Foreword
This is a quick note, which tends to be just off the cuff thoughts/ideas that look at current market situations, and to try to encourage some discussions.
As usual, a reminder that I am not a financial professional by training — I am a software engineer by training, and by trade. The following is based on my personal understanding, which is gained through self-study and working in finance for a few years.
If you find anything that you feel is incorrect, please feel free to leave a comment, and discuss your thoughts.
Burry
About 2 quarters ago, Michael Burry (of “Big Short” fame) started shorting long term Treasuries quite aggressively. Basically, it seems like he was betting that long term interest rates would be going up in the nearish future — it didn’t (and hasn’t). That didn’t seem to deter him — he modified his bets somewhat, but he is still, essentially, short long term Treasuries.
Over the weekend, Youtube recommended this video to me, which does a reasonably good job of discussing Burry’s bets, and what they really mean. Essentially, it seems like Burry is betting that inflation will rise, and the Fed will raise rates to counter that inflation.
If you look at Burry’s portfolio, you’ll also notice that he’s very heavily in things that I suggested in the June 6 inflation post may be good inflation hedges — consumer staples, real estate (housing), healthcare, utilities(-like) companies that have fixed costs and floating prices.
So, it seems like Burry’s betting heavily on inflation.
Fed
Last Friday, on August 27, Jerome Powell, the current head of the Federal Reserve, gave a speech at Jackson Hole which can simply be summed up as, “Inflation is high, but probably transitory; QE is probably ending soon; Rates may not rise quite as soon”.
Which is to say, Burry’s bet on interest rates rising are probably not doing well right now, and Powell appears to disagree with his inflation bets as well.
Clarifications
And finally, some clarifications on the June 6 inflation post. In various forums which discussed that post, some people brought up some points which seem to misunderstand the post. So to clarify:
- I believe the Fed will do something to counter high inflation, if it happens. In particular (and as noted in the prior post), I’m expecting the first rate hike to happen sometime in the 2022 – 2023 period.
- I had previously thought the Fed would act earlier (in 2021), but Yellen’s speech (see prior post for link) made me change my mind to the new 2022 – 2023 time frame.
- I expect the Fed will be able to counter inflation. It may require drastic actions (see 1970’s and Volcker’s policies), but it seems like they have the necessary tools. Which is also why I don’t expect elevated inflation (i.e.: more than 2.5%) to last more than ~2 years (starting from the June post).
- Inflation is the rate of change of prices — not actual prices. And no, I do not expect deflation in the near/medium term (say 2-5 years). Which is to say, I expect the increase in (average consumer) prices to remain. But the higher rate of increase of prices (i.e.: higher inflation) to be transitory.
- So yes, this “up to 2 years of elevated inflation” would be painful, especially for those who are most financially vulnerable.
Janky Thoughts 