tesla is a fundamentally
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misunderstood company because it spans many different market sectors, industries,
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and technologies ranging from artificial intelligence and robotics to energy generation and
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storage. That's why so much of my content focuses on the science and engineering going on at Tesla.
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The way I see it, ARK Invest focuses on making long-term gains by understanding technologies that
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most of the market doesn't, while Michael Burry focuses on making shorter-term gains directly from
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these misunderstandings themselves, by making big bets when a company's valuation doesn't align with
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its balance sheet one way or the other. Here's the issue: when one or two balance sheets look
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bad compared to their valuations, you can write it off as those specific companies being too richly
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valued. That explains Burry's short position on Tesla. His short position against ARKK is far more
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interesting because when every company's balance sheet starts to look bad, you're forced into one
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of two positions: the short-term position that we must be in the greatest speculative bubble of all
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time in all things by two orders of magnitude or the long-term position that technology and
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innovation are somehow allowing newer companies and markets to scale much faster than they used
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to, justifying SOME of these higher multiples. Now that we've re-framed the debate as short-term
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versus long-term, here's a quick clip from Cathie Wood's recent interview on CNBC's Tech Check,
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where she explains this exact phenomenon and how it's actually good for her strategy:
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So, it's obvious to Cathie Wood that we're not in a bubble because bubbles show certain
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signs and patterns that we're not seeing in the market today, like extreme bullishness and high
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momentum across the board. If we take a look at the American Association of Individual Investors
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Sentiment Survey, we can see that bullishness is at 43.4% percent,
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a little higher than the historical average of 38% percent, but a far cray away from even the
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1-year bullish high of 57% percent we saw this past spring or the over 70% percent before the
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dot com bust 20 years ago. Also, one-third of all surveyed market participants are bearish
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right now, which is slightly higher than the historical average. If it were a bubble,
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I'd expect the bear-to-bull ratio to be a lot more, well, bullish. All this negative sentiment
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is actually great for Cathie Wood's strategy because she actively trades into stocks she feels
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are getting discounted way more than they should be. People who think that ARK Invest is somehow
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stuck in one position or another aren't paying attention to the holdings inside these funds;
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they shift all the time. Earlier this summer, I made multiple episodes highlighting Cathie
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Wood's massive moves away from genomics stocks and into deeply discounted web technology stocks
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inside ARKK specifically. Cathie Wood loaded up on stocks like Twilio, Coinbase, Twitter,
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Palantir, Draftkings, UiPath, and Unity Software. Since then, ARKK is up over 25% percent and many
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of the stocks inside the fund are up by way more than that. Michael Burry is an incredibly
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smart investor, so he'd be crazy to bet against Cathie Wood as a stock picker. So the question
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we should be asking is: what exactly is he betting against with his short position on ARKK and why?
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Yeah, just listen to the language here. Wright's Law. Declining production costs and projections
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of demand. The truth is that these two investors aren't fighting because they're not even speaking
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the same language. Michael Burry is treating ARKK like an index of stocks that are very sensitive
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to inflation and rising interest rates. He's betting that inflation will go up in the SHORT
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TERM, causing the value of this particular basket of stocks to go down in the SHORT TERM. Cathie
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Wood is saying that deflationary forces are going to outweigh inflation over the LONG TERM and in
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some cases, like the cost declines associated with electric vehicles, sooner than we expect.
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And again, if you recognize their different time-horizons, Michael Burry and Cathie Wood
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can both be right. Let's start with inflation. During the height of the pandemic, people were
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stuck inside, so they were working on their homes and stocking up on stuff. That caused businesses
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to double- and triple-order inventories, causing a lack of supply. As a result, we saw the cost
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of household goods and commodities like lumber go way up. Lumber is already down by two-thirds from
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its highs in early May. That inflation had two properties; it was focused on goods specifically,
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since that's where people were pouring their money instead of services and experiences,
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and it's temporary because services and experiences won't be shut down forever. Now
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the opposite is true. As services and experiences come back into the mix, they'll be able to charge
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more because there's a lot of pent-up demand and limited capacities. Traveling, going out to shows,
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and so on will all cost more than they did pre-pandemic until this pent-up demand is filled,
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so again, there is price inflation, but it's narrowly focused, near-term, and temporary.
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Now let's talk about the deflationary forces. I already covered the first one, which is the
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price of stuff coming down as pent-up demand gets filled. The second type of deflation is actually
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good deflation, which is technology getting cheaper to produce thanks to Wright's Law. If you
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want to learn all about Wight's Law, you can check out one of my very first episodes where I lay out
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exactly how it works. [clip of that episode] The channel has come a long way but if you want
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to check out that episode, I'll link it in the top right-hand corner of your screen right now
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and in the description below as well. It's a real nail-biter. The effects of Wright's Law
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and good deflation are everywhere. Think about the first iPhone versus the iPhone today or the first
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laptop versus laptops today. This is the same type of good deflation that's responsible for electric
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vehicles getting cheaper as the costs of batteries and industrial robots and so on continue to go
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down. That lets these innovative companies to produce even more of their products and services,
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which lowers the cost, which increases demand, which results in more production,
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and that virtuous cycle goes on and on. When Cathie Wood talks about wanting companies to
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spend money today to dominate winner-take-most markets in the long-term, she's talking about
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them investing in this cycle of lowering costs to greatly increase demand to the point where entire
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markets and ecosystems are built on top of their platforms. The final type of deflation is called
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creative destruction, which is a creative way of saying that non-innovative companies are going
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to get destructed because they can't deliver the same performance at the same price point. Again,
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let's think about electric vehicles in general and Tesla specifically. The Tesla Model S Plaid
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is the current record holder for going zero to sixty miles per hour, which it does in just under
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two seconds. It also costs a fraction of the price of most of the cars on this list. And,
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as you can see, more and more cars near the top of this list are all-electric and dual-motor. So,
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if you're building cars on a different platform, say, an internal combustion engine, and that
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platform can't compete in performance, what do you do? You cut your prices. That's permanent,
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not temporary, because it creates a vicious cycle where lower prices means less profit means less
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production and investment in innovation, which means less performance improvement over time,
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which means lowering prices again, and so on. Winners keep extending their lead and losers keep
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losing ground over time. That's creative destruction, also known as bad deflation.
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So how is it that ARK Invest figured this out? Here's a clip of Cathie Wood
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putting it all together.
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Wright's Law, cost decline trajectories, price elasticity of demand, trends crossing
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the tipping point. I'm not saying that Cathie Wood is smarter than Michael Burry or that ARK Invest
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is better than Scion Asset Management. What I am saying is Cathie Wood set up ARK Invest
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to understand the market from a completely different perspective than traditional asset
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managers: technology platforms, not just earnings reports. The truth is, if you stop worrying about
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the average P E ratio of the S and P 500 and start researching the remarkable pace of innovation,
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you'll see that the real risk… is investing in the companies that are getting left behind.
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This is ticker symbol you.
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My name is Alex, reminding you, that the best investment you can make, is in you.