Michael Burry, the investor famously known for predicting the 2008 housing collapse, has expressed concern over the US Federal Reserve's plan to purchase $40 billion in Treasury bills (T-bills) monthly. Burry suggests this initiative is not primarily about financial stability but rather reflects a financial system that has become heavily reliant on Fed support.
Fed's Reserve Management Purchases Raise Concerns
Michael Burry took to X (formerly Twitter) to state that the Fed's intention to commence "reserve management purchases" (RMPs) indicates growing fragility within the US banking system. He highlighted that the US banking system is currently fragile, with reserves having expanded from $45 billion in 2007 to over $3 trillion today. Burry argued that this dependency signifies weakness rather than strength and could potentially lead to permanent balance sheet expansion or the complete nationalization of the $40 trillion US debt market.
RMPs as a Hidden Attempt to Stabilize the Banking Sector
Fed Chair Jerome Powell announced that the US Federal Reserve would purchase T-bills worth $40 billion per month. This action is intended to manage market liquidity levels and ensure the central bank maintains firm control over its interest rate target system. However, Michael Burry questioned the timing of this decision.
Burry noted that the Treasury has been increasing its sales of short-term bills to prevent 10-year yields from rising. He found the Fed's decision to then purchase those same bills to be "awfully convenient." According to Burry, this plan represents a hidden attempt to stabilize a banking sector that is still contending with the aftershocks of the banking crisis that occurred two years ago. He pointed out that bank reserves stood at just $2.2 trillion before that crisis, compared to over $3 trillion currently.
"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 added.
He believes this dynamic helps explain the current strength observed in the stock market.
"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," he wrote.
The Fed formally concluded its quantitative tightening program earlier this month, having reduced its asset holdings by approximately $2.4 trillion since 2022. This move comes amidst increasing volatility in funding markets, particularly the $12 trillion repo market. Short-term repo rates have repeatedly exceeded the Fed's target range, raising concerns about liquidity. Burry interprets these developments as further evidence of underlying weakness in the financial system.
Burry's Advice for Investors and Market Observations
Burry highlighted a strategic shift where the US Treasury is focusing on selling more short-term bills, while the US Fed is concentrating on purchasing them. This approach aims to prevent an increase in 10-year Treasury yields. Following the FOMC meeting, the US 2-month Treasury yield (US2M) saw an increase, and the US 10-year Treasury yield decreased, as anticipated.
Furthermore, Burry advises investors to avoid bank stocks. He revealed that for amounts exceeding the $250,000 FDIC insurance limit, he prefers to hold cash in Treasury Money Market Funds. Concurrently, a Bloomberg dot plot suggests that the Fed anticipates gradual interest rate cuts, bringing rates down to approximately 3% by 2026.
In related market news, the Fed's third consecutive interest-rate cut on Wednesday boosted market sentiment, leading to strong gains in several high-beta stocks associated with clean energy, crypto mining, and space technology. The Dow Jones increased by 1.05%, the S&P 500 added 0.67%, and the Nasdaq 100 advanced by 0.42%.
However, the price of Bitcoin experienced a fall of more than 2% in the preceding 24 hours, ahead of the Bitcoin options expiry. Reports indicate that BTC miners are selling assets, with Marathon Digital (MARA) reportedly dumping 275 BTC, valued at $25.31 million. Bitcoin is currently trading at $90,369.