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This week, none other than legendary investor Michael Burry made a comeback on his Twitter account to share another apocalyptic warning about overvalued markets and the epic asset bubble burst that is about to be triggered by rampant inflation and higher interest rates. Earlier this year, the investor alerted that the U.S. was on the path to face Weimar-like hyperinflation, he argued that government monetary policies were “inviting inflation” by adding trillions of stimulus money to the financial markets, overlooking the national debt, and fueling consumer demand in times when employee and supply chain costs have been skyrocketing. Burry argued that America will face a major paradigm shift that can only be compared to what happened to Germany in the 1920s. And up until this point, his forecast is seeming worryingly accurate.
During that period, Germany’s markets and businesses were booming, just as we’re seeing happening in the U.S. right now, with the demand for goods and assets much greater than the available supply, leading prices to all-time highs. Like the dollar today, the exchange rate of the mark against other currencies rose for quite a while, and there was a short span – right on inflation’s eve – in which the mark was actually considered the strongest currency in the world. And while the government fueled the markets’ progress during that time, side by side with the wealth were the pockets of poverty. Similar to what we have been witnessing since the beginning of the health-crisis-induced economic recession, back then, many fortunes arose overnight, while the cities remained plagued by turbulence and chaos.
The similarities don’t stop quite there, since Germany saw its strong currency suddenly become worthless in face of a major inflationary collapse. At that time, authorities have enabled the inflation cycle to run for years, and Burry indicated that’s exactly what the U.S. government is currently doing, especially now that “dollars are falling from the sky” and management teams are having the opportunity to get creative and take more risk by paying out debt-financed dividends to investors or investing in risky growth opportunities, which, in his view, “has beaten a frugal mentality – hands down.”
All of which led to Burry’s latest tweet warning yesterday: “People always ask me what is going on in the markets. It is simple. Greatest Speculative Bubble Of All Time In All Things. By two orders of magnitude. #FlyingPigs360,” he wrote. The hashtag was a reference to a popular saying in investing: “Bulls make money, bears make money, but pigs get slaughtered.” Burry has repeatedly alerted that investors that are being too greedy, speculating wildly, taking on too much risk, and expecting unrealistic returns.
His latest tweets echoed many of his other cautions. He compared the hype surrounding bitcoin, Tesla cars, and meme stocks to the dot-com and housing bubbles. A couple of months ago, he said that the stock market was “dancing on a knife’s edge,” and amongst the factors he sees as signs of an imminent new crash are rising investors’ debt to leverage their positions, and “out of control speculation”. On Monday, he resumed tweeting and on Tuesday morning, he warned of the biggest market bubble in history, suggesting that his worries about growing inflation and speculation only grew during his 10-week hiatus from social media.
The latest market data shows that the investor’s warnings are likely accurate, as the market valuation rose to unprecedented levels, in line with what was seen in 2000 and among the highest ever recorded. Today, valuation metrics point to an extraordinarily overvalued market – for instance, equity value to GDP stands at the highest level since the 1950s while the Wilshire 5000 Total Market Index to GDP ratio hit a record high. The most frequent catalyst of a bubble burst throughout history has been rising inflation and interest rates, and as Burry fears, there’s no way to turn around an inflationary collapse.
As for the housing market, it seems that the national average doesn’t do justice to the absurdities seen in specific housing markets. In Boise, Idaho, housing prices skyrocketed 37% year-over-year. The national average might not be as high, but it’s crazy enough. House prices soared nearly 17% from a year ago, the biggest increase since December 2005, on the eve before it all started to fall apart in 2006. Needless to say, this will not end well, especially considering that the housing market is extremely vulnerable to rising interest rates. With inflationary pressures mounting and increasingly more warnings making the headlines every day, it’s safe to say that just as all prior bubbles, this too will burst – and we may be closer to that event than we think.