over 1 year ago • 2 mins
When Michael Burry speaks, investors listen. The hedge fund manager correctly predicted the 2008 subprime mortgage crisis, and subsequently gained fame as a central character in the film The Big Short. And now, he’s got everyone talking about a retail sector “bullwhip effect” that could cause the Federal Reserve to reverse course on its interest rate hikes.
Burry just tweeted a CNN story about a potential policy change among retailers that involves refunding dissatisfied customers without even asking for the products back. The idea is to avoid re-adding items to their already mounting inventories: stockpiles at retailers like Walmart and Target were up 26% last quarter on the same time last year, according to Bloomberg – hitting around $45 billion in total.
Burry thinks those bloated inventories are actually a good thing, arguing that they’ll prove “deflationary” – i.e. that they’ll ultimately cause consumer prices to fall. That’s partly because they’ll force retailers to slash prices to offload the goods. But more importantly, it’s because they could cause a bullwhip effect – a phenomenon in which small changes in demand at the retail level cause progressively bigger changes in demand further along the supply chain.
In this particular case, Burry is expecting retailers with oversized inventories to reduce their orders from wholesalers, which would cause wholesalers to reduce their orders from manufacturers, and manufacturers to reduce their orders from materials companies. That, ultimately, could drive down commodity prices. And since high commodity prices are such a massive factor in inflation, Burry thinks this effect could cause inflation to do a U-turn.
That would be huge: inflation is the whole reason the Fed is so gung-ho on interest rate hikes at the moment. So if Mike’s right, it should allow the central bank to pause or even reverse those rate hikes – a move that could finally give stocks and bonds a second wind.
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