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Danger of Inflation: Burry Heeds Buffet Warning

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EDITOR NOTE: If you’ve been following Michael Burry or The Great Short fame, then you’re probably aware that he sounded the alarm on hyperinflation with a recent tweet comparing the US with the Weimar Republic in the 1920s. It may seem shocking to most investors who follow mainstream thought with all its myopic assurances. Burry’s warning may even sound like it's coming from the fringes of economic babble, almost bordering on conspiracy theory. But the principles are quite plain and straightforward, as it echoes a few lines of wisdom that Warren Buffett shared back in 1980. Burry is a big fan of Buffett, whose investment style may be unique, distinctive, but at its core, sound and commonsensical. If Buffett’s words on the danger of inflation sound foreign to most mainstream investors, then it shows just how “fringe” the mainstream has become, where central bank monetary manipulations define the norm, and money has always floated freely, unbacked by anything of substantial value; it’s also where private digital currency becomes equivalent to “gold” while at the same time gold becomes is viewed as nothing more than an antiquated “supplement” to money’s true foundation, which is paper.

Michael Burry of "The Big Short" fame turned to Warren Buffett to hammer home the dangers of inflation in a Twitter thread on Tuesday.

"Warren Buffett's #BerkshireHathaway annual letters guided me tremendously earlier on," the Scion Asset Management boss said.

"During the last great inflation, #WarrenBuffett wrote about the topic at hand, and for those eyeing the future, this is worth revisiting, the 1980 chairman's letter."

Burry shared several screenshots from Buffett's 1980 letter to Berkshire Hathaway shareholders. In the letter, Buffett explained that high rates of inflation act as a tax on capital, discouraging companies from investing by reducing their real returns.

Inflation can also result in investors earning negative returns, Buffett said, because it serves as an implicit tax on their purchasing power, on top of the explicit taxes they pay on dividends and investment gains.

"The average tax-paying investor is now running up a down escalator whose pace has accelerated to the point where his upward progress is nil," the Berkshire chief wrote.

Burry dredged up the letter to emphasize that if inflation ramps up, corporate profits today will be far more valuable then profits in the future.

"Taking #Buffett's lessons from 1980, and porting them to 2021 doesn't take much translation," he tweeted

"If high inflation...Each $ of earnings today becomes important," he continued. "Earnings 10 and 20 years from now, the corollary goes, may be worth substantially less tomorrow than today."

Banging the inflation drum

Burry shot to fame after his billion-dollar bet against the US housing bubble was immortalized in the book and movie "The Big Short."

He also paved the way for the GameStop short squeeze in January when he bought a stake in the video-game retailer in 2019 and wrote several letters to its board.

Burry has been sounding the alarm on inflation. He warned investors last week to "prepare for inflation" as the US economy reopens and receives a fresh round of stimulus. He also compared America's current trajectory to Germany's path to hyperinflation in the 1920s.

The Scion chief studied Buffett early in his career, but decided not to model himself on the Berkshire boss. Burry realized Buffett's quirks and distinctive investment style were key to his outsized success, and also recognized he was too socially awkward to ever be as popular as the investing icon.

Originally posted on Markets Insider

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