'Big Short' investor Michael Burry says 'prepare for inflation'(markets.businessinsider.com)
markets.businessinsider.com
'Big Short' investor Michael Burry says 'prepare for inflation'
https://markets.businessinsider.com/currencies/news/big-short-michael-burry-warns-inflation-bitcoin-gold-hedge-risk-2021-2-1030102452
45 comments
True. Feels like the concept of looking for inflation by watching the price of milk and bread makes no sense when the supply/demand curve is hiding the fact that we have an extreme overproduction of both ready to go, but kept from the market in order to avoid harming the market. On the other hand everyone is putting every last excess dollar they have into the stock market because banks can’t offer interest, so prices are exploding without any grip on reality.
> blood-bath that will ensue if rates were increased to a reasonable level.
Any reason to think that'll happen?
Won't assets inflation just stay and maybe level off.. my point is: nobody is going to pull money out of stocks to buy bread and milk.
Isn't stonks the best thing to hold, if we have inflation.
Any reason to think that'll happen?
Won't assets inflation just stay and maybe level off.. my point is: nobody is going to pull money out of stocks to buy bread and milk.
Isn't stonks the best thing to hold, if we have inflation.
It's a complicated relationship, but yes stocks generally perform well in inflationary environments, certainly better than bonds which unequivocally get crushed. However, often what happens along with rate increases is tighter lending standards, increased borrowing costs, less ability to refinance at attractive rates, etc. It's also more difficult to raise equity when investors have reasonable alternatives in other asset classes. Suddenly investors start caring about tired and old things like "valuation" again, and "price to eyeballs" or "tweets per minute" matter less.
For companies that have been riding the wave of free money in perpetuity, that's a bitter pill to swallow - when it's time to refinance they aren't prepared to pay the new bill. More dangerously, they simply may not be able to refinance at all if credit markets dry up (2008), and that is when it gets really ugly.
Stock prices are as high as they are right now because there are no reasonable alternatives. It's the "least bad" option.
For companies that have been riding the wave of free money in perpetuity, that's a bitter pill to swallow - when it's time to refinance they aren't prepared to pay the new bill. More dangerously, they simply may not be able to refinance at all if credit markets dry up (2008), and that is when it gets really ugly.
Stock prices are as high as they are right now because there are no reasonable alternatives. It's the "least bad" option.
So as long as the fed can increase money supply, the dance continues -- and holding stonks is fine.
Once the dance stops, which might be a while... Then you'll want to be holding assets of actual value.
What happens to inflation when money supply dries out?
Once the dance stops, which might be a while... Then you'll want to be holding assets of actual value.
What happens to inflation when money supply dries out?
I thought interest rates and rate of inflation have an inverse relationship.
nominal interest = real interest + inflation
Does anyone else feel like inflation is under-reported on a personal level?
After barber shops opened I was surprised my barber increased his prices from $25 -> $40. I poked my head in a few other barber shops and they've had similar price increases. I think restaurants also increased their prices. I remember restaurants where the prices were $14-17 for most dishes now charge ~$18-22
Of course this is purely anecdotal.
After barber shops opened I was surprised my barber increased his prices from $25 -> $40. I poked my head in a few other barber shops and they've had similar price increases. I think restaurants also increased their prices. I remember restaurants where the prices were $14-17 for most dishes now charge ~$18-22
Of course this is purely anecdotal.
Barber shops and restaurants are a fairly small part of what people spend money on (especially with COVID) and have seen a big drop in unit sales across which to spread fixed costs. So, inflation there is higher than general inflation.
Inflation across different sectors varies a lot; the overall level is a aggregate but not one around which the sector-specific numbers cluster tightly.
https://www.bls.gov/news.release/archives/cpi_02102021.htm
Inflation across different sectors varies a lot; the overall level is a aggregate but not one around which the sector-specific numbers cluster tightly.
https://www.bls.gov/news.release/archives/cpi_02102021.htm
Personally, I haven't noticed in the price of goods. I wouldn't be surprised if services increased their price since we're still in the middle of a pandemic. I imagine the flow of customers are down (I love restaurants but don't have any immediate interest in going to that or a barber shop) and the people going are more motivated than the average customer hence willing to pay more. I also think a price increase might be done because of sympathies knowing those kinds of businesses are struggling.
