'Big Short' investor Michael Burry warns of a massive bubble and epic market crash

[BlueKelah]

What I noticed though, is that USD/SGD is creeping up. This is actually a sign of deflation (at least, relative to SGD).

Wonder what buddies' opinions are?

My opinion is not original, it is a mishmash of many different thoughts, but I think we have entered an "inverted liquidity trap". I think to understand what happened post GFC we have to go back to fundamental monetary theory. Since the GFC M2 money supply has increased by 150% while inflation has went up on average less than 2% annually. That's a huge disconnect. Everyone from Bernanke to Buffett have been scratching their heads about how you can have low inflation, huge government deficits and huge monetary expansion all at the same time.

The start of the answer might lie in money velocity. Money velocity is so important that even Hayek said it was advisable for the government to step in to keep it up during times of crisis. Before the GFC it was 2, so every US dollar on averaged was spent twice a year. Now its barely above 1. Money velocity is M2 money supply divided by GDP, so when your GDP is mostly stagnant like it has been for the US, money velocity is almost perfectly inversely proportional to the expansion of M2. In other words, it seems most of the new M2 money supply has been sitting idle. There's a lot of anecdotal and empirical evidence for this. Everyone knows of Berkshire's record cash pile, now sitting at 145.4 billion (a fifth of market cap), an incredible amount for a man who is so insistent on investing cash that he doesn't issue dividends. Jamie Dimon is hoarding cash at JP Morgan because he expects interest rates to rise. Excess bank reserves have grown thousands of fold pre GFC to now. There's so much money but no one is spending it.

Rates have been pushed down by quantitative easing. At the time of the GFC it was an unconventional but brilliant move. It simultaneously flatlined interest rates while expanding the money supply, theoretically boosting the economy by increasing the spread between an investment's return and the interest on loan to finance it while keeping banks stuffed full of cash to stave off any bank run. Bernanke, a student of the Great Depression, was adamant that credit had to be cheap and ample to prevent another. He was in that regard extremely successful. To a large extent it worked - for awhile. Banks build up cash. Companies refinanced and invested into lower projected return projects that could not before. But there is a limit to this. These all increase the production of goods and services, but not its demand (inflation). As disciplined capital managers, companies anticipate the demand for new factories and stores to see if their investment will make returns. If the demand is not there they won't do it. So there's also no demand for new capital in the form of loans. 

Now in theory the economy should rebalance between the two. There is a time value to money, a minimum rate which depositors/investors expect to make in return for investing their money. If the market offers a rate below this then people would rather spend their money instead, thus balancing the production and consumption of goods. And this would have happened - had the money not largely gone to two very kinds of entities. 

The first is billionaires and the growing wealth gap. As we learn form microeconomics, the utility of goods decreases the more of it you have. Billionaires have so much most goods have almost no utility to them. This is empirically supported, as people's net worth increase, so does their expenditure as a percentage of income and returns decrease. Likewise in America if you're in the bottom 50%, you spend as much as you earn and do not accumulate net worth. There has been tremendous asset price inflation and its indicators such as the CAPE Shiller P/E have went up tremendously. This pushes real returns down. But billionaires have almost no use for spending it so they put it into assets to accumulate more wealth. More accurately we can imagine that the money has gone disproportionately to wealthier people who disproportionately do not spend it. So something like every dollar to the top 5% sees 5 cents spent on consumption, while every dollar to the bottom 50% sees 95 cents on consumption. In between the middle classes spend less and less of every dollar on consumption. This problem is compounded by the stagnation of real wages in the USA's blue collar workers, which is a natural source of inflation. 

This theory is supported by how inflation has spiked temporarily after stimulus - but only if they had substantial money flows to lower to middle classes such as Trump's tax cuts and the Coronavirus stimulus package which included a flat few thousand per citizen. But things like Obama's stimulus worked to some extent, but only the payroll credits and other lower income focused stimulus which was a small part of it had an effect. But virtually all of QE went to banks, financial institutions and to a lesser extent fund government deficits (which probably has been the biggest consistent driver of inflation but still not enough). 

Second is the explosion of what can be called third party capital allocators, everything from funds to banks to publicly traded companies. These are people who get their capital from someone else but invest it professionally. These people's compensation are virtually all based on their AUM or profits, so they have zero incentive to return cash to investors to let them spend it even if returns are extremely low. They've been around for as long as capitalism has existed but as investors get more numerous, it becomes harder for them to work in concert to force management to change, and management gets less accountable while their AUM explodes.

