The Federal Reserve has raised its interest rate target by 150 basis points since March and speculation is now focused on how far the Fed will go.
Interest rate futures traders see an 89% chance that the central bank will hike rates by at least 175 basis points this year.
But Michael Burry, whose character (played by Christian Bale) had a starring role in The Big Short movie, sees it differently. He is already talking about the Fed turning zone to lower interest rates.
You think Walmart WMT, Target TGT and Macy’s (M) – Macy’s for the Economy, Inc. Receiving signal distress. “This retail glut is the bullwhip effect,” he tweeted,
The tweet links to a CNN story reporting an increase in stock levels and saying that while some stores are offering refunds for returns, they are asking customers to keep goods. This allows stores to reduce their inventory.
What is the bullwhip effect?
The bullwhip effect describes a small fluctuation at one end of a chain that, like a bullwhip, has a large effect on the way to the end. “Google it. Understandable for your investment efforts,” Bury writes.
“It drains legumes [inventory surplus] -> Deflation in CPI [consumer price index] Later this year -> Fed turns around on rates and QT [quantitative tightening] –> Cycles.”
In other words, excess inventory points to economic weakness that will drag down inflation, Bari says. Consumer prices rose 8.6% in the 12 months to May.
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And that deflation would cause the Fed to cut rates and stop selling Treasuries and mortgage bonds off its balance sheet, rather than raising rates. These sales represent a quantitative tightening.
Meanwhile, Harvard economist Larry Summers doesn’t expect the Fed to give up raising rates any time soon, but does expect the rate hike to eventually push the economy into recession.
And then he believes we’re about to enter a period of secular stagnation again, where growth and interest rates are subpar and the result of a financial bubble.
What is a Goldman Sachs view?
Goldman Sachs economists recently warned of a recession.
“Commodity prices have continued to rise and inflation expectations have risen, and housing inflation picked up in May,” economists said.
“In response, the Fed has raised front-loading rates more aggressively.”
Expectations have risen and financial conditions have tightened.”
“These tighter conditions mean growth is under severe pressure – much more urgent than we think,” the economists said.
Economists are predicting that there will be a 48% chance of a recession in the next two years, up from 35% previously.
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