Michael Burry's Huge Inflation Warning for 2023

Michael Murray, who a lot of people know as this guy in this movie, isn't the type of person who fears putting his reputation on the line by making bold economic predictions. He's done it many times over the years, and the scary thing is he usually ends up being correct. In 2006 and 2007, he was ridiculed by his investors as he predicted the failure of the US housing market, only to be 100 percent correct in 2008.

In February 2021, he predicted a massive surge of inflation in the United States at a time where the latest reported inflation rate was less than two percent. Fast forward to today, correct again. In June 2021, he predicted the greatest speculative bubble of all time in all things—before what do you know? Stocks and cryptocurrencies crashed throughout 2022. In September of 2022, he predicted a white collar-led recession, and look at what we have now—massive layoffs occurring across the tech sector. The guy definitely has a knack for getting things right.

Recently, he's come out and made another big bold prediction, and I'm not going to lie; this latest forecast, if correct, would likely have bigger economic implications than anything he's been talking about over the past few years. So, what's Barry's stock market outlook for 2023? Well, let's find out.

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So, Michael Murray has continued his Twitter rampage over the last month or so, and actually, interestingly, it seems at least for now, that he isn't deleting his tweets anymore. So, that certainly makes it a lot easier for us to follow the guy. Now, without getting sidetracked, it was on the 2nd of January that Barry updated us with his thoughts on the economic environment we're all going to see throughout the next few years, and this is what he had to say:

"Inflation peaked, but it is not the last peak of the cycle. We are likely going to see CPI lower, possibly negative, in the second half of 2023 and the US in recession by any definition. Fed will cut and government will stimulate, and we will have another inflation spike."

It's not hard. I always find it funny just how confidently Barry puts out these predictions. It's like, come on guys, it's not that hard—of course this is going to happen. Although, I do have to say, sorry Michael, I do at least hope you're wrong on this one because essentially what Barry is predicting is that the current downtrend in inflation we're seeing is simply the end of a first wave of inflation.

Over the next few years, we'll likely see more waves of inflation because the Federal Reserve will lack the willpower to keep rates high. Yes, potentially cause a recession, but keep rates high, and in doing so, crush inflation once and for all. The reason that this potential situation immediately sends shivers down the spine of investors is that this would be exactly the same scenario that happened back in the 1970s.

But first of all, a little bit of context as to what the hell's going on. What we've seen over the past few years is a combination of supply chain issues and also money printing, and both of those things together has caused inflation to skyrocket to the highest level in 40 years. So, this has forced the Federal Reserve to step in and raise interest rates to put the brakes on the economy—to rein in citizens' and businesses' ability to access borrowed money.

Thus, rain in the spending. But of course, doing this also causes the economy to slow down, and it puts everyone under increased financial pressure. It's essentially choosing the lesser of two evils. Do you want to just let inflation run wild and everything becomes increasingly unaffordable, or do you want to raise interest rates and impose financial hardship on your people for a period of time to choke the demand for goods and services, which forces inflation to settle down?

Now, history tells us what you should do is the latter. What we saw in 2022 is the Fed raising rates to about four and a half percent from effectively zero, and in doing so, inflation is now trending down. But here's the thing—people really do suffer during periods of high interest rates. Now they're not super high right now, but they are tipped to continue rising throughout 2023.

What high-interest rates mean for the people is that, you know, debts like mortgages and personal loans eat up more and more of their disposable income until they've got no money left over to spend on other things. So, it's definitely not a popular decision to keep interest rates very high for very long. Inevitably, there ends up being a lot of political pressure from the population for interest rates to be lowered.

After all, lower interest rates make people feel better, and politicians want to make people happy. Furthermore, the chair of the Federal Reserve is actually nominated by the president, so all the political pressure is for rates to be lowered. But if that's done prematurely, you can get inflation ramping right back up, and then for all the financial pain you inflicted trying to stop inflation—or bad luck—the problem isn't resolved, and you're right back to square one.

This is exactly what happened in the 1970s. Inflation crept up past five percent in 1970, and the effective federal funds rate was nine percent. Then, what do you know? Inflation went back down to three percent, and the FED lowered interest rates, only for inflation to ramp up again to 11 in 1974, to which rates were raised again, this time to 13. Eventually, inflation cooled back to six percent in 1976, and the FED relaxed once more, saying, you know, inflation's going away now, and they lowered their interest rates back down to five percent.

