Beware of Passive Investing (Index Funds and ETFs) Post-MOASS - Growing Wrinkles with Michael Burry, weekend of June 11th 2021
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| Author       | Source       | 
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|  [u/Pop-Tart_Rabies_Monk](https://www.reddit.com/user/Pop-Tart_Rabies_Monk/) | [Reddit](https://www.reddit.com/r/Superstonk/comments/ny9rxv/beware_of_passive_investing_index_funds_and_etfs/) | 

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[DD 👨‍🔬](https://www.reddit.com/r/Superstonk/search?q=flair_name%3A%22DD%20%F0%9F%91%A8%E2%80%8D%F0%9F%94%AC%22&restrict_sr=1)

APES. What a week it has been. We saw some gains. We had them taken away. [We felt woozy.](https://mobile.twitter.com/TheRoaringKitty/status/1403060736889344004) But we HODLd. And we dealt with some serious uncertainty with the shareholder meeting on Wednesday, and the flurry of new info from GameStop. I don't know about you, but it felt pretty shilly in here. Give the shills credit - they tried sooo hard! But we apes are strong together.

Many of you were kind enough to read [my post on Michael Burry last weekend](https://www.reddit.com/r/Superstonk/comments/nsmbnk/a_look_back_at_what_michael_burry_knew/) and offer your thoughts, your updoots, and your awards. I had a lot of fun writing it, and I was overwhelmed with the response it received. So why don't we make it a regular thing? I will try to post it on Friday evenings or Saturdays as I am able. I can't promise it will be every weekend, but I know those times have a reputation for being rather... meme-filled on Superstonk 😁 (not that I don't enjoy the weekend shitpost, fluff, and meme frenzy! Last weekend was great with all the Melissa Lee memes, and in 20 or 30 years when I look back fondly on this saga, I will 100% remember the Melissa Lee weekend. "Naked shorts, yeah" 😳), and I have seen many apes calling for more weekend DD warriors to fill the void. I will step in as much as I am able, and also try to offer something a little different to the community.

I'm not exactly a quant or a technical analysis guy. Other than detecting a basic bull flag on the stock chart, I have absolutely 0 predictive abilities for the price action of GME during the week. But what I do have is the ability to understand complex ideas, and to translate them into apespeak. So I thought it would be a worthwhile project to spend some time going through different things that Michael Burry has written, said, and done. I know I can certainly learn a lot from it, and hopefully you can too. Besides, the way I see it, when we have our tendies we will need to have all the right moves in order to bring about change and to be better rich people than the ones we are betting against. So what better time to learn all these things than right now, while we are HODLing and meme-ing and vibing and waiting for the rocket engines to come online?

This week, I have ETFs, Index funds, and passive investing on the mind. At the beginning of The Big Short, it was said that Michael Burry and the others did something nobody else did leading up to 2008 - they looked. Michael Burry has warned of another bubble forming again, similar and yet different from last time. So let's try and be like Burry this time around. Let's be among The Ones That Looked. So grab your weekend beverage of choice, and let's do some looking, shall we?

Passive Investing

We begin this week, just as we did last week, with a tweet by Burry.

[![r/Superstonk - Beware of Passive Investing (Index Funds and ETFs) Post-MOASS - Growing Wrinkles with Michael Burry, weekend of June 11th 2021](https://preview.redd.it/urkvn2b0lu471.jpg?width=1100&format=pjpg&auto=webp&s=b3070056e7884a100e9bcbb7ffb05ef1999c379c)](https://preview.redd.it/urkvn2b0lu471.jpg?width=1100&format=pjpg&auto=webp&s=b3070056e7884a100e9bcbb7ffb05ef1999c379c)

February 21st Tweet

There's a lot going on in this one. Look at it as long as you need to. Took me a while too.

So this graph tracks the price of the S&P 500. And (surprise!) it has a direct relationship with the collective amount of margin debt (note that the units for margin debt are reversed on the left because... well... it's *debt*).

I looked up the version of this chart that has been updated as of April 2021. Here is the non-inversed version, so you can see just how close the correlation is. Over 24 years!

