When markets grind higher and volatility collapses, most investors start to believe risk has gone away. They measure portfolios by how much short-term pain they have avoided, not by how well they will compound over the next decade. That is exactly the moment when serious risk accumulates quietly and pain shows up later. I’ve heard the phrase ‘buy the dip’ way too often recently.
That is where Michael Burry’s commentary fits in this environment. People fixate on his timing, as if predicting when prices will go down is the main skill. It is not. Timing is almost always unknowable. Markets stay irrational longer than anyone expects. Liquidity can overwhelm logic for years. But the setup he is talking about has merit because it is structural, not emotional.
When markets rise, most investors stop underwriting risk. They assume rising prices equal safety. That assumption makes the wrong things more expensive and the right things cheaper by default. Rising markets do not make businesses healthier; they make them appear healthier.
You can beat earnings expectations and still destroy value, and you can generate top-line growth and fail to create shareholder returns. Running a good P&L does not mean deploying capital well. Capital allocation becomes obvious in hindsight. That pattern has not changed, even if price charts look tidy.
Markets reward decisions, not stories. Currently, mechanical forces are driving prices more than business improvements. Passive flows, index rebalancing, and mandate-driven buying allow markets to rise without corresponding improvements in return on invested capital. That disconnect hides structural risk. Investors who focus on timing market peaks and troughs often miss the real source of future returns. Big moves in stock prices usually follow changes in capital allocation, not earnings beats. When management reassigns capital away from low-return uses into higher-return uses, that is where future returns begin. You can see earnings dictated by accounting changes. You cannot see capital discipline until it hits cash flows and balance sheets.
Part of what Burry is talking about is not valuation. It is capital inefficiency. Investors are wasting too much capital on low-return projects, dividend maintenance, acquisitions without return discipline, and buybacks executed at inflated prices. Rising markets tolerate these behaviors because the price disguises them. When liquidity tightens, those behaviors become obvious and painful. We are not there yet in price, but the structural tensions are already visible in cash deployment decisions. Markets do not break because earnings are bad. They break when capital is misallocated and liquidity is no longer there to mask it. The real risk today is that earnings are strong. The real risk is that capital allocation mistakes have become embedded in corporate strategy and will be revealed when conditions shift. This is why the ‘what next’ matters more than ‘when next.’ Reallocating capital into better opportunities is not timing. It is positioning. It is an exercise in judgment, not prediction.
