Michael Burry CALLS OUT The Fed's Inflation Metrics

Well, just when you thought I was done talking about inflation, heck, even when I thought I was done talking about inflation, guess who pops back into the frame? Yes, that guy right there, Michael Burry. So, I can't let this one slide past. Honestly, I wasn't going to make another video on inflation. To be perfectly honest, it's not even particularly relevant for the style of investing that we subscribe to here on the channel. But I know you guys love following what Michael Burry is saying, and honestly, you know I do too.

And this time around, he's brought a very interesting argument to light, and that argument is that the Fed's quoted inflation numbers might be a little bit deceptive. So, this is a really interesting one, so let's roll the intro and get stuck into it.

This video is brought to you by Sharesight. Seek of tracking your performance manually, track capital gains, dividends, and currency fluctuations easily, and when it comes to tax time, have everything you need ready to go with just a click of a button. Try Sharesight for free or use the referral link in the description to get four months free when you sign up to an annual plan.

So, I've been following the inflation data reasonably closely for about the past year or so. The reason being is that, you know, macroeconomics was definitely one of my weaker points. And I have to say that, you know, interviews by Ray Dalio and tweet storms from Michael Burry have really given me an interesting perspective on the macroeconomic landscape.

And for those that haven't been keeping up with this, Michael Burry is definitely in the camp of, you know, inflation incoming. A lot of his tweeting earlier in the year was around that, and you know, he was right. Now, just yesterday, he's really taken aim at Jerome Powell and the Federal Reserve, essentially saying their inflation stats are deceptive—that they've cherry-picked the numbers to fit their narrative.

From what I've read, I've found there's really two camps that investors fall into when talking about this topic. The first camp is, you know, of the opinion that, as I just said, you know, that Fed is cherry-picking what inflation numbers they use to fit their narrative.

Then the other camp is of the opinion that yes, the Fed cherry picks the inflation metrics, but is to try and examine lasting inflation caused by their monetary policy decisions, as opposed to simply using, you know, all-encompassing inflation metrics that also include short-term lockdown-specific inflation factors, such as air travel. Because if you include that kind of data, it can really skew the inflation metrics around, which isn't helpful because, you know, these short-term effects are exactly that—they are short-term and they will most likely correct themselves in a few months and really won't matter at all in, say, a few years.

For example, when people discuss inflation, they always talk about the Consumer Price Index, which is the prices of a basket of goods and services, including things like transportation, food, medical care, housing, apparel, recreation, education, communication. There's a whole lot of stuff.

Now, to judge inflation, we then track how that index changes over time. If the goods get more expensive, it's inflation; if they get less expensive, it's deflation. But it's also a common practice to look at core inflation, which strips out food and energy costs.

Now, face value, this seems crazy because everyone has to pay for food and pay for energy, and it's very relevant to the average consumer. So why would you remove it? Well, the argument is that these categories often see sharp, temporary swings in their prices, both up and down, and those two groups can skew inflation data considerably from month to month.

So, as you can see by this chart here, by removing food and energy, you get a much more stable line. So, that's the thinking behind altering, you know, raw Consumer Price Index numbers or the raw data for personal consumption expenditures. But it's fair to say that Michael Burry doesn't buy that—that's simply what the Federal Reserve is doing.

In fact, yesterday, Michael Burry called out the Federal Reserve for skewing their inflation metrics. He said on Twitter, "Regarding inflation, so Federal Reserve, are you lying to us or are you lying to us?" And then he shows a paragraph from a Wall Street Journal article.

Now, I went through and I read this whole article, and it was really quite interesting. It spoke a lot about that concept we just described—why the Consumer Price Index, you know, kind of gets tinkered with, but also points out the fact that the Federal Reserve might be doing a little bit too much tinkering.

The article notes, "Across the 300 or so separate categories that the Bureau of Labor Statistics tracks, there were more with big rises and more with big falls in August than in July. The median price fell slightly, but when there are so many areas with prices moving a lot, this doesn't really pick out the signal." Fed Chairman Jerome Powell said at Jackson Hole last month the Fed was using a measure that strips out extreme price moves to try and get to the true underlying rate.

This doesn't really work either, as so much depends on the definition of extreme. And that's the bit that Michael Burry doesn't really like—the fact that the Federal Reserve is basing their decision-making off of inflation gauges that remove a lot of the data.

And this leads us to the portion of the article that Barry posted along with his tweet, which says, "Mr. Powell used a gauge from the Dallas Fed that throws out the top 31 percent and the bottom 24 of personal consumption expenditure price changes and was bang on the Fed's 2 percent year-over-year target in July. The latest available alternative measure from the Cleveland Fed strips out the top and bottom 16 of Consumer Price Index changes and was far higher. Worse, the monthly rate was unchanged in August from July, giving no support to the idea that inflation is already coming back down."

And this is true. The Fed is using a measure that cuts off the top 31 percent of categories, but only the bottom 24, which of course skews the information towards the categories with lower inflation. And the Fed isn't trying to hide this.

