DOI: 10.21227/fnrv-2032
title: Bet on rising interest - shorting

description: There was quite a stir when Michael Burry’s hedge fund, Scion Asset Mgmt, disclosed a short position in Tesla. The position has a notional value of $534 MM.These articles are missing the point— nearly every article mentions how Burry thinks the company is overvalued; focusing all their attention on the Tesla shorts. If we focus on Tesla, sure the company is overvalued; most of us can reasonably come to that conclusion. If we want to grasp why he’s short TSLA, however, we need to look at the bigger picture.Scion Asset Mgmt. - June 2021. There’s a lot to keep track of, which is why I like to filter for overweight positions first. This helps me parse out where his convictions lie:What does this tell us? This is a bet on rising interest rates. Scion Asset mgmt has 56% of its portfolio in TSLA puts, TLT puts, and TBT calls. This suggests a strategy with a high-conviction macro perspective in mind. When interest rates rise, the price of TLT drops, while the price of TBT rises. He doesn't see TSLA as an isolated failure, he sees it as a company that’s extremely sensitive to interest rates. This is because:The stock price of TSLA has already baked in expected profits & revenues for the next 10+ yearsRaising interest rates is the only real tool the central bank has to fight persistent inflation (at this point at least.)Higher interest rates make money more expensive to borrow. Growth companies get hit hard, boring companies with sustained and consistent cash flow (like grocery stores) fare better.      Why is inflation so problematic? The following example illustrates it:Let's say you are an american who won a $1,000,000 lottery in 2004 . You can receive your earnings in one of two ways:A.) Get a lump sum payout right now, but pay a tax of half your winnings, meaning you actually only win $500,000.B.) Get paid with monthly checks over 20 years, with the incentive that you pay no taxes & actually keep the full $1,000,000. For most people, Option B is the smartest choice mentally and financially.Now, imagine you had won the same lotto in Venezuela. In this scenario, if you chose option B with the 20 year annuity, you would’ve watched helplessly as the monthly check you received was able to buy less and less goods….. until in 2017 it essentially became worthless.In a similar vein, Growth companies bake into their stock price the expected future profits, even if they produce 0 profit today. Those profits are then discounted by the interest rate to be turned into today's dollars. In other words, it doesn't matter how much money Tesla is going to make in the future because if interest rates surge today, the stock price of Tesla MUST go down. A simple way to look at it is the Stock price = company earnings - interest rate (not perfect, but I hope you get my point).How does this relate to the Burry bet? Scroll a few lines down and you will see:  He has almost as many GOOG/FB calls as he does TSLA puts. Around ~$330MM in notional value. Why does this matter? They’re one of the few tech companies making cold hard cash today. So what are the possible outcomes? - Interest rates stay the same & big tech goes up= Break even.-. Big tech goes down = Break even.-  Interest rates rise = Make so much $$$ they film a big short sequel.  It’s an efficient way to bet on inflation.  If you think the market will go down by early 2022 because of rising interest rates, you could short the S&P 500 or the Nasdaq based on its stock price in Google Sheets. But the smarter play is to find the stock with the most room to fall. Firstly, Tesla is a growth stock with a lot of assumed/discounted future earnings. These types of Cathy Wood/ARK stocks will be hit hardest if interest rates go up. Secondly, High Inflation = more expensive Teslas. Partly from higher procurement + production costs and partly from higher car loan APRs. Simply put, less people will buy Teslas. Thirdly, a ton of Robinhood investors own Tesla shares. If we see panic selling from this group, it’ll get ugly. Like someone yelled “fire” in a packed movie with 1 exit.  The Fed says inflation is transitory. They are wrong.  The supply of money has ballooned so rapidly that the gov discontinued weekly updates of M1 money stock in March 2021. This has hugely affected the market's stock price in Excel. Last year, sovereign nations were net sellers of US treasuries.If treasuries are the safest investment in a economic downturn, why would sovereign investors be net sellers? Perhaps they’re losing faith in America’s ability to pay its debt? To get the details answer, use this guide which shows how to get stock price in Excel and do the analysis.