Michael Burry Sounds Fed Warning. What Is the Bullwhip Effect?

No stranger to controversy or publicly broadcasting contrarian opinions, Michael Burry, the founder of Scion Asset Management and one of the main subjects of “The Big Short,” recently made waves on social media. Retweeting a CNN article that detailed the troubles of major retailers in the U.S., the hedge-fund manager warned investors about the bullwhip effect.

He wasn’t done. Urging onlookers to research the supply chain phenomenon, Michael Burry then took aim at the Federal Reserve. Casting aside contemporary concerns about soaring inflation, the famous contrarian investor argued that deflationary pulses were at play. Doubling down, he suggested that economists will see disinflation in the consumer price index (CPI). Then, that will ultimately lead to the Fed reversing itself regarding rising interest rates.

How can one article about Target (NYSE:TGT) incentivizing its customers to hold onto their unwanted products inspire such a paradigm shift in monetary policy? It turns out the hedge-fund manager knows a thing or two.

What Is the Bullwhip Effect?

A disruptive event in commercial operations, the bullwhip effect describes the consequences of mistaken demand amplification from the retail level up to the point of manufacturing under a supply chain network. The name derives from a concept in physics, where comparatively small movements of a person cracking a whip extends out to big motions at the tail end of a whip.