Compressed Spring: why an investor in The Big Short is expecting a collapse like never before seen

The U.S. stock market has reached a stage where each new "black swan" has increasingly devastating consequences, believes investor Michael Burry, known as the prototypical "Downgrade" character. For 34 years, stock prices have been rising in isolation from real corporate profits - a gap that has turned the market into a "compressed spring" that must sooner or later return to its original position, he writes in his Substack blog. Burry believes the next crash will be more powerful than last year's Bailout Day, and its effects will be longer-lasting.

In order to assess the scale of market crashes, Burry introduces the "shock index": the ratio of market losses over two days to GDP per capita (48 hours for Burry is a universal "ruler" of an acute crash, allowing to compare peak panics of different eras). "Shock Index" translates abstract capitalization into an understandable quantity: how much of the average American's annual income goes to zero in a moment of panic.

The investor calculates that "Emancipation Day" in 2025 (the simultaneous collapse of stocks, bonds, and the dollar) would wipe out the equivalent of about 22% of the average American's annual income in 48 hours. This is less than the Great Depression of 1929 (25.6%), but higher than the covid shock (20.6%). The main anomaly of the 2025 crash was that investors had nowhere to hide: defensive instruments were also losing value.

The investor cites IMF data for 2026, which confirms that bonds are no longer "insurance" and are now falling in sync with stocks. Burry attributes this to the fact that investors have stopped relying on the math of earnings and interest rates. Therefore, the stock price becomes hostage to subjective expectations. Once optimism is replaced by panic, a domino effect occurs that turns any market shock into a prolonged crash.

Burry cites the breakdown of the market's internal mechanisms as the cause of the painful collapses: active managers looking for the real value of companies were replaced by passive strategies.

This structure creates an illusion of stability: as long as the pension systems receive monthly deductions from salaries, the funds are obliged to allocate them to the purchase of shares included in the index. This forced inflow of money keeps quotations afloat, but behind the facade there is a vacuum - there are almost no people left on the market who are ready to buy assets consciously in moments of panic.

Burry writes that the resulting lacuna was filled by two forces:

Burry believes that it is they who turn local volatility into a systemic catastrophe: in moments of panic, large funds start dumping shares en masse to automatically close their losses. And private investors, who are used to simply holding the index, find themselves trapped: there are no more buyers in the market, and it is impossible to sell a huge volume of securities at the same time - the market is simply unable to absorb such a mass of bids without the price falling. This structural fragility makes the market hypersensitive to any external shock.

If the fragile market structure is a "powder keg," demographics will be the spark that undermines it, Burry says. Today, investors over the age of 70 control more than 30% of U.S. stocks (over $32 trillion). After age 73, they are required to withdraw those funds, thus turning a major source of demand in the market into a source of inevitable selloffs. Burry estimates that 2028 will be the tipping point: for the first time in three decades, retiree redemptions will exceed new contributions from the working population.

This is a game changer, says the investor: the "blind" money that used to buy out any drawdowns will now methodically push prices down. Such a demographic tide cannot be stopped by the Fed's printing press, which will make the future crisis exhaustingly long.

The second powerful factor of market support - buybacks - is now being undermined by the companies themselves. For years, this mechanism served as the main "crutch" of the U.S. market: by buying back their own shares, companies artificially reduced their number and pushed the price up. In 2022, the volume of buybacks exceeded $1 trillion, and in 2025 this record was broken, but now the resource for such support is exhausted.

The reason is what Burry calls "structural breakdown": the Magnificent Seven no longer want to support their quotes. All the free cachet is now being channeled into the race for AI leadership.

At the end of 2025, the buybacks of the biggest bigtechs have collapsed by 74%, Burry writes. Free cash flow is evaporating: Alphabet expects the figure to fall by 90%, and Amazon, according to various estimates, risks going negative by $17-28 billion.

Burry calls it a direct road to collapse: the market has lost its main insurance - the "price floor". According to Burry, without this defense mechanism, stocks will simply have nothing to cling to when they fall.

Burry doesn't try to guess a specific reason for the collapse - it could be anything from the realization that $5 trillion in investments in venture capital "unicorns" is worthless to a sudden geopolitical crisis. It is not the trigger that scares him, but the market's internal readiness for disaster.

As long as the majority continues to believe in illusions of a "perfect future" and market fairy tales, the accumulated tension is ready to recoil. In Burry's view, this will trigger a collapse more powerful and prolonged than anything investors have seen before.

Investors believe that the only way to endure will be a return to fundamental analysis and real cash flows. The biggest players are already turning to math. As examples, Burry cites Warren Buffett, who has amassed a record $373 billion in cash in his Berkshire Hathaway holding, and Gamestop CEO Ryan Cohen, who is looking for undervalued assets to buy.

This article was AI-translated and verified by a human editor