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This Is Why Michael Burry Tweeted "Sell"
Yesterday evening legendary investor Michael Burry tweeted the single word “sell”. Less than twelve hours later Burry deletes his twitter account.
The tweet was haunting and comes at a time when the S&P 500 is up 6.2% YTD and the Nasdaq is up 11%, the best performance since 2001. The hardest hit stocks in 2022 are making a comeback in 2023 as inflation continues to trend lower and the likelihood of the Fed reducing their rate hikes or completely reversing take into effect.
But Burry is skeptical of the dramatic stock market recovery and has been since the start of the year.
For an example, on January 23, 2023, Burry tweeted a chart that compared the market drop during the dot-com crash and the rally between September 2001 and March 2002. After March 2002, the market continued to crash. Anyone short made a killing.
Burry has been concerned about elevated valuations for years now, and frankly, we have been as well. Two decades of ultra-low interest rates fueled a speculative bubble like no other and cracks in the economy are starting to turn into fissures.
Individuals, corporations and government institutions have become addicted to cheap money and the Fed has essentially turned off the spigot. Taking away cheap money from the economy is akin to taking away heroin from the drug addict and going completely cold turkey.
There are major repercussions to rising rates, and we are just starting to feel these now.
Alphabet layoffs: 12,000 employees
Amazon layoffs: 18,000 employees
Meta layoffs: 11,000 employees
Microsoft layoffs: 10,000 employees
SalesForcs layoffs: 8,000 employees
Twitter layoffs: 4,000 employees
IBM layoffs: 3,900 employees
PayPal layoffs: 2,000 employees
Snapchat layoff: 1,200 employees
Shopify layoffs: 1,000 employees
Tech layoffs are just the start. As high-income producing individuals are laid off in the tech world, it will begin to spill down into other sectors. The money supply will contract as unemployment rises. Unemployment will lead to more unemployment. More unemployment will lead to a slowing down of GDP. And the Fed will eventually reverse course and inject more money into the economy by lowering interest rates.
With over $31 trillion of national debt and counting there is no way the Fed can leave interest rates at current levels for any extended period of time. At the current levels, the U.S. national debt to GDP is at 124%, the highest it has ever been, essentially stating the U.S. is insolvent.
Even worse, the average interest rate on the national debt is currently at 2.07% and rising quickly.
As of the most recent data, 64% of the national debt is scheduled to mature over the next four years. With interest rates approaching 5% the cost to service this debt will increase exponentially as the debt matures. The goal of the Treasury is to borrow at the lowest costs over time and the rising rate environment is not condusive to this goal.
As a hypothetical example, assuming the Treasury is forced to refinance all $31 trillion of U.S. debt at a 5% rate, the annual cost of that debt is $1.55 trillion. U.S. GDP in 2021 was $23.32 trillion, meaning 15% of U.S. GDP will be used exclusively for debt servicing.
What this means is interest rates are likely to drop over the long-term as the Fed hyperinflates its way out of this debt problem.
In a hyperinflationary environment you will want to own assets, specifically stocks that have a large margin of safety and owned assets. Asset prices will appreciate with the rate of inflation and investors will preserve their purchasing power.
But over the short-term, there is likely to be a lot more pain. In fact, we think the stock market could crash as employers continue to lay off workers in droves.
The game plan of the Fed is simple and the ones who can follow it will make a lot of money:
Increase rates to lower inflation and cause unemployment
As unemployment increases labor rates will fall
When there is pain in the economy lower rates before the Treasury has to refinance debt at a higher cost of capital
Assets go ballistic at this stage as hyperinflation kicks in
This is a dangerous time in the economy. The Fed is playing funny money games. Wealth will be lost, and wealth will be gained.
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