[![r/Superstonk - Beware of Passive Investing (Index Funds and ETFs) Post-MOASS - Growing Wrinkles with Michael Burry, weekend of June 11th 2021](https://preview.redd.it/319eyr6olu471.png?width=1379&format=png&auto=webp&s=d222cf2abf998786a7bdf2da33f352c55628eae2)](https://preview.redd.it/319eyr6olu471.png?width=1379&format=png&auto=webp&s=d222cf2abf998786a7bdf2da33f352c55628eae2)

S&P 500 vs Margin Debt

Now, at first glance this set off a couple of bells in my mind. First was an [interview I heard with Steve Eisman](https://youtu.be/NJodqhzqPKQ) (the real-life Mark Baum from The Big Short - the part in question starts around 13:00). He said that, leading up to 2008, the biggest of the idiots "mistook leverage for genius." Leverage, by the way, = margin debt. Is it concerning to you that the S&P 500, which is one of the key indices of the stock market, only seems to go up on the strength of margin debt? Doesn't seem like the best foundation for financial growth, IDK. And margin debt is spiking like crazy ever since the end of 2020, as the chart shows (sidenote: what situation do we know of that has seen big players in Wall Street taking on tons and tons of margin debt? And I can't remember, does that situation seem to have an inverse relationship with the S&P 500? 🤔)

At this point I should mention that Index Funds and ETFs (Exchange-Traded Funds) are both funds that track a sector or a large sampling of the entire market. The key difference between the two is that Index Funds cannot be traded during the day - you can only get into an index fund with an up front investment, usually $2000 or $3000. ETFs on the other hand, track the exact same things that Index Funds do, except ETFs can be traded during the day just like shares of a company. So for example the S&P 500 is an Index Fund. SPY is an ETF (some people have called it the granddaddy of all ETFs) that tracks the S&P 500 Index.

ETFs and Index Funds have a pretty special relationship with GME and market manipulation in general. I give a TON of credit to [u/ahh_soy](https://www.reddit.com/u/ahh_soy/), who [in this post](https://www.reddit.com/r/GME/comments/ljwo3v/serious_researchers_needed_now_i_think_i_know/) back in the doldrums of February discovered that Kenny & company were using ETFs that contained GME to hide their short interest in GME. They essentially paid their credit card bill with another credit card bill (hellooooo, margin debt!), to bring the short interest down and to make it look like they had covered during the craziness of January. There are other examples too. The Russell 2000 has been shorted just to affect the price of GME in recent months as well. Seems like a super inefficient way of going about it Kenny, but whatever. Anyways, the point is that ETFs are a favorite tool for the kind of people that we are betting against.

Michael Burry's tweet above paints a very dark picture. And ETFs are at the center of it. In doing a little research on the subject, [I discovered that Michael Burry has compared Index Funds and ETFs to the CDOs](https://money.usnews.com/investing/funds/articles/do-index-funds-etfs-quietly-pose-a-systemic-risk-michael-burry-thinks-so) that caused the 2008 collapse. If you don't know what a CDO is, I could try and explain it to you. Or I could link to a clip of Jared Vennet explaining it in The Big Short.

[Oh what the heck, I'll just do both.](https://www.youtube.com/watch?v=xbiDrzTd8fE)

It's complicated, but basically CDOs are a type of hybrid security which is backed by parts of other securities (usually loans of some sort, especially mortgages). It is a convenient way for the big banks and their lackeys to refinance mortgages and to create securities based off of subprime loans that didn't make it into the big Mortgage-Backed Securities. Then they sell those new hybrid securities to make even more money off of it. Is it their problem if what they are selling is over 50% hot garbage?! Nope!

An Index fund or an ETF is similar in the sense that you are buying or investing a security with an incredibly diverse list of holdings, some of them very good and some of them bad. For example, if you wanted to invest in the airline industry but don't want to get into picking companies for fear that one of the two or 3 you pick go bankrupt, you could just buy an ETF based off the airline industry. You might buy one ETF that has shares of multiple airlines and aircraft manufacturers, some of which are exceptional and some of which are not (smh, still can't believe what Boeing did with the 737 MAX). But the idea is that through diversification you overcome any potential risks.

