Always a Contrarian, Michael Burry Predicts a Bullwhip Effect in the Months to Come.
Some of the economic data in America point in his direction.
While everyone is saying everything and anything these days, talking about recession, stagflation, hyperinflation, or even the Big One, Michael Burry is once again standing out. Always a contrarian, the man who saw the subprime crisis coming before anyone else sees a different scenario than increased inflation and endless rate hikes by central banks in the months to come.
In a recent tweet, Michael Burry suggested that the Fed might not even raise interest rates anymore. For Burry, it's even possible that the Fed will decide to lower rates, against all odds.
According to Burry, this depends on the Bullwhip effect. This phenomenon indicates a fluctuation in the demand for orders within a supply chain. In this case, Burry talks about the deflationary consequences that can occur when retailers hold too much inventory.
Burry believes that merchandise prices may fall because retailers want to get rid of their excess inventory. That would lower inflation in part, allowing the Fed to reduce its interest rate policy. Then stores stock up heavily again and the phenomenon repeats itself. “Cycles,” Burry dryly notes in his tweet:
The deflationary consequences are already beginning to appear
There has been a supply problem in the markets for several months. In recent weeks, deflationary signals have slowly begun to emerge, according to some analysts. For example, the Bloomberg Commodity Index, a benchmark index that tracks the commodity market through futures contracts, has fallen at least 10% since June 9, 2022.
However, the benchmark has risen 43% since December 2021. So this is an observation to be weighed. Energy, metals, and agricultural products would all eventually see their prices fall.
So the deflationary consequences that Michael Burry talks about seem to be happening already. The June 2022 U.S. Consumer Price Index (CPI), to be announced on July 13, 2022, looks set to fall below the 8.6% recorded in May 2022. To believe otherwise, one would have to ignore a whole mountain of economic data.
Inflation is seen as a consequence of hoarding during the pandemic
If Michael Burry's analysis is correct, the rise in the inflation rate would not be stopped by the Fed's policy of tightening interest rates, but by a massive sell-off in assets. In the past, the Fed had to regularly push interest rates above the inflation rate to cool the money supply. This almost exclusively leads to a painful recession in the economy.
There may still be a temporary element in the current inflation that was a function of easing, government spending, and hoarding during the pandemic. Now that those variables are gone, inflation could fall on its own. And that could spark bullishness in the stock and bond markets.
The current bear market is based on the idea that the Fed has no choice but to raise interest rates and push the economy into recession to keep inflation in check.
Michael Burry's predictions are not always accurate, but they are worth considering
Michael Burry became famous for betting in 2005 that the U.S. housing market was a huge bubble that would collapse. Burry had been betting for years against overpriced mortgages in this housing market. In 2007, he was right when the market stagnated and eventually became the cause of the 2008 crisis.
So when Burry predicts the markets, it is often worth at least considering his opinion. The hedge fund manager calls himself Cassandra on Twitter, referring to a Trojan princess who predicted the fall of her city, but was not believed by anyone.
Her views on the supply and inflation problem are, in this case, shared by many experts. However, most analysts still expect a recession to be inevitable.
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