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Mr. Big Short Issues a Dire Warning About the Economy

In the current recent euphoria of the markets, Michael Burry must appear as a killjoy.

Moreover, he chose as “Cassandra B.C.” as a handle in the microblogging website Twitter. This suggests that it does not bother him to be often against the current of the general trend if in the end he ends up being right. 

The main financial indices closed on Aug. 12 for a fourth consecutive week in the green. The S&P 500, the benchmark index, rose 134.96 points, or 3.3% for the week. The Dow Jones was up 957.58 points, or 2.9%, while the Nasdaq gained 389.63 points, or 3.1%.

The reason for this euphoria is that investors are now convinced that the Federal Reserve will probably be less aggressive in its policy of raising rates to fight inflation, which is at its highest in 40 years.

U.S. inflation slowed notably last month, data from the Bureau of Labor Statistics indicated on Aug. 10, setting the possibility of a pause in Fed rate hikes.

Euphoria

The headline consumer price index for the month of July was estimated to have risen 8.5% from last year, down from the 9.1% pace recorded in June and firmly inside the Street consensus forecast of 8.7%.

On a monthly basis, inflation was flat the BLS said, compared to the June increase of 1.3% and a May reading of 1.1% and again fell below the Street forecast of a 0.2% acceleration.

Buoyed by these figures, investors prefer to ignore any negative signs such as comments made after the inflation figures by members of the Fed suggesting that their fight against rising prices was far from over.

Minneapolis Federal Reserve Bank President Neel Kashkari told the Aspen Ideas Conference on Aug. 10 hat the central bank is “far, far away from declaring victory”, and still sees the need of a Fed Funds rate approaching 4% by the end of the year.

Inflation has dominated discussions on the markets for several weeks. Many experts fear that an aggressive rate hike by the Fed is likely to cause a hard landing in the economy. Basically, a recession would be inevitable if the central bank continues to raise rates so strongly.

‘Winter Coming’

Burry warns against those who think the economy is probably out of danger. In a recent cryptic tweet, the financier explains that there is another fact which could augur future problems for the economy: households continue to spend as if nothing had happened. 

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The investor, whose bet against the housing market is portrayed in the 2015 movie “The Big Short”, believes that consumers’ growing indebtedness poses a serious risk to the economy. 

“Net consumer credit balances are rising at record rates as consumers choose violence rather than cut back on spending in the face of inflation,” the legendary investor posted on Twitter on Aug. 12, with a graph from Bloomberg showing that U.S. consumer borrowing increased by $40.2 billion in June from the prior month. This was the second-biggest increase ever, according to data from the Federal Reserve.

“Remember the savings glut problem? No more. COVID helicopter cash taught people to spend again, and it’s addictive. Winter coming,” Burry added. He has since deleted the tweet as he commonly does with all his posts.

Burry seems to be referring here to the stimulus checks received by a large number of Americans from the federal government to avoid a collapse of the economy when the covid-19 pandemic had paralyzed economic activity. 

He seems to suggest that households continue to spend money without looking, which also affects their savings. In doing so, Americans are putting themselves in a precarious financial situation while inflation remains a drag on the economy.

For some experts, stimulus checks contributed to the U.S. inflation.

“Winter coming” seems to be a reference to HBO series “Game of Thrones.” Characters used the phrase as a warning.

As often with Burry, it’s hard to know what he clearly means. But in July, he suggested that he foresees a credit crunch for consumers.

Credit- and debit-card spending, which account for more than 20% of total payments, gained 8% in July from a year earlier, while card spending per household climbed 5.3%, easing from a 5.7% ascent in June, according to a report on July consumer payments by Bank of America Institute, the bank’s internal think tank.

Consumer sentiment jumped sharply in August to 55.1, well ahead of the Street consensus of 52.5 and nearly four points higher than the July reading.

Burry also marked his difference with the majority of investors by warning that the current rebound of the Nasdaq index, which includes the majority of technology groups, does not mean that confidence has returned.

“Nasdaq now up 23% off its low. Congratulations, we now have the average bear market rally. Across 26 bear market rallies from 1929-1932 and 2000-2002, the average is 23%. After 2000, there were two 40%+ bear market rallies and one 50%+ rally before the market bottomed.”

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