And I can understand why people would think this way! I personally know multiple people who ONLY INVEST in ETFs and Index funds (i.e. they only invest passively) because they think it is safer. I can hear the voice of one of them in my head now as I type this: "the S&P 500 grows by 6-8% like clockwork every single year. It is THE safest way to invest." But even with diversification you still have hundreds of billions of dollars invested in a security that is in large part composed of smaller market-cap, lower volume-traded stocks. Now, I grant you, there are nuanced differences between passive investing and CDOs that I don't fully understand. But the basic principle is the same, the market is betting unimaginable sums of money on securities with significant "subprime" holdings. It is the same problem as with CDOs, except that now we have no excuse for not knowing better.

I might even go so far as to say that the bull run we are seeing on many ETFs and Index funds is a mirage. CNBC looks at the price of the S&P 500 these days and thinks "wow, we sure recovered from the pandemic quick!" But it isn't that simple. Michael Burry compares passive investing to a theater that keeps getting more and more crowded, but the exit stays the same - just one little door. If the show stinks, or worse if their is a fire, it will be deadly. Essentially the money is "trapped" in the market. And when the flow of money reverses from in to out eventually, there isn't enough liquidity to withstand it. It will create the mother of all bottlenecks (MOABN? Meh. I'll keep thinking). People will be literally trampled to death on their way to the exits. Like, hypothetically, if a global pandemic were to come along and weaken the value of like the bottom 2/3rds of every stock included in these index funds and ETFs.

"But Poptart," you might say, "how could the pandemic be the final straw if the pandemic is already over? The first chart you posted even puts an end-date to the recession at earlier this year. What gives?"

Well, dear ape, let me put it to you this way. Look at the chart of the S&P 500 again here.

[![r/Superstonk - Beware of Passive Investing (Index Funds and ETFs) Post-MOASS - Growing Wrinkles with Michael Burry, weekend of June 11th 2021](https://preview.redd.it/ctv95wgqqu471.png?width=1549&format=png&auto=webp&s=19461c245c1989cb8654e5ed872d664e36213eec)](https://preview.redd.it/ctv95wgqqu471.png?width=1549&format=png&auto=webp&s=19461c245c1989cb8654e5ed872d664e36213eec)

Ruh roh

See how right after the Covid dip, the price starts to take a parabolic turn north? Does that look natural to you? Can you think of anything natural in the economy that would have happened since then to bring about that growth? Or does it seem more likely to you that it is just the result of quantitative easing, inflation, and stimulus checks trapped in the market? (sidenote: I am NOT placing the blame for this on either of the parties that introduced stimulus checks into the economy, nor am I placing blame on people like you and me who invested them into the market. I am just saying that it is delaying the inevitable.) Does that look like a natural recovery, or does it look like the market was given a shot of a steroid and now it feels great even though it is dying? (dark, I know... sorry)

Price Discovery

The other problem that Burry has with Index funds and ETFs is that they make it impossible for "price discovery to occur. Price Discovery is the process of the market weeding out businesses that don't perform well and that deserve to go bankrupt, and also conversely the process of rewarding companies that do well. It is essentially the idea that a company's performance should have a direct relationship with its stock price. This is really just a free market functioning as it should.

ETFs and Index funds hurt price discovery in the market because the businesses in the fund move not according to what the market dictates, but according to how the overall fund is moving. Don't believe me? Here, take a look at a few holdings of the S&P 500. Represented here are technology, energy, manufacturing, airline, and retail. But do they move together? You bet they do.

[![r/Superstonk - Beware of Passive Investing (Index Funds and ETFs) Post-MOASS - Growing Wrinkles with Michael Burry, weekend of June 11th 2021](https://preview.redd.it/515d36poru471.png?width=994&format=png&auto=webp&s=fd009526e6a8b00f01e274d6223bcc707c70b32d)](https://preview.redd.it/515d36poru471.png?width=994&format=png&auto=webp&s=fd009526e6a8b00f01e274d6223bcc707c70b32d)

Technology

[![r/Superstonk - Beware of Passive Investing (Index Funds and ETFs) Post-MOASS - Growing Wrinkles with Michael Burry, weekend of June 11th 2021](https://preview.redd.it/00v3e4rsru471.png?width=990&format=png&auto=webp&s=34395dedf841a62efafad015d607a662679f6e8d)](https://preview.redd.it/00v3e4rsru471.png?width=990&format=png&auto=webp&s=34395dedf841a62efafad015d607a662679f6e8d)

