The Big Short’s Michael Burry Is Warning About Inflation
The very first article I wrote for this website — just after Easter last year — was about inflation.
I wrote about various aspects of it again in July… twice in August… in September… in December… and one more time in January.
My Venture Society colleague Marin Katusa also wrote about it pretty frequently — in May, in July and again in September in a great piece on Modern Monetary Theory and the resulting inevitability of inflation.
I’ve got to be honest. While there have been a few folks out there writing about this topic, it’s mostly been pretty lonely out here on inflation island all this time.
But not anymore.
Because now, we’ve got company. And he’s kind of a big deal.
Source: Twitter.com/michaeljburry
That’s right, none other than Dr. Michael Burry himself — of The Big Short fame — went on an inflation Tweetstorm the other day.
In it, Burry compared our current situation here in the United States to 1920’s German hyperinflation, quoting several passages from the great 1974 Ronald Marcks/Jens Parsson book “Dying of Money: Lessons of the Great German and American Inflations.”
And the similarities are striking, particularly in the period just prior to the highly destructive hyperinflationary episode.
It began with a “Great Prosperity” in 1920-21, just after the end of World War I.
“Prices in Germany were steady, and both business and the stock market were booming. The exchange rate of the mark against the dollar and other currencies actually rose for a time, and the mark was momentarily the strongest currency in the world.”
That prosperity, much like ours now, belied a great divergence of economic outcomes for different socioeconomic classes.
“Side by side with the wealth were the pockets of poverty. Greater numbers of people remained on the outside of the easy money, looking in but not able to enter. The crime rate soared.”
“Accounts of the time tell of a progressive demoralization which crept over the common people, compounded of their weariness with the breakneck pace, to no visible purpose, and their fears from watching their own precarious positions slip while others grew so conspicuously rich.”
That ample, top-heavy wealth in turn gave rise to a speculative frenzy, very similar in nature to what happened last year with “zombie companies.”
“Almost any kind of business could make money. Business failures and bankruptcies became few. The boom suspended the normal processes of natural selection by which the nonessential and ineffective otherwise would have been culled out.”
“Speculation alone, while adding nothing to Germany’s wealth, became one of its largest activities. The fever to join in turning a quick mark infected nearly all classes. Everyone from the elevator operator up was playing the market.”
That speculative fever took its toll, with massive numbers of trades clogging their clearing houses with paperwork — almost exactly like the measures Robinhood and other brokers took to restrict buying activity in GameStop, thereby allowing the shares to settle on a t+2 basis.
“The volumes of turnover in securities on the Berlin Bourse became so high that the financial industry could not keep up with the paperwork…and the Bourse was obliged to close several days a week to work off the backlog.”
And amongst the ultimate results of all these knock-on effects was hyperinflation, and a massive devaluation of the German Mark.
“All the marks that existed in the world in the summer of 1922 were not worth enough, by November of 1923, to buy a single newspaper or a tram ticket. That was the spectacular part of the collapse, but most of the real loss in money wealth had been suffered much earlier.”
“Throughout these years the structure was quietly building itself up for the blow. Germany’s inflation cycle ran not for a year but for nine years, representing eight years of gestation and only one year of collapse.”
Dr. Burry then added the reminder that this book was, “Written in 1974 re: 1914-1923.”
And for the coup de grace, he implied that the proper analog to the current market is that our future inflation has been gestating for an 11-year period from 2010 through 2021.
Inflation and Interest Rates
The falloff in the market this morning was 100% inflation-related, as volatility in bonds (as measured by BOA/Merrill Lynch’s MOVE Index) indicates fears of rising interest rates.
Source: Bloomberg
And this tick upward in bond volatility is rooted in reality, as yields on longer-duration treasury bonds have been steadily creeping north since September.
Source: Stockcharts.com
But Federal Reserve Chair Jerome Powell’s dovish comments on inflation to lawmakers today managed to calm market participants, yields bounced off of their highs, and markets staged a blistering rally into the close.
I’m not sure how someone can deny inflation is a problem when commodities have blasted through the stratosphere like they have since Nov. 4 but that is absolutely what happened. Lumber and oil prices alone — up 94% and 66%, respectively over that time — should be a dead giveaway.
I mean, we’ve all got eyes… Look at the chart below.
Source: Bloomberg
Moreover, Powell simply saying that runaway inflation isn’t a problem now doesn’t mean that it can’t be soon.
When we look at volatility across asset classes, the VIX barely budged despite the selloff, and the MOVE Index (in orange) appears to be the only one trending upward, and it’s still not even at the highs we saw last September.
Source: Bloomberg
Remember, to see a broad market selloff, we must see volatility across everything – equities, treasuries, currencies, and bonds… And we’re just not seeing that.
Yet.
But when it happens, believe me… We will all know.
But in the meantime, all we can do is buy dips and sell rips.
And it’s time to sell the rip, as our plays on both copper — Ivanhoe Mines Ltd (OTC: IVPAF) — and cruise line reopening — Carnival Corp. (NYSE: CCL) — have moved up 30% and 44% since I talked about them a couple of weeks back.
I’ll take any profits I can get in a choppy, volatile market like this.
But if there’s one thing to really take away from these trades, it’s that the only way to beat the market during periods of high inflation… is to be long the things that are inflating.
All the best,
Matt Warder
