Sorry for length....
I think his point is in multiple facets
One of the big problems with the derivatives in the mortgage backed securitization industry in the 2000s was how mortgages were chopped up into tranches, and then sold as a new group. And then the assets secured by those MBSs were chopped up and sold, and chopped up and sold, etc. The synthetic CDOs were each given an independent price/valuation that ultimately was not tied back to the risk based price of the original debt obligation.
How is that tied into this story about passive index funds? These funds are run by independent brokerage houses, and they basically are created and given their own share price. These prices are going up because the volume is really only going one way, with simple increases because people are throwing steady money into the stocks. This leads to the values of those individual funds having a higher P/E than is necessarily market. When these funds get created and cash flowed initially, they are buying the individual company stocks, which is a huge inflow of cash, raising the price of the stock on a steady basis. I think the question he is asking is, how much of Amazon's stock price/market cap is based upon a steady inflow of capital from these index funds? How much of Apple's? How much of Microsoft? And then how much of these funds' individual prices are inflated due to one way volumes? Given that dollars we are talking that are currently in retirement vehicles, it is likely significant enough to warrant discussion. And if they have inflated Pes in their own price based initially upon an inflated PE of the underlying companies due to one way volume, is there a hidden cost in the passive index funds of a few PE multiples? Likely so.
If the values of these index funds are inflated based upon multiple levels of P/E appreciation, then the stocks who are not part of these index funds are either appropriately valued or undervalued due to a lack of volume during what should have been an income growth run up. In that instance, I don't think Mr. Burry is talking about the bubble. I think he is stating there is value out there for traditional stock pickers and stock evaluators. You just need to look at the companies who have not been a part of this passive volume push. He mentions small Japanese tech firms. I think he is really looking at acquisition targets who get scooped up for big multiples. He wouldn't be buying these low volume stocks awaiting simple appreciation when values are normalized, not at what should be the end of a traditional bull market cycle before a bear. With Japan dumping liquidity onto the marketplace, these small cap companies are very likely to be gobbled up by bigger companies flush with cash. That's the play.