Energy

[![r/Superstonk - Beware of Passive Investing (Index Funds and ETFs) Post-MOASS - Growing Wrinkles with Michael Burry, weekend of June 11th 2021](https://preview.redd.it/alnhlbuxru471.png?width=1025&format=png&auto=webp&s=f89fd9dc4927e3bd944155200594321b87e691c1)](https://preview.redd.it/alnhlbuxru471.png?width=1025&format=png&auto=webp&s=f89fd9dc4927e3bd944155200594321b87e691c1)

Airline

[![r/Superstonk - Beware of Passive Investing (Index Funds and ETFs) Post-MOASS - Growing Wrinkles with Michael Burry, weekend of June 11th 2021](https://preview.redd.it/zsibrimvru471.png?width=1020&format=png&auto=webp&s=4adb3fcc71341df58db32d90e5309c4cb94ad69b)](https://preview.redd.it/zsibrimvru471.png?width=1020&format=png&auto=webp&s=4adb3fcc71341df58db32d90e5309c4cb94ad69b)

Manufacturing

[![r/Superstonk - Beware of Passive Investing (Index Funds and ETFs) Post-MOASS - Growing Wrinkles with Michael Burry, weekend of June 11th 2021](https://preview.redd.it/nswxamgzru471.png?width=1073&format=png&auto=webp&s=5e2ca05a6da8dfb73ed636101a8a4b6bb192d850)](https://preview.redd.it/nswxamgzru471.png?width=1073&format=png&auto=webp&s=5e2ca05a6da8dfb73ed636101a8a4b6bb192d850)

Retail

Notice how every time there is a sharp divergence on one of the stocks, it immediately corrects back to the general path of the fund?

When a market is drunk on Index funds and ETFs, the price discovery is taken out of the hands of individual investors and put into the hands of the people with the cushy job in downtown Manhattan who decide which stocks will go into the fund. In other words, the price discovery is left to the kinds of people like the CDO managers and the stuff-shirt working for Standard & Poors in The Big Short. You know, the kind of people who can easily be bribed to make certain decisions. The kind of people who will pick stocks not so much based on which ones are more deserving, but based on how much money they will get paid. Does that scare you? It sure does me.

One final note on price discovery before we go... what Citadel and friends tried to do to GME, just as they did to Toys R Us, and SEARS, and many others before GME, is the enemy of price discovery just as much as ETFs and Index funds are. In fact if you squint when you look at the two problems, it is just one problem - rich people thinking they should be the ones to determine which companies survive; rich people thinking they know better than the free market; rich people not caring who they screw up in order to make money. Do we live in a free market or don't we? Because right now it doesn't feel like it.

My main takeaways after this exercise:

1.  What I just said about price discovery and GME can't be repeated enough. And THIS is why the GME situation is so terrifying for them. GME doesn't just represent them losing out on the bankruptcy jackpot with one company. The more people learn about what is going on with GME and especially what is going here on Superstonk, the more democratized the market becomes. The more people will learn that-- *looks at hands* -- WE have the power. This is why CNBC tries to ignore us except to nervous laugh at us when GME is up big. They know that we aren't just winning this game - we are establishing a whole new paradigm, and the powers that be don't want to let the cat out of the bag. They are in damage-control mode. I really believe that future generations will read about GameStop in their high school economics textbooks. And THAT is a very happy thought, isn't it apes?

2.  I didn't have time to go over this in the main body but thought it was important to address: I do not think Burry is criticizing us directly when he says "#stonksgoup hype" adds to the problem, and the reason for this is simple: I cannot believe that Burry would think a bunch of people deciding they like the stock, then buying and holding it is the problem. It has to be much more intelligent and nuanced than that, coming from Burry. I think he is criticizing the people who push stocks or crypto just for the laughs but don't really believe they have any value (I am thinking especially of proponents of a certain canine-inspired crypto here). What we are talking about here with GME (and I also include our movie theater friends in this) is that we are trying to stand up for price discovery. We are calling bull💩 on the game that market manipulators are playing. If anything, we are taking a stand against the very problem that Burry is identifying.

3.  BUY. HODL. ~~VOTE.~~ 😅

TLDR: Get ready because the market is gonna need our tendies. And when the time comes, invest in STOCKS. Not Funds or ETFs.

Not financial advice. I literally can't tell my own rear end from a coconut FYI.
