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

[specuvestor]

Actually the failure of Neo-monetarism since Greenspan and the success of Neo-Keynesian bail outs gave credence to the idea of Modern Monetary Theory that increasing local debt is not an issue as the Central Bank is there to monetise it

The 2 forces of productivity gains and imported deflation from China depressed inflationary forces from monetary loosening that continued to COVID-19 until supply chain issue and stimulus that’s withdrawn too late is panicking the Fed

If the Fed had started to QT back in 2H21 instead of saying inflation is transient and started raising rates with BoE in Dec 2021 the scenarios would have been very different.

https://www.valuebuddies.com/thread-5133...#pid165437

In my view, its quite simple to tame inflation without raising interest rates too high. During 2020, the Fed was doing QE at approx rate of $120 billion per month. So for this QT, just do the same set it at $120 billion per month (or perhaps $200 billion), instead of the $95 billion now.

A QT of this magnitude will have about the same effect as a 1% hike, without increasing interest rates. However, the Fed does not seem intent to expand QT because it affects the stock markets and silicon valley companies. In my opinion, deflating the latter 2 affects the rich disproportionally and the Fed does not want to hurt the rich too much. However, again my view, it will definitely tame inflation which affects all income levels in society--> a 1%-1.25% interest rate environment with aggressive QT will do the trick.

Inflation is caused mainly by expansion of M2 monetary supply. 

In 2020 FED did not just expand their balance sheet by doing QE of 120b ( actually i think it was 80b a month, not that that matters ) The US gov also have a big multitrillion $$ deficit to fun the stimilus programs and checks and infrastructure builds etc...

There were trillions injected into the economy for 2020 and also 2021. If you refer to the chart below the expansion of M2 Money supply from just ~15.5trillion in Jan 2020 to 21.8trillion in march 2022. Thats an addition of 6.3trillion++ in the span of 2 years. thats almost the same amount as the amount from the past decade jan 2010 to jan 2020(~7trillion) Thats roughly 40% over 2 years, so roughly 15-20% inflation per year over next 1.5 to 2 years as this wall of money chases limited goods. USA CPI is misleading as if they used their original CPI calculations from decades ago, it would be roughly 10-15% at least. you will also notice most food/goods will have corresponding price increases of at least 10%-15%, even in singapore over next couple years if not already.

M2 money supply chart link below.
https://fred.stlouisfed.org/series/M2SL

If you expand the money supply by so much, in such a short span of time you gonna get massive inflation. --> basic macro economics which the economists at FED are all paid millions but "no one expected it" according to one of the FED people trying to push the blame on. [note the rapid expansion during the 1970s from 600billion to 1.5 trillion, almost 200% over 10 years, thus they had 15-20% inflation and needed a 20% interest rate in early 1980s by their new FED chair to finally control inflation]

Fed can reverse the QE with QT which they have broadcast intention to do so by reducing balance sheet. However when market crashes there will be no one to buy up these junk debt and other securities that FED has bought over the years. FED balance sheet now 8,94trillion https://www.statista.com/statistics/1121...-timeline/

With the negative CPI signalling start of a possible recession, FED will be unable to do any QT at all i reckon. And it cant hike rates above 2%, unlike in 1980s where it could afford to pay its debts at 20% interest rate.. which means it will just let the country go to stagflation and just try to inflate away the debt and prop up the USD. 

well who knows, perhaps trump will win the year end election again and we start seeing some civil unrest/riots/conflict in usa due to high inflation.

[Behappyalways]

The Fed Will Sacrifice Investors To Beat Inflation
https://m.youtube.com/watch?v=jOaLdM2JPBg

[weijian]

This is reminiscent of Sequoia Capital's warning at the early stage of the pandemic in 2020

YC advises founders to ‘plan for the worst’ amid market teardown

During this week we’ve done office hours with a large number of YC companies.  They reached out to ask whether they should change their plans around spending, runway, hiring, and funding rounds based on the current state of public markets. What we’ve told them is that economic downturns often become huge opportunities for the founders who quickly change their mindset, plan ahead, and make sure their company survives.

https://techcrunch.com/2022/05/19/yc-adv...the-worst/

[CY09]

What presided after Sequoia's warning was a round of QE.

In the end, companies know they have a fall back party which are the central banks who will rescue them with cheap financing. The key is to survive until the central banks think the damage is too huge and QE restarts.

I for one, do not think central banks should be doing such things and let the "nature" do its weeding work like in the dot com bust. However, the QE is a new invention in the 2007 (after the dot com bust), though Japan has been using it. It will be a surprise if central banks keep to their guns

[weijian]

We all have our own opinions of what the Fed should do. But the Fed will do what they can do.