Also housing, healthcare, and college tuition.
> I think we are experiencing extreme inflation, just not in CPI goods, but rather capital assets
Assets don't provide direct utility, asset price inflation isn't inflation as that term is understood without modification, the same reason that producer price inflation and other inflation outside of consumer goods and services is. It's definitely a thing that occurs, but it doesn't have the same effects and trying to conflate them is just equivocation.
> Just look at the IPO landscape,
The cycles in the IPO landscape and stock market trends for fairly early-stage but post-IPO firms probably relates more to waves of enthusiasm about promising new immature sectors (and the erosion of those enthusiasms) than monetary policy; the dotcom boom had all the same things you say about the current time, despite much tighter monetary policy with Fed funds rates in the 5% range rather than hovering around 0%.
Assets don't provide direct utility, asset price inflation isn't inflation as that term is understood without modification, the same reason that producer price inflation and other inflation outside of consumer goods and services is. It's definitely a thing that occurs, but it doesn't have the same effects and trying to conflate them is just equivocation.
> Just look at the IPO landscape,
The cycles in the IPO landscape and stock market trends for fairly early-stage but post-IPO firms probably relates more to waves of enthusiasm about promising new immature sectors (and the erosion of those enthusiasms) than monetary policy; the dotcom boom had all the same things you say about the current time, despite much tighter monetary policy with Fed funds rates in the 5% range rather than hovering around 0%.
In my family, we see it in our food bills. Due to COVID, most other expenses are down, as we drive less, and don't go out to our normal activities (everything from coffee, to restaurants, movies, even just stopping in a corner store on the drive home). However, our food bills are almost double what they were a few years ago. The worst part is that packages of standard food items keep getting smaller which hides this effect in some of the inflation indices - just look at the weight of a package of cookies, or the cost of a pound of beef. But, hey, at least the increase in housing prices is hidden by ridiculously low interest rates.
> we see it in our food bills
I saw this too but ppl point me to govt figures for inflation and its never matches what i experience personally.
I saw this too but ppl point me to govt figures for inflation and its never matches what i experience personally.
My government is pretty expert at changing the method to calculate official inflation figures to make them look lower. Sometimes we include housing, sometimes not. Sometimes we include loan interest, sometimes not... Etc.
They are also expert at issuing provisional figures that are usually revised upwards retrospectively many years later.
They are also expert at issuing provisional figures that are usually revised upwards retrospectively many years later.
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News articles about cryptic, now-deleted tweets are not a great way to discuss these issues. It seems the media wants inflation and stocks and Bitcoin to be the new attention-grabbing topic now that the election is over and COVID is trending downward due to vaccine availability.
Inflation has entered the public zeitgeist in a weird way: Too many people are convinced that inflation is a binary on/off switch, rather than a range of values. Too many people have also been led to believe that Bitcoin is the only way to escape inflation, when really any asset will rise with inflation (by definition).
Inflation has entered the public zeitgeist in a weird way: Too many people are convinced that inflation is a binary on/off switch, rather than a range of values. Too many people have also been led to believe that Bitcoin is the only way to escape inflation, when really any asset will rise with inflation (by definition).
In some ways though inflation is on/off. There have been a number of events in US history where inflation went from “ off” (sub 5%) to “on” (>10%). No one is worried inflation will rise to 2% they’re worried it’ll rise to 20% (or as BTC holders think - 2,000,000%)
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He posts then deletes every one of his tweets, just what he does.
> Too many people are convinced
Oh? How do you know? I think you are convinced that other people are convinced which is different.
It may sound like I'm being obnoxious but I only attempt to hint that it's hard to believe in a 100% natural 'public zeitgeist' anymore.
Oh? How do you know? I think you are convinced that other people are convinced which is different.
It may sound like I'm being obnoxious but I only attempt to hint that it's hard to believe in a 100% natural 'public zeitgeist' anymore.
