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The Bullwhip effect

Leestijd: 5 min.

Brecht Soenen


Michael Burry

Michael Burry, the 51 year old investor from California made his name with the crisis in 2008. The film The Big Short tells his story in which the doctor saw the big crash in the housing market coming. As manager of the hedge fund "scion" he saw what was coming as early as 2005 and positioned himself by going short on the housing market. He was way ahead of his time and was declared a fool for this action. Practically nobody saw what he saw and he made billions through his speculation on the housing market, when the market collapsed. After his big hit, he quit the hedge fund to focus on his own investments. Not surprisingly, when Michael says something, many have an ear to his contemporary views. Even now he is warning the world via twitter about what is coming namely "the bullwhip effect". This is a disruption in the supply chain that always comes back in cycles. We explain in more detail.


As you know, a huge amount of money has been printed through the principle of quantative easing. Through this so-called QE, worthless securities can be bought up, resulting in a lot of new fresh money or liquidity coming into the markets. The more money that is pumped into the economy, the more dollar liquidity circulates. Which stimulates this so-called false new prosperity from the consumption of goods. Well don't forget that this also causes inflation to skyrocket.

The bullwhip effect

But anyway, the bullwhip effect. Let's take a bottle of water as an example. When more water is sold by the retailer, they drive up their order. Say instead of selling 50 bottles a day they suddenly sell 100 bottles. Logically they order more plus some extra to meet any increase in demand. So they place an order of 150 bottles, the wholesaler who wants to meet the demand also orders extra of course. Anything to meet the growing demand. So if they deliver 150 bottles a day they make sure that their stock in turn is also increased to 200 bottles. In turn, the distributor increases their stock to 250 bottles. You see it coming, indeed, the manufacturer of the water also wants to build up some reserves so they increase their production to 300 bottles per day. Meanwhile, the money printer continues to go like never before and inflation continues to rise. It then comes to a point where the central banks have to intervene to curb inflation.

Quantitative thightening

One of the things they can do is raise interest rates and do some quantative thightening, which is when money is taken out of circulation. When money is taken out of circulation then less wealth circulates, because of less wealth people are more frugal and consumption goes down. As a result, fewer bottles of water are sold. As a result, the retailer orders less water from the wholesaler, the wholesaler orders less from the distributor and the distributor reduces its demand, leaving the manufacturer with a large surplus. Because of the large surplus, this of course has major consequences for the manufacturer because he is left with his goods. And then the troubles start. Because of the huge surplus, the prices of the goods can crash. Because of this crash, it can possibly cause falling prices to greatly reduce inflation. This is a cycle. You can guess it, everything starts back at square one. The money printer is put back in motion with all its consequences. This is what is happening now, it is not for nothing that Michael Burry has tweeted that Christmas is coming in July. By which he means that we can expect a big drop at this point in the cycle, namely the crash in price of consumer goods due to the large overstock. If it does indeed happen effectively then it is safe to say that Michael does great credit to his reputation. He sees like no other what is about to happen, it is almost as if he has a crystal ball.

Strong dollar

That's one of the cycles that an economy goes through. And they are lucky then to be standing with a strong dollar. If we see what the euro is doing right now. The fact is that right now, for the first time in 20 years, the dollar is higher than the euro. The question is, is the dollar that strong or is the euro that weak? The fact is that in America inflation is being fought by raising interest rates, while here in Europe the central bank has not yet taken any action. How all this will end and whether Michael Burry will be right again will be clear in the not so distant future. We will keep you informed.


Conclusion of this thesis is that there can be a new potential upside in the stock market & crypto market if the printing machine provides fresh liquidity. This liquidity should also save the debt market from its demise. At the same time we are also seeing a flight from the bond market as it is linked to confidence in governments, with a rise in the dollar following. All these markets are like communicating vessels connected to each other. A fun fact, currency is like the current of the sea, it is sometimes said...

Interesting to take a look at: https://www.youtube.com/watch?v=AYObaBrpZkA

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