Michael Burry is again invoking the possibility of a 1987-style market break, warning that record highs in the S&P 500 may be masking systemic risks tied to leverage and volatility-sensitive trading.
The S&P 500 rose 3.37% this week and reset its all-time high. In his Aug. 4 newsletter, Burry wrote, “Declining volatility forces volatility-targeting funds to increase leverage, and it also drives leverage used by other momentum strategies.”
The point he was making centers on a common feature of hedge funds and systematic strategies: when volatility falls, exposure is increased automatically. If volatility turns higher, those same strategies can cut risk quickly and swing into selling. The size of funds that adjust positions based on volatility targets is estimated at about $2 trillion globally.
Burry is still betting against AI-linked names including Nvidia, Tesla and Palantir. His stated view is that capital spending on AI infrastructure depends on a financing structure that may not be sustainable.
How far the 1987 comparison goes
Bloomberg columnist Jonathan Levin argued that Burry’s emphasis on volatility mechanics does call to mind part of what happened on Oct. 19, 1987, or Black Monday. On that day, the Dow Jones Industrial Average plunged 22.6%, which remains the largest one-day drop on record.
Levin wrote that portfolio insurance was one of the mechanisms that intensified the crash. Computer programs were designed to sell more as stock prices fell in order to hedge downside exposure, reinforcing the decline and creating a self-feeding spiral.
He agreed that this kind of systemic vulnerability deserves regulatory attention in advance. He compared it to a fire drill: once the alarm goes off, nearly everyone runs for the exit at the same time.
Warning signs are not the same as trading signals
Where Levin split with Burry was on how useful such warnings are for actual portfolio decisions. He argued that treating a systemic-risk warning as a clean buy-or-sell signal has limited value.
According to Levin, flash crashes driven by internal market mechanics often snap back sharply if the fundamental backdrop has not deteriorated. He said Burry highlights how severe the 1987 drop was, but not the fact that markets recovered much of the loss in 1988 and were reaching fresh highs again in 1989.
Missing the rebound can be as costly as missing the crash
Levin’s broader point was that even if an investor managed to exit just before Black Monday, the trade would still be hard to justify without getting the re-entry timing right as well. In his view, that has long been one of the weakest spots for persistent bears, and part of the reason he favors long-term holding over market timing.
He also wrote that while the S&P 500’s price-to-earnings ratio is now relatively elevated by historical standards, corporate profit momentum remains among the strongest he can remember. Past market behavior, he said, shows that all-time highs often lead to more all-time highs rather than an immediate reversal.