- Walmart issued a profit warning after inflation hit demand, and it slashed prices to move inventory.
- Michael Burry of "The Big Short" predicted lower spending and markdowns would hit retail earnings.
- Burry expects a "disinflationary overstock consumer recession by Christmas."
Michael Burry, the investor of "The Big Short" fame, predicted inflation would force consumers to cut their spending, and overstocked retailers would slash prices to get rid of excess inventory, dealing a one-two punch to corporate profits this year.
Walmart's profit warning this week suggests Burry's call was right on the money. The world's biggest retailer complained that higher food and gas prices are eroding shoppers' ability to buy clothes and other non-food products, leaving it no choice but to mark down unsold goods to reduce inventory levels at its Walmart and Sam's Club stores across the US.
"We're now anticipating more pressure on general merchandise in the back half," CEO Doug McMillon said in the press release. Walmart, which in May forecast a 1% fall in full-year operating income, now anticipates a decline of 11% to 13%.
Burry has explained why consumer spending is under pressure, and why retailers are drowning in surplus inventory, in several recent tweets.
He's pointed to soaring living costs leading American households to saeve less and rack up credit-card debt, leaving them on track to virtually exhaust their savings by the end of this year. He anticipates consumer demand will slump as a result, hammering companies' earnings.
Meanwhile, he's blamed bloated inventories on the "Bullwhip Effect," when retailers, wholesalers, and manufacturers overreact to a slight increase in consumer demand, resulting in excess supply. Burry has also described the trend as "Just in Case" supply-chain management, or companies producing and stocking more goods in preparation for a potential surge in demand.
Burry has summed up his outlook as a "disinflationary overstock consumer recession by Christmas." He's also warned the resulting blow to company earnings could double the decline in stocks and cryptocurrencies so far this year.
On the other hand, the fund manager sees lower inflation and an economic downturn prompting the Federal Reserve to reverse course, cutting interest rates and growing its balance sheet to revitalize growth.
The Scion Asset Management boss shot to fame after he predicted and profited from the collapse of the US housing market in 2008. His contrarian wager was covered in the book and the movie "The Big Short."
Burry is also known for unwittingly helping to spark the meme-stock craze by taking a stake in GameStop, placing short bets against Elon Musk's Tesla and Cathie Wood's flagship Ark fund last year, and tweeting dire warnings about historic asset bubbles and epic market crashes.
Based on Walmart blaming inflation for lower consumer demand, cutting prices to address its inventory glut, and guiding towards a sharp decline in profits this year, Burry's knack for predicting the future appears intact.