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Michael "Big Short" Burry's Latest Take on U.S. Inflation

Scion Asset Management founder Michael J. Burry has chimed in on the Fed's position regarding interest rates and monetary policy.

Scion Capital hedge fund founder Michael Burry, famous for predicting and profiting from the housing market crash in the mid-2000s, has returned to Twitter  (TWTR) - Get Twitter Inc. Report to comment on inflation and the Fed's interest rate increases and monetary policy.

Figure 1: Michael "Big Short" Burry's Latest Take on U.S. Inflation

Figure 1: Michael "Big Short" Burry's Latest Take on U.S. Inflation

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Burry Calls the "Bullwhip Effect"

Recently, Burry tweeted about a CNN report that said retailers prefer customers keep their unwanted items, rather than returning them:

According to Burry, this highlights a supply glut and is an example of the "Bullwhip Effect."

According to BlueCart, the Bullwhip Effect is a "phenomenon where demand changes at the end of a supply chain lead to inventory changes along the chain."

"You assume that demand is increasing and purchase 2,000 cans to ensure you don't run out. Seeing your increased purchase, your supplier may also increase the amount of tuna they stock, thus further amplifying the issue."

This demand distortion tends to lead to deflation. Retailers have too much inventory, and theoretically, this forces them to lower their prices.

Burry predicts that retail deflation will be reflected in Consumer Price Index (CPI) data later this year. In turn, that may lead to more dovish Fed interest rate and monetary policy measures.

For now, New York Fed President John Williams believes whether to raise interest rates by 50 or 75 basis points will be the "debate" at the Fed's next meeting in July.

Retailers Are Drowning in Inventory

If we are indeed seeing the Bullwhip Effect, as Burry predicts, it's due mainly to retailers dealing with loaded inventories on top of rising costs.

We've seen this lately in the disastrous earnings reports from the likes of Walmart  (WMT) - Get Walmart Inc. Report and Target  (TGT) - Get Target Corporation Report.

During the early innings of COVID, there was a boom in demand for a wide range of items. This forced retailers to increase their inventories to cope with the high demand.

But at the same time, several suppliers temporarily paused production — especially in China. That caused a major disruption in the supply chain. And the cost of shipping goods skyrocketed.

As life returned to "normal" in late 2021, rising inflation changed consumer habits again. And this is leaving retailers with huge inventories that will force them to sell goods at lower margins.

This should force a general price reduction — generating a deflationary effect — as we finally move toward a supply/demand balance in the upcoming months.

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