The Fed wants inflation. They've been trying to create it for awhile. Just this year they announced broadening the window over which they calc the 2% target. They will let inflation run for some time, if it comes.
What if we stopped measuring inflation? Can't help but think inflation causes more inflation and it's just used as a lazy excuse to raise the price of goods.
Why have train ticket prices gone up? Inflation. Why have the debt repayments gone up? Inflation.
Why have train ticket prices gone up? Inflation. Why have the debt repayments gone up? Inflation.
Even if we stopped measuring it, it would still exist and so there’s no benefit to not measuring and in fact it would be worse as you would have less data to make reasoned and informed solutions to economic problems.
Can’t be right every time
Would you bet against him?
Absolutely. If you don't understand the mechanisms that create inflation and are still clinging to long discredited worries about the "money supply", then I'll bet against any opinion of yours on inflation. I'll win that bet much more often than not.
I realized some more information would be needed for people genuinely curious about the relationships between monetary aggregates and inflation. A good summary is this essay, by the Federal Reserve:
https://www.federalreserve.gov/faqs/money_12845.htm
Basically, in the beggining the Fed was charged with keeping the money supply from growing too quickly, but it found that
1) it was unable to control the size of the monetary aggregates because these are determined by the lending, repayment, and asset allocations of the private sector. All the central bank could do is encourage various allocations by adjusting the interest rate. For example when rates are low, there is not much point in keeping your money in bonds or savings accounts, so a greater proportion is kept in demand accounts as the extra flexibility outweighs the pittance in interest you'll earn.
2) the size of the money supply didn't have much to do with inflation anyway.
By the 90s, they stopped trying to do this and they even stopped tracking some of the aggregates, as they were just irrelevant to managing inflation.
Inflation is managed by interest rates and the money supply is endogenous, created or destroyed by the financial sector in response to consumer tastes so all the federal government can do is try to incentivize those tastes by adjusting interest rates.
If people want to keep their money in bonds, they shift their assets to reduce deposit claims and increase bond claims. The result of this asset re-allocation is that any excess is pushed back onto the financial system and sits idle as excess reserves in banks, not creating any inflation, not "chasing goods", or causing any trouble for anyone except a small number of people who read the statistics about excess reserves and start worrying that the excess reserves will make a run for it, break out of the banks, and start bidding up the prices of goods and services.
I can understand why a reporter would have this view, but really we should see things a bit more clearly. People spend more when their wages go up so they can afford to buy more, or when interest rates fall to encourage them to borrow to buy durable goods because the financing costs are cheaper. They don't spend more as a result of whether Citibank has 1 trillion or 4 trillion in excess reserves. That is completely irrelevant to anyone's spending decision, to any firm's investment or production plans, and thus to inflation.
https://www.federalreserve.gov/faqs/money_12845.htm
Basically, in the beggining the Fed was charged with keeping the money supply from growing too quickly, but it found that
1) it was unable to control the size of the monetary aggregates because these are determined by the lending, repayment, and asset allocations of the private sector. All the central bank could do is encourage various allocations by adjusting the interest rate. For example when rates are low, there is not much point in keeping your money in bonds or savings accounts, so a greater proportion is kept in demand accounts as the extra flexibility outweighs the pittance in interest you'll earn.
2) the size of the money supply didn't have much to do with inflation anyway.
By the 90s, they stopped trying to do this and they even stopped tracking some of the aggregates, as they were just irrelevant to managing inflation.
Inflation is managed by interest rates and the money supply is endogenous, created or destroyed by the financial sector in response to consumer tastes so all the federal government can do is try to incentivize those tastes by adjusting interest rates.
If people want to keep their money in bonds, they shift their assets to reduce deposit claims and increase bond claims. The result of this asset re-allocation is that any excess is pushed back onto the financial system and sits idle as excess reserves in banks, not creating any inflation, not "chasing goods", or causing any trouble for anyone except a small number of people who read the statistics about excess reserves and start worrying that the excess reserves will make a run for it, break out of the banks, and start bidding up the prices of goods and services.
