Michael Burry vs Cathie Wood; a fun story that emerged this week as markets meander through the month of August.

Burry turned heads after quarterly filings revealed that his investment firm, Scion Asset Management, had taken out short positions in the ARK Innovation ETF (ARKK) — Wood’s high-flying tech fund.

Both are big names. Burry rose to fame after successfully predicting the US housing crash that precipitated the 2008 financial crisis, which was documented in the book (and film) The Big Short.

ARK Invest has stayed the course with large positions in Tesla and a host of other high-growth tech stocks that have comfortably outperformed in the stimulus-fuelled post-COVID bull market.

While Michael Burry vs ARK makes for an easy headline, is it actually reflective of the complex environment facing investors in the second half of the year?

For a pro investor view on the markets showdown of the week, Stockhead caught up with James Whelan, Sydney-based manager of the VFS Group Global Macro Fund.

Time and place

As a framework for Burry vs ARK, Whelan began by saying that the markets environment is indeed growing more complex.

In client discussions, he’s fielding more queries about how to position for the next phase in the post-COVID cycle.

And if there is a change in the macro environment, those short positions in ARKK Invest might become more lucrative.

“I think you’ve got to legitimately look at whether a shift is going on, where a lot of companies might get found out,” he said.

Whelan said he’s moved to thinking about markets with the view that rock-bottom rates won’t last forever.

“Even if US rates are around 1-1.5%, a lot of companies that really don’t want or need to be found out, well, get found out. Because right now it’s free money.”

“You can get away with no revenue. I was joking recently that having revenue isn’t so good because people can value you based on revenue, and in this market if you don’t have revenue it almost makes it easier.”

“And if you’re looking for a manager who’s into some wild tech ideas and pie-in-the-sky valuations, then Cathie’s my go-to at this time of the cycle.”

Which, Whelan says, is “coming to an end”.

“If there is a normalisation of rates, then a lot of companies that have been able to get away scot-free with lofty valuations get found out. And she (Wood) is in those stocks,” he said.

When it comes to ARKK’s investment performance, Whelan’s general feeling is that “for every part of the cycle, there’s a fund manager who’s a gun for those times.”

But taking a closer look, he said the fund has made some “clanging errors in their analysis of some stocks”.

“And there should be more of a focus on that, but you can get away with it in this market because everything just keeps on going up because money’s free.”

Add to that the new investment trends — Redditors and the increased access to stock investment via trading apps.

“If she says ‘I’m buying’ and they storm in, no one wants to be on the other side of that trade. So she wields quite a lot of power in this kind of market.”

That being said…

Michael Burry is an experienced investment manager. And he’s not the only successful ‘fundie’ skilled in the dark arts of talking one’s book, Whelan says.

Back in February, Burry tweeted that Wood’s vision for some of the transformative technologies ARK invested in was unlikely to come to fruition.

He deleted his Twitter account in April, reopened it in June, then deleted it again a week later after warning of the ‘greatest speculative bubble of all time.’

“I do take what he says with a grain of salt, because he’s talking his book as much as the next guy,” Whelan said.

There’s also the fact that The Big Short made him an investment media darling (editor’s note: irony not lost on me that this article is indeed about Michael Burry).

“He is very intelligent and he got that one thing really right (in 2008),” Whelan said.

Like Wood in red-hot post-COVID markets, Burry is an investor he “wouldn’t want to take on”.

“But there’s a big book-talking side to what he said. And also at the end of the day, people love talking about the Big Short guy because it’s a strong narrative.”

Making sense of it

So, is Burry vs ARK a pre-cursor for the next leg of the market cycle?

Scion isn’t alone in shorting the ARKK ETF. An FT report showed short positions in ARKK from other hedge funds rose to a record 12% of outstanding shares in August — a cumulative bet worth US$2.7bn (up from US$40m a year ago).

Whelan says he’s playing something of a waiting game as the global economy emerges from the pandemic.

“It’s still a question of whether inflation will prove transitory,” Whelan said.

“Will there be a slight rate rise, will the market care, and what can the Fed raise rates to without hurting the US consumer?”

Big US tech names — the FAANG stocks — have proven to be barometers of market safety in the post-COVID economy.

But if rates normalise, “what’s the switch and rotation going to be to out of your post-COVID safety stocks?”, Whelan asked.

“To me, it’s all on a bit of a precipice at the moment and the annoying thing is that August is usually such a quiet month and it’s hard to find direction.”

Whelan said that investors should use any dips or corrections to buy Quality — stocks that can consistently generate cashflows in any operating environment.

“That’s the rule through the end of the year. So the best thing to do is position yourself accordingly and just wait,” Whelan said.