By Sean Kelly
It really is not hard to see inflation and even worse stagflation coming now, for anyone…
… for anyone willing to look at the evidence.
It really was not that hard to see the housing bubble before it popped, for anyone…
It really wasn’t hard to figure out that Bernie Madoff was running a scam, for anyone…
Michael Burry is famous for looking at the evidence. If you saw the 2015 movie The Big Short, you will remember Burry, the rock-drumming, hedge fund manager played by Christian Bale.
When disaster struck the subprime mortgage market, Burry’s clients made about $700 million from his fund. Burry made $100 million himself. Burry’s fund, Scion Asset Management, also participated in the GameStop saga, investing in the stock as early as 2018. He reportedly liquidated his position in late 2020, well before the Reddit-driven frenzy in January. Even so, Forbes report that Burry make $100 million on GameStop.
Burry has the traits of what is known in the investment world as a “quant,” someone who drills down into the number to see what is really going on. That is why he is now sounding the alarm about wicked price inflation headed our way.
“Prepare for inflation,” warns Burry, even citing the precedent of the Great German Inflation, the Weimar inflation of the 1920s.
Just days ago, Burry tweeted, “Pre-COVID it took $3 debt to create $1 GDP, and it is worse now.”
Burry has happened upon the crucial – indeed the existential – issue confronting our economy: As US debt explodes, what do we get for it?
Economists have a term for this problem. It is called “the marginal productivity of debt”—how many dollars of additional wealth are created with each additional dollar of debt?
We hope our friends and clients recall our discussion about it last year. If not, see our research report DEFICIT SPENDING, some of which follows:
“One can easily imagine a business that willingly borrows $1.00 to earn $1.10. But those that borrow $1.00 to earn $0.90 will not be around long. Since the measure of national wealth is Gross Domestic Product (a flawed metric to be sure, but commonly used for such purposes), the question is how much GDP growth do we get for ever-growing US debt?
“Is the debt growing for sound reasons, to drive growth, or is it used to fund present consumption, like a farmer who consumes his seed corn over the winter and has nothing to plant in the spring?
“We’re afraid the answer is that US debt is being used to fund present consumption.
“Gross federal debt passed GDP in 2012. Its growth has more or less continuously outpaced productivity ever since. Expect returns on the national debt to continue diminishing as the impact of COVID-19 unfolds.”
The evidence of inflation’s approach is abundant.
In a piece this week asking if the Federal Reserve’s is thinking about inflation properly (they are not!), the Wall Street Journal points to price inflation outside of the Consumer Price Index: “Tesla’s stock price is up more than 300% in the past year. Copper prices are up 56%. The S&P Case-Shiller Home price index is up 9.5%. Freight prices are up 215%; soybeans, 54%, lumber, 117%.”
As Washington’s fiscal stimulus and the Fed’s monetary stimulus continue apace, inflation’s wealth destroying approach can no longer be denied.
Accountant Harry Markopolos provided the SEC with evidence of Bernie Madoff’s fraud repeatedly, years before the $64 billion Ponzi scheme it blew up. No one listened. When Fed chairman Alan Greenspan was pointed to evidence of the growing housing bubble, he laughed. Now Michael Burry is sounding the alarm about inflation.
In fact, Burry topped off his tweetstorm with this: “People say I didn’t warn last time. I did, but no one listened. So I warn this time. And still, no one listens. But I will have proof I warned.”
Implicit in Burry’s warning is the importance of owning physical gold and silver in the crisis that is developing. Not precious metal stocks or ETFs. Real gold and silver.
It is important to understand why. Please contact us at once to learn more.