Watch my previous Michael Burry video here: https://www.youtube.com/watch?v=jEong6XEbN4

Michael Burry is known for the Big Short, but he’ll soon be known for the Big Short 2. Burry is currently betting on the worst financial crisis in US history. That’s right, we’re talking about a collapse that is worse than the 2008 recession, the dot-com bubble, the Great Depression, and the Great Inflation. Burry is foreseeing the mother of all crashes backed by the biggest decline in corporate earnings. The world is about to wake up to this crisis within the next few months, and Burry will once again make billions in the process.
The past 13 years represented the largest bull run in US history. The S&P 500 has increased by over six times in value since 2008. This unprecedented price increase was fueled by growing liabilities. Total public debt has tripled to over $30 trillion since 2009. And while it’s impossible to know how much debt is too much, it’s certainly not sustainable to keep adding trillions of dollars in debt every year. The growing debt balance is coupled with a massive decline in consumer savings. The US personal savings rate is currently reaching levels that haven’t been seen since 2008. Total personal savings have also declined to levels not seen in almost a decade despite inflation. The fact that total savings are declining while trillions of dollars are being added to the economy is extremely concerning. To make matters even worse, credit card debt is reaching all-time highs, signalling that the consumer is getting weaker and weaker every day. Michael Burry tweeted that “US Personal Savings fell to 2013 levels, the saving rate to 2008 levels - while revolving credit card debt grew at a record-setting pace back to pre-COVID peak despite all those $trillions of cash dropped in their laps. Looming: a consumer recession and more earnings trouble.” The weakening consumer directly impacts the sales of companies, as the economy works with a circular flow. Businesses and households transact in the factor market by exchanging labor for income. The other side of this is the product market, where households purchases products that businesses profit from. Because the households have weak purchasing power, this will cause the product market to experience lower activity. Lower consumption in the product market will lead to less corporate profits. Less corporate profits will cause the factor market to weaken, decreasing household income and weakening the product market once again. This is a positive feedback loop, because one negative event could instigate an infinite downwards spiral. Economists call this the circular flow model, as economic disasters at any point in the cycle are contagious. Think about the circular flow model like dropping one drop of food coloring into a bucket of water. The entire bucket of water will be colored within a matter of seconds. Burry is giving numerical evidence as to why the lowering consumer sentiment will cause a recession. The reason why is that the low consumer activity will lower corporate earnings, decreasing household income and leading to even less saving. Burry reiterated his statement by showing the downwards trend of the US personal savings to GDP. “Charting Total US Personal Savings/GDP. Red line is the all-time low at 1.5%, set in July 2005. At the last 12 mos’ rate of depletion of savings, could hit that level between September and December this year. Borrowing time”. Attached to the tweet is a graph showing a cyclical decline in the personal savings to GDP ratio. Burry is clearly calling for a consumer led recession, but he’s not the only one saying that. Federal Reserve Chairman Jerome Powell once said in 2019 that he was very worried about the growing US debt. The total US debt back then was roughly $22 trillion. That number has now increased to over $30 trillion, which is a 36% increase in three and a half years. All of this is concerning, but you might be wondering what degree of a collapse we’re talking about here. Prominent economists worldwide often compare our situation to the 1970s when the US experienced inflation in the double digits. The 1970s is often seen as a period of stagflation, because the economy simultaneously experienced high unemployment and high inflation. This period of time coincided with a record increase in the misery index due to low consumer purchasing power. Imagine a period in which you not only become unemployed, but also witness your money become worthless. That might seem frightening, but Burry actually believes that our current situation is magnitudes worse than the 1970s. Michael Burry explained how “some compare the US of today to the 1970s. But the 1970s saw rapidly growing labor force participation due to the post WWII Baby Boom. We have the opposite today. Birth rates at 1950 levels and nuclear families at 1959 levels, despite a 2x larger population don’t help.”