Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / How AI-Hype Sectors Spawn Unexpected Short Squeezes
Transcript
- Lucas: So Michael Burry just disclosed a short position in Caterpillar — his first ever — after the stock nearly doubled in what people are calling the ai driven rally of 2026. And I think this is one of those trades that tells you more about the market than about Caterpillar itself. Luna: Right — because Caterpillar isn't an AI company. It makes bulldozers and diesel engines. So why is it up in an AI rally? Lucas: Exactly. And honestly, if today's conversation was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. Listener support is what keeps this show ad-free and independent. Luna: Yeah, it's a small thing that makes a big difference for us. So back to Burry — what's the thesis here? Lucas: Burry is known for betting against things that look frothy. He shorted subprime mortgages before 2008, he shorted tech in 2021. And here he's looking at Caterpillar and seeing a stock that's priced for perfection — a price to earnings ratio that's expanded way faster than earnings have. Luna: The stock has nearly doubled, but how much has earnings actually grown? Lucas: Caterpillar's earnings per share have grown maybe mid-single digits annually over the last couple years. The stock has grown way more than that. So you've got multiple expansion — investors are paying more for each dollar of earnings because they're extrapolating ai related demand into Caterpillar's future. Luna: And what's the AI connection exactly? I mean, the bull case is that data centers need backup generators, and Caterpillar makes those. Plus mining equipment for copper and other metals used in AI infrastructure. Lucas: That's the narrative. And there's some truth to it — data center construction is booming. But the question is whether that demand is big enough to justify a doubling in the stock price. Burry's bet is that it's not. Luna: So he's shorting it. But short squeezes have burned a lot of people. Remember GameStop? Lucas: Right, and that's the risk. Caterpillar is a much bigger, more liquid stock — about $170 billion market cap. It's harder to squeeze. But the VIX is at 16.45 right now, down almost 12 percent in five days. That tells you the market is pretty complacent. When everyone's calm, that's often when shorts get squeezed. Luna: And the VVIX — the VIX of VIX — is at 86.87, down 9 percent. So tail risk premiums are cheap. That's actually a backdrop where contrarian bets can work. Lucas: Let's look at the numbers. Caterpillar's trailing P/E is around 22. Its five-year average is about 18. So it's not wildly expensive, but it's above average. The question is whether earnings can grow into that multiple. Luna: And earnings are tied to the global economy. GDP growth is at 2.1 percent annualised — solid but not booming. Infrastructure spending is up, but a lot of that is already priced in. Lucas: Exactly. So Burry is essentially saying the market is overestimating the AI tailwind for Caterpillar. He's betting on mean reversion. And he's not the only one — short interest has been creeping up. Luna: But here's the thing: small caps just had their best first half in 35 years. The Russell 2000 is up 13 percent. Some of that is rotation out of mega-cap tech into value. Caterpillar could benefit from that rotation even if the AI story fades. Lucas: That's a fair counterpoint. But Burry's timing is interesting — he disclosed this short right after the Fed stress test results, which showed banks are resilient. That might have given him confidence that a broader market selloff isn't imminent, so his short is purely stock-specific. Luna: So he's not macro bearish, he's micro bearish on Caterpillar. Lucas: Right. And look at the yield curve — the 10-year minus 2-year spread is now 30 basis points, up from 28. That steepening is usually good for industrials because it signals economic growth. So Burry is going against that tailwind. Luna: That's what makes it interesting. He's willing to bet against a stock that has macro tailwinds because he thinks the valuation has run too far. Lucas: And he's done this before. In 2021, he shorted Tesla when it was trading at extreme multiples. That trade didn't work out immediately — Tesla went higher — but eventually it corrected. Burry is patient. Luna: So what should a regular investor do with this information? I mean, most of us aren't shorting Caterpillar. Lucas: I think the lesson is about understanding what you own. If you hold Caterpillar, ask yourself: am I paying for AI growth that may not materialize? Or is this a core industrial holding that I'm comfortable with at 22 times earnings? Luna: And for people looking for ideas — does Burry's short signal that other old-economy stocks that have ridden the AI wave are overvalued? Lucas: Probably. I'd look at companies that supply data center components — electrical equipment makers, industrial real estate, even utilities. The AI hype has lifted a lot of boats. Not all of them will float. Luna: The VIX at 16 suggests the market isn't pricing in much risk. That could mean we're in for a surprise. Lucas: Historically, when the VIX is below 17 and the market is at all-time highs, the next three months have been choppy. Not necessarily a crash, but volatility picks up. Burry might be betting on that volatility to deliver his short. Luna: So the takeaway: Burry's short is a bet that AI hype has infected even Caterpillar, and that mean reversion is coming. Lucas: Exactly. Whether he's right depends on earnings — if Caterpillar delivers, he'll get squeezed. If not, he'll profit. Either way, it's a fascinating window into how this AI cycle is playing out across the entire market, not just tech stocks. Luna: And it's a reminder that even in a calm market — VIX at 16, indices at records — there are always pockets of overvaluation that attract contrarians. Lucas: That's the bear market podcast angle: we don't need a bear market to find shorts. We just need hype. And there's plenty of that to go around. Luna: Well said. Thanks Lucas.