Michael Burry, the investor who made his name predicting the 2008 housing collapse in "The Big Short," has a new warning: the Federal Reserve's decision to restart Treasury bill purchases isn't a sign of strength. It's a red flag.

A Banking System on Life Support

Burry posted on X this week, citing a Financial Times analysis about the Fed's upcoming "reserve management purchases" — essentially a plan to buy $35 billion to $45 billion worth of Treasury bills each month starting in January.

The move marks the end of quantitative tightening, which saw the Fed shed about $2.4 trillion in assets since 2022. But Burry sees something troubling in the pivot.

"I would add that if the US Banking system can't function without $3+ trillion in reserves/life support from the Fed, that is not a sign of strength but a sign of fragility," he wrote.

The comparison is stark. Banks needed only around $2.2 trillion in reserves before the 2023 banking turmoil. Back in 2007? Just $45 billion.

"So I'd say US Banks are getting weaker way too fast," Burry added.

Convenient Timing Between Fed and Treasury

Burry also raised eyebrows at the coordination between the Fed and Treasury. The Treasury has been issuing more short-term bills lately to avoid pushing longer-term yields higher. And now the Fed plans to buy those exact same short-term bills.

"Awfully convenient," Burry noted.

He suggested the Fed has fallen into a pattern of expanding its balance sheet after every crisis to prevent funding stress in the banking system. That dynamic, he argues, helps explain why stock markets keep climbing despite underlying fragility.

"The practical limit of this might be full nationalization of the US bond market – the Fed owns all $40 trillion US debt. So party on, I guess," he wrote.

Why the Fed Is Acting Now

The Federal Reserve formally ended quantitative tightening earlier this month as signs of strain emerged in funding markets. The $12 trillion repo market has shown increasing volatility, with short-term repo rates repeatedly breaking above the Fed's target range.

Economists at Evercore ISI, Bank of America and Goldman Sachs all expect the Fed to launch these reserve management purchases to rebuild a buffer and stabilize overnight rates.

Markets Rally Despite the Warning

Meanwhile, the Fed's third consecutive interest-rate cut on Wednesday lifted market sentiment. The iShares Russell 2000 ETF (IWM) gained 1.36%, while the Dow Jones rose 1.05%, the S&P 500 added 0.67%, and the Nasdaq 100 advanced 0.42%.

High-beta stocks linked to clean energy, crypto mining and space technology saw particularly strong gains.

So the market's partying for now. Burry's just wondering how long the Fed can keep the music playing.