Summary: Michael Burry, known for predicting the 2008 housing crisis, is shutting down his hedge fund Scion Capital due to concerns that the current market is detached from fundamentals, particularly in the AI sector. He highlights questionable accounting practices around tech depreciation, which may be inflating earnings and contributing to an AI bubble. Burry’s cautious stance reflects broader skepticism about the sustainability of valuations in AI-related companies.
Michael Burry’s Bold Move: Closing Scion Capital
Michael Burry, famously portrayed by Christian Bale in The Big Short, recently announced he is closing his hedge fund, Scion Capital. In a letter dated October 27, Burry informed investors that his assessment of securities’ value has been out of sync with the market for some time. This decision underscores his lack of trust in the current economic environment, which he believes is disconnected from underlying fundamentals.
Short Positions on Palantir and Nvidia
Shortly before this announcement, Burry revealed his short positions against Palantir, a defense tech and surveillance firm aligned with the Trump administration, and Nvidia, a leading chip manufacturer. On social media platform X, Burry shared that he has set a $50 target price for Palantir by 2027, despite the stock trading above $170 per share at the time.
The AI Bubble and Depreciation Concerns
Burry recently spoke out about what he sees as a bubble in the AI sector, a concern shared by others in the investment community. His unique perspective centers on how companies may be manipulating depreciation schedules for their chipsets—a practice he calls “one of the more common frauds of the modern era.” According to Burry, major tech companies like Oracle, Meta, and Google are overstating the useful life of their technology, claiming five to six years when it may realistically be closer to two to three years.
The Impact of Depreciation on Earnings
This accounting approach could significantly inflate reported earnings. Burry shared a chart suggesting that between 2026 and 2028, earnings could be overstated by $176 billion, with companies like Oracle and Meta potentially overstating earnings by more than 20%. Supporting this view, short seller Jim Chanos pointed to cloud-based GPU provider CoreWeave as an example where more accurate depreciation timelines reveal the company is barely profitable.
Skepticism and Responses from Industry Leaders
Short sellers often face skepticism regarding their motives. Palantir CEO Alex Karp criticized Burry’s short position, stating, “As far as I can tell, the two companies he’s shorting are the ones making all the money, which is super weird,” and dismissed the idea of shorting chip and ontology companies as “batshit crazy.”
Broader Questions About AI Companies’ Profitability
Beyond Burry’s concerns, others are questioning the profitability of AI firms. Source News reported that during a private call, investors asked OpenAI’s CFO, Sarah Friar, about slowing growth. Friar attributed part of this slowdown to reduced user engagement with ChatGPT following the implementation of stricter content restrictions. Whether such factors will ease market worries remains uncertain.