Ultra-rich players place bets on trouble ahead

Ultra-rich players place bets on trouble ahead
Ultra-rich players place bets on trouble ahead

ONE is buying and the other is selling but even if their investment strategies are poles apart, it is hard to ignore the track records of multi-billionaires Warren Buffett and Michael Burry because both strategies signal trouble ahead.

Mr Buffett is the better known of the two, making his $US119 billion ($185 billion) fortune by acquiring high-quality assets when other people reckon it’s time to sell.

“Be greedy when others are fearful, and fearful when others are greedy,” is one of Mr Buffett’s better-known sayings.

Mr Burry made his $US44 billion fortune by identifying over-valued assets and then placing bets on their eventual fall, a short-selling technique perfected in the years before the 2008 US sub-prime property crash and captured in a book and film called The Big Short.

“I felt like I was watching a plane crash,” Mr Burry said in a 2015 interview, about his research into the over-leveraged US housing market and the sub-prime lending practices of some banks.

Mr Burry has not always been right but his latest ‘short’ is his biggest since the 2008 market crash, a $US1.6 billion bet that the major US stock market indices will fall sharply before the end of the year because he believes a crash is likely to occur in the next four months.

Mr Buffett’s latest big bet is on liquefied natural gas partly because of recent events in Australia, the world’s second biggest LNG producer, and partly because he believed that strict adherence to environment, social and governance beliefs is causing a worldwide shortage of energy.

Strict controls on LNG exports imposed by the Australian government, coupled with active discouragement of exploration and a move by the Western Australian government to ban the export of gas from projects in the south of the state, have all helped shape Mr Buffett’s $US3.3 billion investment in a new LNG export terminal in the US.

Mr Buffett’s LNG investment continues a long history of backing the US oil and gas industry at a time when climate change activists have demonised the industry.

Protests against Woodside Energy are a local example of what’s happening on a global scale. Essentially, Mr Buffett is placing a bet against ESG and one of its core aims of driving fossil fuels out of the economy and replacing them with renewables.

In time, the changeover from oil and gas to wind and solar may occur but it won’t be sudden, which is why Mr Buffett believes gas is a good bet as a halfway house on the road to a renewables future.

Mr Burry’s short strategy involves buying $US866 million in put options (the right to sell an asset at a future fixed price) against a fund which tracks the S&P 500, an index comprising the top 500 companies in the US, and $US739 million in put options against the Nasdaq 100, a similar index.

Essentially, Mr Burry is following his pre-2008 playbook and betting against the US economy, the exact opposite of Mr Buffett’s approach, which is backing the US, the home of oil.

Mr Burry’s timing with his negative approach could not be more interesting.

Not only is the rapid rise in interest rates squeezing profits but speculative trading has sparked a recent share price revival, which might not be supported by future earnings.

And then there’s the history of past big stock market events, which have occurred in October, including the 1929 crash (it started on October 24) and the 1987 crash which started on October 19 in the US, spreading to the rest of the world on October 20.

Spoiler alert: lock up your money before October.

Wrong tactic

RENT controls, one of the proposals to help fix Australia’s housing shortage, have little chance of being effective because they attack the issue from the wrong direction.

But to best see what happens when you peg the supply or price of a commodity, consider the energy crisis in Iran.

Once one of the world’s biggest oil exporters, Iran has long supplied petrol and diesel to local consumers at massively discounted prices as low as US3 cents a litre (yes, US3c).

Gross inefficiencies followed the cheap fuel as industry and consumers grew used to a government-controlled pricing system, which saw demand dramatically exceed Iran’s oil refining capacity, partly as a result of sanctions on the country.

Today, the Iranian government is being forced to import petrol from its neighbours at prices of more than US50c a litre while it continues selling it to consumers at US3c a litre.

The easy solution would be to charge a market price for fuel but the gap has grown so wide that a sudden move to market prices would almost certainly cause social unrest.

 

Source: businessnews.com.au

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