[Editor’s note: “Legend Michael Burry Warns of ‘Disinflation’ and Soaring Growth Stocks” was previously published in June 2022. It has since been updated to include the most relevant information available.]
If there’s one person that every investor should listen to during a bear market, it’s Michael Burry. When the esteemed hedge fund manager of Big Short fame speaks, I’m keen to listen. He correctly predicted the subprime mortgage market meltdown in 2008, after all.
He’s a certified bear market genius. No one knows how to navigate turbulent markets better than him. And he issued a shocking warning to his 875,000 Twitter followers about the current bear market. He warned that if you don’t buy growth stocks now, you may miss a monster rally of epic proportions over the next six months!
That’s right. The bear market genius Burry himself is suddenly sounding a bullish tone.
So, what exactly did Burry say? How is it bullish for growth stocks? And is he right?
Let’s take a deeper look.
Burry basically said that the macroeconomic environment will do a complete 180 over the next six months.
Over the past 18 months, supply shortages have coupled with the unleashing of pent-up consumer demand and pandemic-juiced savings accounts. This created a situation of super-low supply and super-high demand. We simply had too many dollars chasing too few goods. And consequently, inflation soared.
But according to Burry, all those dynamics are now reversing course.
Retailers incorrectly forecasted that 2021’s pent-up consumer demand would persist into 2022. So, they over-ordered a bunch of products for those consumers to buy. That led to an over-ordering of supplies from manufacturers to make those products. And then that led to an over-ordering of raw resources from suppliers to make the supplies for those products.
This is the “bullwhip effect” Burry is referring to. Like a bullwhip, a slight change on one end of the supply chain leads to exponentially larger changes further along. Here, an increased demand forecast led to bulk overordering at the manufacturer and supplier levels.
The result is that even a small demand overestimation can create sizable supply gluts. The problem with the current situation, Burry says, is that every retailer overestimated demand. So, we have what amounts to a pretty big demand overestimation, and that’s leading to an unprecedentedly large supply glut.
Retailers are now rushing to clear those supply gluts. That means deep discounts. But it’ll happen against the backdrop of a consumer who is cutting back on discretionary spend due to recession fears. The result will be a round of deep price cuts on tons of items.
According to Burry, this will lead to disinflation in the back half of 2022. And this will in turn force the Fed to pause rate hikes and end quantitative tightening.
In short, the past 18 months have seen too many dollars chasing too few goods, breakaway inflation, and higher rates. But Burry says the next six months will see too few dollars chasing too many goods, disinflation, and lower rates.
Is It Time to Buy Growth Stocks?
Burry is calling for disinflation and a dovish Fed policy pivot over the next six months. If he’s right, growth stocks are set to soar.
When inflation is running hot, the Fed hikes rates to curtail economic demand to bring inflation down. When it’s hiking rates, Treasury yields tend to rise to account for higher risk-free borrowing rates.
And when Treasury yields rise, growth stocks fall.
This goes back to Valuation 101. A company’s value is equal to the net present value of all its future cash flows, plus its current book value. For growth stocks, the bulk of the valuation is tied up in the net present value of future cash flows. And that goes down when Treasury yields go up. Therefore, when Treasury yields rise, growth stock valuations are disproportionately impacted.
This has been very true over the past 16 months. When yields were mostly flat throughout 2021, growth stocks traded sideways. But when yields started marching higher in late 2021, stocks began falling. Throughout most of this year, yields have been soaring while growth stocks have been crashing.
If yields suddenly reverse course and start crashing, it reasons that growth stocks will start soaring.
If Burry is right, that’s exactly what will happen.
Disinflation will force the Fed to either pause rate hikes or even cut rates. And that will lead to a sharp decline in Treasury yields that will spark a huge rally in growth stocks.
Fortunately for growth stock bulls, we think Burry is 100% right.
Why Michael Burry Is Right
The bulk of evidence today suggests that the bear market king is right yet again: Disinflation is on the way.
Walmart. Target. Best Buy (BBY). Gap (GPS). American Eagle (AEO). Urban Outfitters (URBN). All those retail giants reported quarterly numbers in recent months. All said they have too much inventory and that they need to clear it.
On a conference call with analysts, Urban Outfitters CEO Richard Hayne said:
“There is a surplus of inventory… across the board at retail right now.”
This surplus is clear in the data. Retailers Inventories dropped well-below “trend” during 2020. But they started to rebuild in 2021, and now they’re back to their trendline in mid-2022. Yet consumer confidence has plunged to record lows, and gas prices have soared.
In other words, we’re rapidly shifting to a “too few dollars chasing too many goods” environment.
The result? Inflation will turn into disinflation. Rate hikes will become rate cuts. Spiking Treasury yields will plunge. And crashing growth stocks will soar.
The Final Word on Growth Stocks
When it comes to making money in bear markets, there is no one like Michael Burry. He is the king of turning bear markets into generational money-making opportunities.
And he’s called for disinflation and a dovish Fed policy pivot over the next six months. If he’s right — and we think he will be proven right yet again — then growth stocks are due for an enormous, face-melting rally into the end of the year.
For a moment, imagine the dream growth stock.
You’re probably thinking of a sub-$5 stock that practically no one has heard of. Maybe it’s run by some of the most talented people in the world that have developed a breakthrough, patented technology. And it has the potential to transform a multi-trillion-dollar industry.
Maybe the stock has more than 10X upside potential. Maybe the tech has already been validated by big-time customers in real-world use cases. And maybe the company even has a potential tie-in with a major firm, like Apple (AAPL).
Well, guess what? That stock exists…
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.