Admitting to disorientation is a sign of honesty and realism
Hedge fund manager Michael Burry issued a tweet Monday suggesting that the Federal Reserve may pause or even reverse its campaign of interest-rate hikes
What he’s referring to with the “Bullwhip Effect” is the deflationary effects of retailers holding too much inventory. The theory is that they will eventually have to drop prices to relieve themselves of the goods they have stockpiled.
In previous inflationary periods, the Fed had to boost interest rates above the rate of inflation to bring inflation down. That may not be the case this time.
As laughable as it may seem, there may still actually be a transitory element to current inflation that was a function of quantitative easing, government spending and pandemic hoarding.
So, if Burry is speculating that the Fed may pause rate hikes, when would that be?
Bloomberg 27 June 2022
Michael Burry, the founder of Scion Asset Management who was made famous by Christian Bale in the movie “The Big Short,” suggested on Twitter that the “Bullwhip Effect” happening in the retail sector may lead to the Federal Reserve reversing rate increases and its Quantitative Tightening policy.
If inflation falls quickly, the Fed and others can desist relatively early. If not, then probably not.
And if economic activity tumbles, or if the fall of some domino sets off a systemic financial crisis, then the Fed may be forced to relent quickly.
If the market is right, the peak fed funds rate, not much above 3.5%, will barely be around for six months before the first cut.
it’s startling that it normally only takes four months from the last hike to the first cut. That in part will be because the Fed realizes it has, in the current widely used phrase, “broken something.”
Tooze’s summation of the BIS view is worth quoting at length:
In the current conjuncture, if you aren’t puzzled you don’t get it. This isn’t your common or garden slowdown. Admitting to disorientation is a sign of honesty and realism.
https://adamtooze.substack.com/p/chartbook-131-calibrating-the-polycrisis
Realistically, this uncertainty cannot be resolved for a while. We need to know how growth reacts to the newly tight monetary policy, we need to know whether inflation does come under control, and we need to know if any financial accidents happen.
John Authers and Matthew Brooker Bloomberg 28 juni 2022
“from whatever it takes to whatever it breaks”
Investors and economists think policymakers will struggle to avoid imposing pain, from rising unemployment to economic stagnation.
https://englundmacro.blogspot.com/2022/06/from-whatever-it-takes-to-whatever-it.html
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