A few months back, Bill Ackman publicly recommended what the Fed had only just started doing. The seeds of the next crisis are always planted in the actions to combat the last.

The Fed Is Fuct…
https://adventuresincapitalism.com/2022/...d-is-fuct/

[Behappyalways]

I kinda agree with Mohammed A. El-Erian that we are at the START of a new phase of selling as we start to focus on deteriorating earnings(Walmart, Target...). Price have come down so PE is down but we have not adjusted the earnings yet. So if earnings are going to be much lower then the current PE might be still very high ...Banks will not do well even if interest rates are going up because there will be more writedowns coming. Company loan defaults, bond losses and etc...This phase we probably will see faster downside. We probably will see the main characters coming out...The main characters are Mr Circuit Breaker A, Ms Circuit Breaker B......like what you see in 2020. The market is still in its buy the dip mood with many people still doing its dollar cost averaging....I am surprised that there are inflows into Cathie Wood's Ark fund. That tells you there is more to go....

Wake me up when Mr Circuit Breaker appears......

全球經濟會不會衰退？陳鳳馨示警「明年比今年更慘」【Yahoo TV#風向龍鳳配】
https://m.youtube.com/watch?v=rjgmxnh4Jqo

[Behappyalways]

Bear Stearns: A Lesson In Bear Market Bounces
https://www.zerohedge.com/markets/bear-s...et-bounces

[weijian]

Bear Stearns: A Lesson In Bear Market Bounces
https://www.zerohedge.com/markets/bear-s...et-bounces

I will be wary about super imposing history (whether how recent or far it was). It is part of our psyche to want to "be in control" of what is to come, when the bigger (and more useful) lesson of history is probably something that is less specific. Ironically, as in all things in life, truth is counterintuitive, and the only way to "be in control" of the future, is to give up trying to make sense/find patterns.

In this current environment, there is a substantial group of investors whom only knew bear markets (2015, 2018 and 2020) rebound just as fast as their decline. These folks will be surprised one day in the future, but God knows when.

[Behappyalways]

We are probably going into an earnings downgrade stage. You will probably see a lot of earnings revised downwards...due to increase in interest rates hence higher cost of funds for companies. Now with higher inflation eating up consumers' budget, you get to see lower sales and profit margin. Walmart and Target with their huge inventories ( cannot sell) and Amazon trying to offload warehouse space are telling you something. Even semiconductor sectors will be hit. They are probably posting good results now due to past orders. Due to supply chain issue, there was a duplication of orders in order to beat the problems. Once these orders are fulfilled, you will start to see lower sales from the semiconductor industry as their customers might have too much inventories. Elon Musk yesterday probably trying to tell you that their earnings in the coming quarters will not be good....I expect a profit warning from Apple soon which would be a big drag on the indices. I would be surprised if they can continue to do well especially with the 'lockdown' in Shanghai and its ripple effects.

We have a lot of debts due to low interest rates. I agree that debts are deflationary. Initially it will boost up consumption but debts are future consumption brought forward hence we probably see lower consumption in the future as consumers try to repair their balance sheet. So there is an argument that there will be deflation but then we have degloblisation, climate change, cost of going green....these are inflationary so interesting to see which side will win the pull.

Stock market is a cycle so when the cycle is down, most stocks will be down. There might be a particular few that perform otherwise. Not impossible but hard...I always talk about probability...nothing is impossible. But to bet on what you are holding to be the particular few....the chances are low...

Now is the time to act conservatively like what James Dimon said.... Adjust your portfolio, keep more cash, lower your leverage, clear your margins....adjust your portfolio in such a way that if there is really a crash, it will not impact on your life much....you will still sleep well and carry on with your lifestyle and your spouse will not ask for a divorce.....🤭🤭🤭

When Will This Bear Market End?
https://www.zerohedge.com/markets/when-w...market-end

[weijian]

I paid a heavy price learning that cheap stocks can go cheaper (or to zero). And then I paid another price that expensive stocks may stay expensive (and more often, become more expensive).

Valuation grounds us but it probably only acts as a guideline, else we may be susceptible to the "hammer man only seeing nails" syndrome.

Investing is a personal journey of self discovery. For example, I am generally a pessimist and so I tend to avoid trees-to-the-sky stories and love bargains. It turns out that some trees do grow to the sky and many bargains turn out to be expensive. So my homework would be to learn to be a optimist to correct my natural bias.

What is your homework?

Are Stocks Undervalued Yet?

Everyone wants to know when the stock market, after its recent declines, will be a good value again.

https://www.wsj.com/articles/stock-marke..._permalink