A third possible factor is that the long and persistent rise in asset prices like the S&P 500 has caused more people to buy into them regardless of the increasingly low real return. Or as Lawrence Summers put it, it's getting increasingly dangerous as investors have had their pessimism beaten out of them by the decade long bull run.

This is a bit paradoxical because if stocks are returning so well why is there a build up of cash and decrease in investments? It's because the its an increase in prices of assets, not returns. Entities like Berkshire and banks who get real returns are hoarding cash. Speculators who look for price increases are throwing money into the market. Real returns are down, pushing up money demand and driving down money velocity for capital (because if investments have high returns, money ought to be circulating fast as people invest). But because of the growing wealth gap and third party capital allocators, all the M2 is circulated among assets and very little money is flowing for consumption. And there is so much money created there is enough to fill up banks an push up the whole stock market to ridiculous P/E ratios.

I call it an inverted liquidity trap because it has many similarities to a liquidity trap but some of its effects are inverted. There's extremely low interest rates, high money demand, high money supply and low inflation. But unlike a liquidity trap there is no shortage of demand for debt, or any other asset for that matter, because of the reasons above.

The reasons are systemic reasons and show no signs of changing. Because of that I think Powell is right when he says inflation pressures are transitory. If we get down to brass tacks, people need to spend to have inflation. As cynical as it is to say the poor still have nothing to spend while the rich are still refusing to spend.

As I always like to say, China and USA are trending towards Japan 2.0. After the epic Japanese crash in early 1990s their economy just been stagnant and not much inflation either no matter how much ABENOMICs pump it. 

Both USA and China are trending towards negative population growth as well which is always bad for any economy. So I expect something like whats happening in Japan and Europe at the moment. Just negative rates eventually. Of course Hyperinflation is happening in USA now as economic theory postulates so maybe no negative rate? but if they raise rates, asset bubbles will pop and cause bad recession maybe even triggering the next GFC, which FED cannot let happen. So like ECB they will just keep printing and devaluing the currency. Might have stagflation.

[corydorus]

Hyperinflation is Extreme. Suggest to lookup what it means before we say that. Countries that have that easily see 30% to 100% devaluation in their currency daily to weekly.

[Wildreamz]

Hyperinflation is Extreme. Suggest to lookup what it means before we say that. Countries that have that easily see 30% to 100% devaluation in their currency daily to weekly.

Indeed. In general, I think the words "Hyperinflation" and "Weimar" been thrown around too lightly by market skeptics. Including Michael Burry himself.

[weijian]

As I always like to say, China and USA are trending towards Japan 2.0. After the epic Japanese crash in early 1990s their economy just been stagnant and not much inflation either no matter how much ABENOMICs pump it. 

Both USA and China are trending towards negative population growth as well which is always bad for any economy. So I expect something like whats happening in Japan and Europe at the moment. Just negative rates eventually. Of course Hyperinflation is happening in USA now as economic theory postulates so maybe no negative rate? but if they raise rates, asset bubbles will pop and cause bad recession maybe even triggering the next GFC, which FED cannot let happen. So like ECB they will just keep printing and devaluing the currency. Might have stagflation.

The above bold statement is not exactly right. Based on the World Bank's estimates, there is a good tailwind for population growth in US. For China, projections are that it will peak in the coming 10-15years, and then start to decline.

   
   

https://databank.worldbank.org/source/po...rojections

[BlueKelah]

As I always like to say, China and USA are trending towards Japan 2.0. After the epic Japanese crash in early 1990s their economy just been stagnant and not much inflation either no matter how much ABENOMICs pump it. 

Both USA and China are trending towards negative population growth as well which is always bad for any economy. So I expect something like whats happening in Japan and Europe at the moment. Just negative rates eventually. Of course Hyperinflation is happening in USA now as economic theory postulates so maybe no negative rate? but if they raise rates, asset bubbles will pop and cause bad recession maybe even triggering the next GFC, which FED cannot let happen. So like ECB they will just keep printing and devaluing the currency. Might have stagflation.

The above bold statement is not exactly right. Based on the World Bank's estimates, there is a good tailwind for population growth in US. For China, projections are that it will peak in the coming 10-15years, and then start to decline.




https://databank.worldbank.org/source/po...rojections

Recently released Census Bureau population estimates show that from July 1, 2019 to July 1, 2020, the nation grew by just 0.35%. This is the lowest annual growth rate since at least 1900. (i would say thats prety much trending to zero)

yeah and you can say its covid but the year before only grew like ~0.5%. And now this year more covid and likely a big GFC/recession/Currency crisis in the making. And big inflation makes everything more expensive, especially having kids.