But too soon, inflation rocketed up to 14 in 1980, and it took Paul Volcker to come in and raise interest rates to 20, and unfortunately, send the US into a harsh recession for inflation to finally be conquered. That's what Michael Barry is predicting for the US over the next few years. He does not believe we've learned our lesson and is tipping history to repeat.

Inflation will calm, rates will remain elevated, the US will fall into a recession, people will suffer, the politics will pressure the FED to lower interest rates and stimulate the economy, thus triggering the next inflation wave. You might think Barry is a bit of a loose cannon with such a bold prediction like this, but interestingly, he isn't the only famous super investor to express this opinion.

One other very notable person that you will definitely know, which also believes the Fed's willpower will not be strong enough to conquer inflation, is Charlie Munger. We're involved after the '70s took the prime rate to 20 percent and the government was paying 15 percent on its government bonds. That was a horrible recession; it lasted a long time, caught with a lot of agony, and I certainly hope we're not going there again.

I think the conditions that allowed Volcker to do that without interference from the politicians were very unusual. 2020 hindsight, it was a good thing that he did it. I would not predict that our modern politicians will be as willing to permit a new Volcker to get that tough with the economy and bring on that kind of a recession. So, I think the new troubles are likely to be different from the old troubles. You may wish you had a Volcker-style recession instead of what you're going to get. The troubles that come to us could be worse than what Volcker was dealing with.

So, very interesting that Charlie Munger and Michael Barry are basically aligned on this line of thinking. In their opinion, the political environment that allowed Volcker to get tough and stop inflation in the 1970s might not be there today. Unless we could see a period where inflation seesaws because the FED gets caught in a cycle of trying to lower interest rates only to be forced to raise them again.

Although, having settled that, to be fair, Jay Powell and the Federal Reserve have actually noted numerous times that they are committed to ensuring this doesn't happen. In a few press conferences now, Jerome Powell has acknowledged the inflation cycles of the 1970s and has stated that the FED is committed to ensuring that a situation like that does not occur this time around.

I'll play you guys an excerpt from the most recent FOMC press conference. Take a listen to how at the end of the clip he references the failures of the FED during the 1970s:

"Price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy. Today, the FOMC raised our policy interest rate by a half percentage point. We continue to anticipate that ongoing increases will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to two percent over time.

My colleagues and I are acutely aware that high inflation imposes significant hardship as it erodes purchasing power, especially for those least able to meet the higher costs of essentials like food, housing, and transportation. The historical record cautions strongly against prematurely loosening policy. We will stay the course until the job is done."

That's the big takeaway quote for me: "The historical record cautions strongly against prematurely loosening policy. We will stay the course until the job is done."

So, make no mistake, the Federal Reserve is very aware of everything that happened throughout the 1970s, and says they are committed to ensuring they don't make the same mistakes again. But while the Federal Reserve says all this, Michael Barry's opinion is still very valid because the FED might be saying all this stuff now, but whether they actually follow through is another question altogether.

That's what both Charlie Munger and Michael Barry are saying. Sure, the FED wants to get inflation back down to two to three percent; that'd be great. But if they have to keep raising and raising interest rates and they cause a nasty recession, it means a lot of Americans lose their jobs and can't afford their mortgages.

Will there be the political willpower to keep going and properly get inflation under control, or will there be too much political pressure to instead keep the people happy and loosen monetary policy, aka lower rates and print money? As Barry said, we are likely going to see CPI lower, possibly negative, in the second half of 2023, and the U.S. in recession by any definition.

If the Fed will cut interest rates, the government will stimulate, aka print money, and we will have another big inflation spike. So, that is Michael Murray's latest prediction, and well, it certainly aligns with his previous tweets, that's for sure. At the end of June, after the stock market had crashed 20%, Barry noted that he thinks we're only halfway there.

He followed up on September the 7th, saying, "No, we have not hit the bottom yet." He said previously that he expects the S&P 500 to drop below the 2020 COVID lows. So, there's still no doubt that he is very bearish for the next few years, and it seems his lack of confidence in the Federal Reserve is the prime reason for that.

With that said, guys, please let me know your thoughts and opinions down in the comment section below. Do you think the FED has the guts to crush inflation once and for all in 2023, or will Michael Barry's prediction come to fruition, giving us the 1970s all over again? How sticky will inflation be? That is the question.

Anyway, guys, please leave a like in the video if you did enjoy it, subscribe if you'd like to see more videos like this one, and I'll see you guys in the next video.