28.06.2022 – Legendary investor Michael Burry just sounded the alarm with a meager tweet that packs a punch: The founder of hedge fund Scion Asset Management warned of the so-called “bullwhip effect” in the retail sector. Soon, he said, there will be a supply glut, which in turn will lead to falling consumer prices later in the year. Eventually, he said, the Federal Reserve will reverse the interest rate hike it just started and end quantitative tightening.
Falling prices – deflation and economic crash. Stock market and commodity market collapse. If you follow this view, you should take a closer look at copper from the short side. Because the red metal can be found almost everywhere and is therefore a fabulous early economic indicator at the beginning of the production chain. Copper is used in electrical engineering, construction, medicine, mechanical engineering, arts and crafts, utilities and communications for furniture and musical instruments. And, by the way, also in the brass of cartridge cases, which are in high demand right now. In the spring, copper was trading at an all-time high of over $10,000 per ton, since then it has gone downhill to well below the 50-day line.
And so to the finer points: The Bullwhip Effect – also known as the Whiplash Effect – means that at the beginning of the whip, there is only a small ripple at the fist of the whip holder as it swings. However, this expands with each lunge – and at the end of the whip, the oscillations are enormous until the crack at the tip.
Misinterpretation of demand
Applied to retail, this means, roughly speaking, that small fluctuations in demand build up over the course of the supply chain – and that the economy is currently assuming that demand is far too large because of inflation in supply chain management. And that it is ramping up production too much. This is reinforced by the effect that retailers rely on large purchase volumes to extract discounts from manufacturers. If a customer also suspects rising prices, he will build up stocks that have little to do with the demand situation. And at some point, oversupply will follow. Ergo, in the worst case, bankruptcy of supermarkets, insolvency of manufacturers, bursting loans, tottering banks, unemployment, recession.
The Big Short II
Michael Burry is not just anyone: Before 2008, he and a handful of like-minded people bet on the bursting of huge amounts of bad financial derivatives backed by worthless mortgages – and on the overturning of investment banks that had bought these assets. Burry was right. Because he had research done on who had actually taken out all those oh-so-safe mortgages – strippers, for example, or homeowners who rented to the unemployed. In the Lehman crash, Burry became a billionaire. The saga was adapted into a book and a film under the title “The Big Short.
Price crash ahead?
We are curious to see if history repeats itself. In recent weeks, the financial blog “ZeroHedge” has also repeatedly warned of a “deflationary tsunami,” a wave of discounting and collapsing prices. Inflation, he said, is not a good indicator because it remains high, primarily because of food and energy. Our conclusion: whether you invest in the stock market or commodities, you should keep this warning in mind. Bernstein Bank wishes you good luck!
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