‘Big Short’ investor says Fed could reverse rate hikes in ‘bullwhip effect’

“Big Short” investor Michael Burry suggested Monday that the Federal Reserve could unexpectedly reverse course on its planned series of sharp interest rate hikes due to an economic phenomenon known as the “bullwhip effect.”

Burry, the head of Scion Capital Management, detailed his view in response to a CNN article on embattled big-box retailers such as Target that are faced with the prospect of paying customers to keep unwanted items due to a massive excess of product inventory.

“This supply glut at retail is the Bullwhip Effect. Google it,” Burry tweeted. “Worth understanding for your investing endeavors. Deflationary pulses from this- -> disinflation in CPI later this year –> Fed reverses itself on rates and QT –> Cycles.”

The “bullwhip effect” refers to a situation in which product demand forecasts do not align with actual sales, leading to massive volatility in inventory levels and other supply chain disruptions.  

In this case, Burry asserted that retailers like Target will have to lower prices to get rid of their excess products, thereby lowering inflation that has surged to its highest level in decades.  

Burry argued that the falling retail prices will lead to declines in the Consumer Price Index, a key inflation gauge that measures the cost of goods and services. Those declines could lead the Fed to hold back on further interest rate hikes, which are meant to address inflation by cooling demand.

Target, Walmart and Gap are among the major retailers that have recently warned of excessive inventory levels. Rather than pay to store returned items, CNN reported that some retailers are mulling whether to provide refunds and just let customers keep the goods.

The central bank hiked its benchmark interest rate by three-quarters of a percentage point earlier this month after the May CPI showed inflation at a higher-than-expected 8.6%. Fed Chair Jerome Powell has indicated that similar hikes will follow in the months ahead if inflation persists.

The Fed is also pursuing a policy of “quantitative tightening” by unloading its $9 trillion in balance sheet, which swelled during a pandemic-era bid to prop up the economy.

Burry shot to national fame after actor Christian Bale portrayed him in a fictionalized account of his bet against the subprime mortgage crisis during the Great Recession.

The hedge fund chief previously provided a bleak outlook at the state of the US economy in May, tweeting that it was “like watching a plane crash” as the stock market plunged.