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Michael Burry just dropped a bombshell prediction: the world is about to head back to the 1970s. The 1970s was a terrifying decade to live in. The stock market was in complete turmoil. It halved within a matter of 20 months. Unemployment was skyrocketing. And while that was happening, prices were rising at unprecedented rates. But worst of all, all of these issues remained for an entire decade. That’s a frightening reality to live in and Burry thinks that we’re taking a trip back in time. Everyone knows that history repeats itself because human behavior never changes. Having studied the 1970s extensively, Burry is confident that several critical patterns in the 70s will occur once again. You see, inflation has begun to decelerate to 6.5% year over year in the latest month. And because of that, everyone thinks that inflation will begin to fade away as we enter a recession. People will say that “once prices begin to drop and the economy recovers, we will recover from our economic crisis.”(do a cartoon speech bubble animation) But Burry knows something that many others don’t know. Burry questioned, “What strategy will pull us out of this real recession? What forces would pull us so? There are none. So we are really looking at an extended multi-year recession. Who is predicting this? There are none.” But what does Burry mean by a multi-year recession? The term may seem foreign because the COVID recession was one of the shortest recessions in history. Behind the finance terminology, Burry’s thesis is actually quite simple. Think about the economy as a bathtub. Everyone wants to understand the level of economic activity and how fast the economy is growing or shrinking. In the analogy of a bathtub, the water level represents the current level of the economy. If the water level is near the top of the bathtub, that would be considered robust economic activity. And if the water level is at the bottom of the tub, that would be a recession or depression. We ideally want to see the water between the middle to the top of the bathtub. The pandemic caused the water level to enter the bottom territory of the tub. The Federal Reserve pumped so much water into the tub that the water overflowed and spilled all over the restroom. To compensate for this disaster, the Fed is now sucking water out of the bathtub, causing the water level to reach the bottom of the tub. This makes perfect sense in theory, but the Fed forgot about the water that spilled all over the restroom. All the water that’s on the floor represents a hidden danger that nobody is thinking about: money velocity. If you were to put that water on the floor back into the bathtub, then the bathtub would be full and spill once again. Burry explained how “velocity is nominal GDP/money supply (M2 here). QT (Quantitative Tightening) + higher rates starting to push M2 down. Yet we are seeing a tick up in velocity, emerging from narrative obscurity. In 1978-79, rising velocity trumped falling money supply to drive inflation higher and higher. Redux would shock.” So let’s think about this in terms of the bathtub analogy. Even though the Fed is sucking water out of the tub, the water on the floor is going to fill the tub at a rate much faster than the Fed is taking water out. This will cause the tub to be filled up once again. But what exactly is the velocity of money? The velocity of money represents the rate at which each dollar is spent on goods and services. Everyone is sitting on their cash right now because people know that we’re in a recession. If prices were to finally start dropping at rapid rates, people will start buying products once again. This would cause the velocity of money to go up because the dollar is being transacted more often. There’s a terrifying dilemma occurring in that scenario. If prices were to drop and the velocity of money were to increase, then prices would start accelerating again. This would lead to a second wave of inflation caused by the velocity of money. Such an occurrence happened in the 1970s. Even though the money supply was being shrunk by the Fed, the velocity of money was increasing so fast that inflation accelerated again to over 14%.
Another event that will make Burry’s thesis even more frightening is the idea that the Fed will suddenly start printing money again. Burry believes that from June to December of 2023, inflation will likely start decelerating to levels that may even be negative. This will be due to rising interest rates from the Federal Reserve. The issue is that the velocity of money likely won’t start accelerating until 2024. So before the velocity of money picks up, the Fed and the fiscal government will start printing money again. This will lead to the start of the next spike in inflation just like we experienced in the late 1970s.