This is Jerome Powell speaking about a month ago: "We consult a range of measures meant to capture whether price increases for particular items are spilling over into broad-based inflation. These include trimmed mean measures and measures excluding durables and computed from just before the pandemic. These measures generally show inflation at or close to our two percent longer-run objective."

Stop the tape. So those three lines that they show come out conveniently around their long-term inflation target of two percent annually. What measures are they? Well, one is that 12-month Dallas trimmed mean, which cuts out the top 31 but only the bottom 24. Then they showed two measures that exclude durable goods, which alone contributed a massive one percent to the latest inflation figure at the time that interview was recorded.

And then, for good measure, they used the change over 18 months to conveniently boost their start point to here instead of here. So, the percentage change over that time is smaller. So when you present this data and nothing else, it sounds as though Jerome Powell is kind of saying, "Well, if you look at the inflation numbers over the past little while, and then you take out the inflation, we actually find there hasn't been any inflation."

And Barry is quite simply calling BS on that. Even looking at the two data points referenced in the paragraph Barry retweeted, you can see the effect. This is the Dallas trimmed mean, which remember took out the top 31 percent of categories and the bottom 24, and bang—you've got a 2 percent annual inflation rate. That's the number the Fed chose to quote.

But if you look at the Cleveland trimmed mean, which just takes out the top and bottom 16, well then you get 3.2 percent inflation over the past 12 months, which is considerably higher than the Fed's 2 percent target. So, that's Barry's argument.

But to be fair, I can also understand why the Federal Reserve doesn't use straight 12-month CPI or PCE changes to guide their decision-making. I mean, they're trying to see what inflation is caused by their monetary policy, so they are trying to cut through the violent up and down swings of different categories that have faced both short-term supply and demand issues over the past 12 to 18 months.

That's also the reason why they try and get that initial measure to be pre-lockdown—to avoid that crazy turbulence where the world stopped and the Consumer Price Index and Personal Consumption Expenditures actually fell.

So, it makes sense that the Federal Reserve doesn't just consider vanilla 12-month CPI or PCE changes to guide decision-making, but you can't deny Barry's message as well—that the figures chosen by the Federal Reserve just seem a little bit too convenient.

Overall, I think this is very much just a case of, you know, how much tweaking is too much tweaking. Now, I can't say I know the answer to that, but I would certainly love to hear your opinion in the comments section below. You know, do you think that Michael Barry is onto something, and the Fed really is cherry-picking the numbers that they choose to quote a little bit too much, or do you feel like the Fed is justified in trying to find these numbers because they're simply trying to cut through the short-term swings up and down from supply-demand equations just being all out of whack to actually try and see what the inflation—the underlying inflation—is from their choices, their policy decisions, their stimulus decisions, and that sort of thing.

So, I mean, this is obviously a really interesting topic. It's one of the hottest topics that investors are talking about at the moment. And you know, in this instance, I mean, normally I do like to hear what Barry says, and typically I do side with him, but in this case I really can see both sides.

So, I really do want to hear what your opinion is down in the comment section below—what's the general consensus out there? I'd love to hear from you guys. And if you enjoyed the video, make sure you leave a like on it, subscribe to the channel if you're new around here, check out Profitful if you'd like to learn how I go about my investing, and check out New Money Clips as well. It's the second channel, it's shorter form content. If you're interested in even more new money content, then definitely check out that channel as well—links in the description.

But apart from that, guys, thank you very much for watching the video. Again, let me know your opinion in the comments section below, and that's it for me. I'll see you guys in the next one. Thanks again to Sharesight for sponsoring this video.

So, recently, I finally decided to stop being lazy and I imported all of my stock portfolios across into Sharesight. Finally, I should have done that a hell of a lot sooner! So, with Sharesight, you sign up, you link your Sharesight account with your stockbroker, or you just add your positions manually, and then from there, Sharesight tracks everything for you.

It tracks your capital gains, it tracks your dividends, it'll track your dividend reinvestment plans, it'll track gains and losses from currency fluctuations. Seriously, this is by far the most thorough portfolio tracker I have ever seen. And because they track and record everything so thoroughly, they can provide you with all of these reports.

So, from literally simple performance reports to complex predicted future cash flow reports, if you're a dividend investor. But here's the really good thing: they also provide all of these detailed reports for tax time. So, send these reports to your accountant—done! You know, plug these numbers into your tax return—done! Simple as that. It's a big, big help, and most of these features are available for free.

But to be honest, to get the best experience, I would personally bite the bullet and upgrade to a paid plan. Honestly, this is one of the few stock market-related subscriptions that I would actually recommend. It's very, very helpful, particularly when it comes to tax time.

Anyway, if you did want to sign up, simply use the referral link in the description, or you can go to Sharesight.com forward slash new money, and Sharesight will give you a special offer of four months free when you sign up to an annual plan. So at least sign up for the free plan. It will make your life easier.

But that's it for today, guys. Thanks very much to Sharesight for sponsoring this content, and I'll see you guys next time.