I would put my money on negative pop. growth for USA in the next 5-10 years if not sooner.

And yeah look at your worldbank chart
https://data.worldbank.org/indicator/SP....cations=CN
its almost touching zero liao. Thats why china gov panic and allow 3 kids now
https://www.bbc.com/news/world-asia-china-57303592
remember last time 1 kid then in 2016 2 kid policy, now can have 3 kids. very soon will be have as many as you want.
""But who wants to have three kids? Young people could have two kids at most. The fundamental issue is living costs are too high and life pressures are too huge.""

unfortunately for countries that become too developed, this is an evil of modern high pressured expensive society.

Even in Sg is a similar situation.

Luckily i have 2girls and 1boy before the wife said NO MORE!!!!

[Wildreamz]

I would put my money on negative pop. growth for USA in the next 5-10 years if not sooner.

Fortunately we do not need to rely on hunches, as we have qualified academics, with data-driven methodologies to project population growth rates:

https://www.census.gov/data/tables/2017/...ables.html

This is the latest I found, which projects population of the United States to continue growing through 2060, albeit at a slower pace than before.

Worldometer Live counter shows US population growth at 0.59% last year:
https://www.worldometers.info/world-popu...opulation/

Of course subjected to immigration policies and other factors. I guess pro-immigration Biden Administration win in 2020, would have changed the math here, again.

[BlueKelah]

I would put my money on negative pop. growth for USA in the next 5-10 years if not sooner.

Fortunately we do not need to rely on hunches, as we have qualified academics, with data-driven methodologies to project population growth rates:

https://www.census.gov/data/tables/2017/...ables.html

This is the latest I found, which projects population of the United States to continue growing through 2060, albeit at a slower pace than before.

Worldometer Live counter shows US population growth at 0.59% last year:
https://www.worldometers.info/world-popu...opulation/

Of course subjected to immigration policies and other factors. I guess pro-immigration Biden Administration win in 2020, would have changed the math here, again.

No matter what data you take, 

The trend is very obvious from near 1% during GFC a decade plus ago and dropping all the way down. your worldof meters link shows the graph very obvious. So lets say that statistic is correct, 0.59% growth, thats still pretty close to tipping into zero growth. What will such low growth do for the economy dependent on consumers? 

Also Covid is not over yet, we could see another spike in deaths this year and impactt on population growth with ever increasing inflation and an economy left on FED life suppot. Even in singapore, do you think we will have good population growth going ahead?

Japan 2.0 is coming to USA and China soon.

As I also like to say,  we'll see....

[donmihaihai]

https://populationmatters.org/population...4XEALw_wcB

If there is a bubble on world population, we should be at or close to the peak. we took more than 10,000 years from  the start of agriculture to reach 1B population just before 1850, and got the next 1B in about 100 years. Then the explosion of population, which is most likely why I am here. 

To keep growing, we need to shift constraints higher. The last 100 to 200 years was not the norm. New energy or now we call it old energy made it happened. 

US is a country of immigrants. If there was a bet and anyone who longed US population or GDP since 1790 will be crazy rich. You can't has this kind of growth without a pro-immigration government/country.

You need space, or land or some say good soil. Something that SG lack, but not US. If I am not wrong, out of the top countries with high population, US land ranked top.

[donmihaihai]

https://markets.businessinsider.com/curr...1030542360

* Michael Burry deleted his Twitter profile again after issuing a slew of dire warnings.
* The "Big Short" investor had warned of a huge market bubble and predicted a brutal crash.
* Burry rang the alarm on crypto, meme stocks, inflation, and the Fed in tweets over the past week.

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Will there be a big crash in the near future? Maybe, maybe not. I maintain, no one, not Michael Burry, Jeremy Grantham, Ray Dalio, Warren Buffett, or even Jerome Powell himself, knows the short-term future with absolute certainty.

Make your own decisions base on objective information, and be responsible for your own results.

Peace.

classic. 

Just like late 1990s, all bears are thrown out, some got out of jobs by the bulls.

[Wildreamz]

classic. 

Just like late 1990s, all bears are thrown out, some got out of jobs by the bulls.

I'm not anti-bear or anti-bull; just advocating making your own judgements and live with own results; not blindly follow any supposed authority (which often contradict one another and themselves anyway).

Peace.