Why Michael Burry Sees Long-Term Inflation, Bigger Market Crash Ahead

Scion Asset Management CEO Michael Burry took to Twitter Inc TWTR on Tuesday to warn his 915,000 followers of long-term inflation and owes it to four critical factors.

What happened: In the now-deleted tweet, Burry said, “Seems China moves on Taiwan in 2023, as the war in Ukraine spreads into the EU, maybe via Lithuania. Onshoring/blue-collar shortages plus global supply chain restructuring raise long-term inflation’s floor even as the bullwhip cycles lower to that end.”
 

Let’s peel back these four factors to better understand why the "Big Short" investor foresees long-term inflation.

1. “Seems China moves on Taiwan in 2023"

China sees Taiwan as a breakaway province, while Taiwan sees itself as an independent country.

President Xi Jinping of China has stated that "reunification" with Taiwan "must be fulfilled" and has left open the possibility of using force to accomplish this. Among the reasons China may be seeking to move on Taiwan is to take control of Taiwan Semiconductor Manufacturing Co. Ltd. TWM, which dominates the global production of computer chips.

China increased its presence in Taiwan in 2021 by deploying military aircraft into Taiwan's self-declared Air Defense Zone, where foreign aircraft are identified and monitored in the interests of the country's national security.

Also read: Hold On To Your Wallet: Fed Minutes Suggest More Aggressive Interest Rate Hikes Ahead

2. “The war in Ukraine spreads into the EU, maybe via Lithuania.”

Burry is alluding to Lithuania's announcement on June 17 that transportation of sanctioned Russian items to Kaliningrad will be prohibited. Oil, refined oil products and any technology that could be utilized for military purposes are also subject to sanctions. Cement, building supplies and metal products were also on the list.

Moscow responded quickly and forcefully, warning "severe consequences," which have not yet been detailed.

Meanwhile, in order to stop Russian aggression, U.S. President Joe Biden has committed to protecting NATO territory, including Lithuania and other NATO countries that border Russia.

3. “Onshoring/blue-collar shortages”

The New York Post linked Burry's opinion to a Bloomberg piece he tweeted about, which describes the "onshoring" trend of U.S. businesses increasingly moving production domestically in an effort to escape the snags caused by COVID-19 pandemic.

Burry refers to a supply chain phenomenon called a "bullwhip" in which discrepancies between expected demand and actual sales lead to fluctuating inventory levels. He predicted last month that there would still be a shortage of blue-collar workers, even as office workers faced further layoffs because of an impending recession.

4. “Global supply chain restructuring raise[s] long-term inflation’s floor”

A once-in-a-generation reinvention of global capitalism is taking place in boardrooms and governments as a result of the pandemic and the war in Ukraine, and supply chains are changing.

Instead of efficiency, this new form of globalization is focused on security. Doing business with nations that your government is friendly with is given priority.

As Burry pointed out, it might lead to protectionism, excessive government and rising inflation. Instead, if businesses and leaders exercise restraint, it might improve the global economy while preserving the advantages of openness.