Michael Burry Sounds Fed Warning. What Is the Bullwhip Effect?

  • Michael Burry recently retweeted an article with the message that investors should be leery about the bullwhip effect in the consumer retail market.
  • A bullwhip effect could impose severe consequences because of the new normal.
  • Burry also warned that problems in retail could ultimately translate to the Federal Reserve reversing course on its hawkish monetary policy.
Michael Burry - Michael Burry Sounds Fed Warning. What Is the Bullwhip Effect?

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No stranger to controversy or publicly broadcasting contrarian opinions, Michael Burry, the founder of Scion Asset Management and one of the main subjects of “The Big Short,” recently made waves on social media. Retweeting a CNN article that detailed the troubles of major retailers in the U.S., the hedge-fund manager warned investors about the bullwhip effect.

He wasn’t done. Urging onlookers to research the supply chain phenomenon, Michael Burry then took aim at the Federal Reserve. Casting aside contemporary concerns about soaring inflation, the famous contrarian investor argued that deflationary pulses were at play. Doubling down, he suggested that economists will see disinflation in the consumer price index (CPI). Then, that will ultimately lead to the Fed reversing itself regarding rising interest rates.

How can one article about Target (NYSE:TGT) incentivizing its customers to hold onto their unwanted products inspire such a paradigm shift in monetary policy? It turns out the hedge-fund manager knows a thing or two.

What Is the Bullwhip Effect?

A disruptive event in commercial operations, the bullwhip effect describes the consequences of mistaken demand amplification from the retail level up to the point of manufacturing under a supply chain network. The name derives from a concept in physics, where comparatively small movements of a person cracking a whip extends out to big motions at the tail end of a whip.

Under a business context, if a retailer anticipates greater product demand based on immediate sales data, the company’s procurement team will relay requests for additional inventory to the distributor. In turn, the distributor will communicate the demand spike to the product manufacturer. Everybody in the supply chain benefits. That is, unless the forecast is wrong.

What Michael Burry is so worked up about is that for myriad big-box retailers, their forecasts were dead wrong. Therefore, it’s only a matter of time before affected companies take action. This could mean consequences like mass layoffs.

Michael Burry and the Fed

Of course, the next question is, what does the bullwhip effect have to do with the Fed reversing its policy on interest rates? The short answer is: everything.

Should retailers start distributing pink slips because they were fooled by retail revenge (or the pandemic-fueled pent-up demand), the net impact to the economy would be deflationary. There would be fewer people with less money to spend.

While Michael Burry initially sounded unreasonably contrarian with his tweet, the reality is that he’s merely looking at hard data. According to the Federal Reserve Bank of St. Louis, money velocity — or the rate at which each unit of currency circulates throughout the economy — has slipped to near all-time lows.

Therefore, it’s more than possible that the Fed could become dovish to stave off a depression.

Tread Carefully

It’s important to conduct your own research before following anyone’s advice, even if it is the great Michael Burry. For one thing, supply chain normalization could roundly cure inflation. Moreover, the Fed is committed to attacking inflation at almost any cost, which may hurt the disinflation argument.

Still, Burry’s been right on more than one occasion. Therefore, it’s worth keeping his latest retweet in consideration.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.


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