Michael Burry of Scion Asset Management, who is popular for his profitable bets against the mid-2000s housing bubble, in a now deleted tweet pointed out factors that he believed would in the long run hike up inflation. He cited onshoring, blue collar shortages and a post-pandemic shake up that prompted a global supply chain restructuring as the main culprits.
The investor whose fame brought about the critically acclaimed movie ‘The Big Short’ attached a link to a Bloomberg article which highlighted the effects of the pandemic on suppliers. A surge in shipping costs, bottlenecks and shortages propelling an onshoring boom in the US.
In the second part of Burry’s tweet, he touches on the ‘Bullwhip Effect’, a supply chain phenomenon where small fluctuations in demand at the retail level can cause progressively larger fluctuations in demand at the wholesale, distributor, manufacturer and raw material supplier levels. This will eventually cause retailers to hold too much inventory because they anticipated a demand that did not materialize.
Retailers overwhelmed by massive amount of Inventory
Numerous US retailers have stores filled to the brim with inventory and in a bid to get rid of this mountain of unsold goods will slash prices. “When you see inventory builds, think two things,” He tweeted. “Just in Case’ supply chain management, and inflation.”
“Just in Case” supply chain management is when companies produce and stock more goods just in case more orders come in. Inflation has risen to levels that have not been this high in forty years. The effect this has on US consumers is devastating, one of the effects is that individuals are saving less. This trend will without a doubt weaken consumer demand, forcing retailers to cut down prices in a bid to clear out their inventory.
This is glaringly evident in the earnings reports from top companies like Walmart and Target. At the beginning of the pandemic, in an attempt to cope with the sudden boom in demand, suppliers were forced to increase their inventory. But a simultaneous disruption in the supply chain caused the temporary shutdown of numerous suppliers and this resulted in the cost of shipping goods going through the roof.
As the world attempted to return to a ‘new normal’, the rising rate of inflation forced consumers to once again change their habits and suppliers were left with more inventory than they knew what to do with.
The Cycle on Steroids
Currently, our economy is experiencing the ‘Bullwhip Effect’ on steroids. When supply goes up due to a perceived increase in demand which does not occur, businesses are stuck with large amounts of inventory. As such, there will be a price cut to sell off these excess goods and retailers will order less supply. Eventually the supply will run out and scarcity will occur, this will cause retailers to increase prices and order more supply. Bringing us right back to where we started, excess supply.
Burry believes that, contrary to what many people think, there would be a supply glut that will cause disinflationary forces and in the long run cause the inflation rate to inevitably fall.