I can understand why a reporter would have this view, but really we should see things a bit more clearly. People spend more when their wages go up so they can afford to buy more, or when interest rates fall to encourage them to borrow to buy durable goods because the financing costs are cheaper. They don't spend more as a result of whether Citibank has 1 trillion or 4 trillion in excess reserves. That is completely irrelevant to anyone's spending decision, to any firm's investment or production plans, and thus to inflation.
He’s predicting Tesla share price dropping 90% this year.
Not going to argue its price is based on sound fundamentals, but yes, I’m currently betting against him.
Not going to argue its price is based on sound fundamentals, but yes, I’m currently betting against him.
I think what he actually said was that if the price dropped 90%, there would be no broader economic fallout, all else constant.
He's publicly short TSLA
What's your point? He can be short without betting on a 90% drop, my reply was strictly pointing out that his claim wasn't necessarily that a drop of that magnitude would happen, but if it did that the economic fallout on the rest of the system would be nil.
Is he wrong?
On inflation, absolutely. Nothing has changed since 2008 when people first brought up inflation
One thing has changed, and that is the amount of household debt.
There is a class of bubble and related collapse that are driven primarily by debt fueled purchases. When debt bubbles collapse, stimulus doesn't have the intended effect because consumers use the stimulus funds to deleverage. This is what happened in 2008, and recoveries from these types of collapses tend to be much more sluggish. When you have consumers paying their mortgages down instead of spending that money on goods/services, inflation is not a concern and the money leaves the system as debts are paid down. There's much less debt this time. I'm not saying there will be massive inflation, but I'm definitely more concerned than I was 13 years ago.
Debt deflation is a known phenomena since 1933 when Irving Fisher published: "The Debt-Deflation Theory of Great Depressions".
There is a class of bubble and related collapse that are driven primarily by debt fueled purchases. When debt bubbles collapse, stimulus doesn't have the intended effect because consumers use the stimulus funds to deleverage. This is what happened in 2008, and recoveries from these types of collapses tend to be much more sluggish. When you have consumers paying their mortgages down instead of spending that money on goods/services, inflation is not a concern and the money leaves the system as debts are paid down. There's much less debt this time. I'm not saying there will be massive inflation, but I'm definitely more concerned than I was 13 years ago.
Debt deflation is a known phenomena since 1933 when Irving Fisher published: "The Debt-Deflation Theory of Great Depressions".
I was reading his tweets and the point that it takes 3 debt dollars to create 1 dollar of value really did resonate with me. Wish I had access to analysis behind it though. And seriously, nothing has changed since 2008? We didn’t print a load of new money for one reason or another?
Yes, a lot of money printed since 2008 and yields at record lows, inflation not in sight.
How do you bet on inflation?
Hold stocks/stonks? Gold?
Hold stocks/stonks? Gold?
TIPS (inflation-protected treasuries) are the purest bet on inflation.
TIPs adjusted by cpi determined by gov. Better off holding real assets. For retail, a large mortgage is a fantastic bet on inflation. For the more risk-loving, long gamma on any vehicles tracking real assets has really good risk/reward in a high inflation market.
I wouldn't, but I wouldn't bet with him either. I think some people (like myself) have the personality where they won't make a bet if there's too much uncertainty.
Yes, he's been wrong about many of his positions. I'll admit he's a damn good investor but he isn't right 100% of the time.
Look into how his TLRD bet went recently.
I think we are experiencing extreme inflation, just not in CPI goods, but rather capital assets. Stocks, bonds, real-estate, all are completely disconnected from any reality right now... traditional valuation is irrelevant and we are now trading purely on sentiment, ala meme-stonks.
Just look at the IPO landscape, and the ridiculous market caps of companies who not only have never had positive net income, but in fact have an increasing loss every year! They can continue doing this because the capital markets basically throw free money at them, it's easy to raise debt at low rates and issue additional shares if needed.
As they say "don't fight the fed", and timing the market is impossible, but I can't even begin to fathom the blood-bath that will ensue if rates were increased to a reasonable level.