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Say hello to the bullwhip effect

Wall Street knows better than to look the other way when Michael Burry, of the “Big Short” fame, casts doubts on the health of the economy and questions the Fed’s policy at a pivotal make-or-break moment in US history. The fund manager whose landmark bet against the US housing market before the 2008 crash was immortalized in Michael Lewis’s famous book, which was later made into a super hit movie, is known to grace twitter with nuggets of market wisdom now and then.

He made one of those surprise visits again earlier this week, warning that the “supply glut in the retail market is the Bullwhip Effect”, implying that there would be “deflationary pulses from this” and disinflation in CPI later this year would make the Fed “reverse itself on rates and QT (quantitative tightening)”. The dictionary describes the ‘bullwhip effect’, also known as the ‘Forrester effect’, as a distribution channel phenomenon in which demand forecasts yield supply chain inefficiencies. Burry was responding to a CNN story about retailers apparently considering letting customers keep returned items rather than add them to their overflowing inventories.

40-plus-year high inflation and chronic supply-chain issues have left some of America’s biggest store chains like Target (TGT), Walmart (WMT), Gap (GPS), etc., with “too much inventory”, according to the CNN report. This is happening when the usually spot-on Bloomberg Economics models are warning of an almost three-in-four (72 percent) probability that the rapid rate hike to counter high inflation will induce a recession in the US economy; the price of controlling runaway prices.

That’s not all, despite all the frenzy about unleashing a Volker-style squeeze on money supply, real interest rates are still deep in negative territory. Long before monetary tightening can begin to tame inflation, then, it is already eating into ordinary Americans’ retirement portfolios, eroding their wealth and adding to their financial worries. All this is very bad news for the Biden administration, which now risks losing its thin majority in Congress in midterm elections in November. If the majority goes, so does its ability to pass legislation, which includes measures to bolster the economy in tough times just like these, with the obvious spill-over effect at the next election.

It’s a “it’s the economy, stupid” moment all over again as Joe Biden risks joining Jimmy Carter, George HW Bush and Donald Trump as recent one-term presidents who “had their re-election hopes fatally injured by the lingering effects of a recession”, according to Bloomberg. They’re no longer talking in terms of if the Fed is engineering a recession to keep the economy from overheating but that the sooner it comes, the better because that would give the Democrats an outside hope that it might be over by the time of the next election and they could squeeze in a people-friendly package or two before voters, another name for consumers, go to vote again.

But if all this is a headache for Joe Biden or the average American consumer, who’s seeing his savings evaporate and his bills inflate, then it’s an outright nightmare for emerging markets, especially in Asia, which will see their economies duly plummet into recession immediately after America’s. Ajay Kumar, head of global emerging markets strategy at BOFA (Bank of America), and something of a rockstar of an analyst, said it best when he pointed out on TV that, “We in Asia love the D-word, that we are decoupled with the US economy, but it doesn’t work on the way down”.

“If the US is falling, it’s very hard for Asia to go up, except for rare instances like 03-07”.

Since we’re in Asia, that’s very bad news for us. Because even the mildest recession would simply break the economy. All the sacrifices, all made by the common man, will be for nothing and we’d be negotiating default scenarios with creditors before we know it. Of course it’ll be a lot worse if Burry’s hidden implication, of deflation, also comes true. Then you’re looking at a collapse on the lines of ’08.

His last notable appearance was in May, when he said that the grim mood of the market and the housing market cooling down reminded him of “2008, when it was like watching a plane crash. It hurts, it’s not fun, and I’m not smiling”.

Recession in the US, which implies less exports to the biggest market and less remittances to Pakistan, is bad enough, but if the cryptic suggestion about flat out deflation is also true, then all bets are off.

The bullwhip effect in America, therefore, is causing some serious jitters in Pakistan. If even Wharton graduates in government, occupying important ministries, cannot read the writing on the wall, then we’re in for a very, very hard landing.

Shahab Jafry, "Say hello to the bullwhip effect," Business recorder. 2022-06-30.
Keywords: Economics , Political sciences , Markets strategy , Supply chain , Monetary fund , Midterm elections , Democrats , Economy , Donald Trump , Joe Biden , America , Asia , TGT , GPS , WMT , TV , IMF , GDP

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