The Big Short Investor's AI Warning Proves Prescient
The man who famously foresaw the 2008 financial crisis is once again making waves on Wall Street, and his latest prediction appears to be coming true with alarming accuracy. Michael Burry, the hedge fund manager immortalised in the film The Big Short, placed a colossal $1 billion bet against the market's hottest artificial intelligence stocks nearly three months ago. Since that moment, those very stocks have experienced dramatic declines, validating Burry's bearish stance and raising concerns about a broader market correction.
A Billion-Dollar Gamble Against the AI Boom
Filings revealed on the morning of November 4th showed Burry's Scion Asset Management had taken substantial positions against two titans of the AI revolution: Palantir Technologies and Nvidia. The trade involved roughly $900 million in put options against Palantir and about $187 million against Nvidia. These financial instruments gain value when the underlying stock price falls, positioning Burry to profit from a downturn. The timing proved remarkably prescient, as November 3rd marked a peak valuation for both companies.
Staggering Losses for Market Leaders
The reaction in the markets was swift and severe. Analysis of Google Finance data shows that within just three trading days of Burry's bet becoming public, Palantir shares had fallen 15 percent and Nvidia had dropped 12 percent. The situation has deteriorated significantly since. As of the close of trading on February 4th, Palantir has been hit the hardest, plummeting by more than 33 percent from its November 3rd closing price of $207. This represents a staggering loss of $69 per share.
In dollar terms, the decline has wiped approximately $161 billion from Palantir's market capitalisation, shrinking it from $494 billion to $333 billion. While Nvidia's percentage decline is less steep at 15 percent, the financial magnitude is far larger due to its immense size. The chipmaker's shares fell from $206.88 to $175.52, and its market cap, while still enormous at $4.25 trillion, has retreated from a historic peak above $5 trillion reached just before Burry's position was disclosed.
From Mockery to Vindication
The sharp declines have transformed a trade that was publicly mocked by Palantir's chief executive, Alex Karp, into one that appears to be paying off handsomely. In a fiery on-air rant on CNBC on November 4th, Karp labelled short sellers as 'bat**** crazy'. This rhetoric now stands in stark contrast to the market reality, where Burry's contrarian view has been validated by significant losses for the very companies he bet against.
Palantir's recent earnings report only served to underscore the volatility and fear surrounding AI stocks. The company posted blockbuster results earlier this week, initially thrilling investors and sending shares jumping more than 7 percent in a single day. However, the celebration proved short-lived. By the market close, the stock had plunged 13 percent, completely erasing those gains and falling below pre-earnings levels.
Historical Parallels and Broader Concerns
Market analysts are drawing uncomfortable parallels with past bubbles. In the twelve months leading up to November, driven by relentless investor enthusiasm for anything tied to artificial intelligence, Palantir shares had surged more than 250 percent and Nvidia had risen roughly 180 percent. These extraordinary gains left both companies trading at valuations that assumed years of uninterrupted, explosive growth—a setup that historically leaves little room for disappointment.
Burry's bearish bet fits a familiar pattern from his career: a high-conviction wager against an industry riding a wave of hype. To Burry, Palantir's eye-watering earnings multiples and Nvidia's briefly market-rivaling valuation may look eerily similar to the overvalued mortgage bonds of 2007. Other seasoned investors, including Steve Eisman (the real-life inspiration for Mark Baum in The Big Short), have also expressed concern about the stratospheric rise of big tech and AI stocks.
Not a Universal Bear
It is noteworthy that Burry has not been bearish across the entire market. In a recent Substack post, he revealed he owns shares of GameStop and has been buying more, triggering a sharp rally that sent the meme-stock favourite jumping as much as 8 percent in a single day. This selective positioning highlights his strategy of targeting specific areas of perceived excess rather than making a blanket pessimistic call on the market.
A Voice from the Past Rings Loud
Michael Burry built his formidable reputation by correctly predicting the collapse of the US subprime mortgage market, a trade that generated billions for his investors and was chronicled in Michael Lewis's bestselling book and the subsequent Oscar-nominated film. Since the 2008 crisis, he has repeatedly warned about speculative excess in various areas, from meme stocks and cryptocurrencies to the post-pandemic tech rally.
If the current sell-off in AI stocks continues and begins to spread beyond Silicon Valley, potentially affecting the millions of Americans whose retirement savings are tied to indices like the S&P 500 and Nasdaq, Wall Street may be forced to confront an uncomfortable truth: the most sceptical voice in the room may have been right all along. The man who spotted the last great crash is worryingly starting to look correct again, and the financial world is watching with bated breath.
