It seems Burry was right, timely, causal, on the small cap value opportunity. I think he's probably right that there will be more flash crashes and the like in the future due to index etfs; maybe a really nasty one to shake loose some of the money.
One thing I would like to ask him or others of similar talent: "How could securities lending by index funds blow up?" It is purported to be risk-free lending by many but I've never known such a thing. I just wonder as more marginal/desperate players get into offering "free" index funds and try and make up the profits on securities lending, what risks (if any) lurk?
Humble contribution: I disagree with Mr. Burry, at least on the extent of securities lending risk versus systemic risk as compared to CDOs in the years 2000's.
The CDO issue was based on a significant growth of securities, backed by real estate collateral and resting on the assumption that the real estate price rise would continue to shift from fundamentals and that, if there would be price declines, it would be mild, would happen in pockets and not in a correlated way. Evaluating this using a solvency to liquidity spectrum, along the value chain, there was a clear problem with liquidity and solvency of home owners and that resulted in questioning the solvency of financial institutions which were highly leveraged and dependent on wholesale short term funding which was mismatched with price discovery of the underlying collateralized asset. A side effect of this was the relative questioning of the solvency of money market funds, which broke the buck, but this was mainly a liquidity issue, was recognized as such and dealt with rapidly with liquidity measures.
I think the securities lending issue with ETFs, if it comes to materialize in a declining environment, would correspond to, essentially, a liquidity issue that may require central money assistance. Securities lending has grown relatively little in the last few years and, even if the collateralized assets vary and may raise questions in certain environments, this, in itself, would not result in a systemic and long lasting issue. Also a lot of the passive inflows have occurred at the expense of 'actively' managed mutual funds, a large part of which tend to follow the crowd and their respective benchmarks. So, the active to passive mindset has happened only to a degree and not as a paradigm shift. Market declines tend to be more concentrated and steeper than market rises and the new relatively passive era has not been tested and the securities lending issue may accentuate underlying trends but I think it is not a systemic issue in itself.
Interesting times: with increased securities lending activity, it is possible that ETFs carrying negative fees will become the norm.
Caveat: Perhaps Mr. Burry has noticed an increasing and inadequate level of securities lending in some areas and perhaps he has detected gradually deteriorating behavior with the management of the 102-105% collateralized assets.
A 2018 regulatory report has some data on this (pages 45-46 of the underlying document)
https://home.treasury.gov/system/files/261/FSOC2018AnnualReport.pdf?46
