Michael Burry, the ‘Big Short’ investor, warned about inflated inventories, and Maersk’s shipping slump confirms his concern.

Michael Burry, the 'Big Short' investor, warned about inflated inventories, and Maersk's shipping slump confirms his concern.

The Inventory Crunch: Maersk’s Earnings Confirm Michael Burry’s Warning

Michael Burry warned last summer that American consumers would run short of cash and cut back on spending, leaving retailers with lots of excess inventory, which would lead to price cuts, slimmer profits, and stocks and cryptocurrencies tumbling. Maersk’s second-quarter earnings report on Friday suggests he was right on the inventory front at least.

A Shipping Slowdown Points to an Inventory Crunch

Maersk, the shipping giant often seen as a bellwether for global trade, reported a shipping slowdown in its second-quarter earnings. The company cited customers’ focus on destocking, confirming Michael Burry’s warning about an impending inventory crunch. “Shipping volumes remained weak due to continued destocking, particularly in North America and Europe,” stated Maersk. The company also revealed that the inventory correction observed since Q4 2022 appears to be prolonged and is now expected to last through year-end. This suggests that many of Maersk’s customers ordered fewer goods last quarter and concentrated on reducing their bloated inventories instead.

As a result of this trend, Maersk’s ocean division experienced a significant decline in sales, resulting in a 50% drop to $8.7 billion. This decrease pulled down the company’s overall revenues by 40% to $13 billion. To make matters worse, Maersk reduced its estimate for growth in global container volumes this year, anticipating a decline between 1% and 4%. This downward revision emphasizes the impact of the inventory crunch, as warned by Michael Burry.

The Bullwhip Effect and “Just in Case” Supply-Chain Management

Michael Burry, renowned for his role in “The Big Short,” aptly highlighted the concept of the “Bullwhip Effect” last year. This phenomenon refers to the increase in consumer demand reverberating up the supply chain, causing retailers, wholesalers, and manufacturers to overstock and overproduce in anticipation of a surge in orders. Burry also described this trend as “Just in Case” supply-chain management, whereby companies produce and stock an excess of goods in preparation for future demand.

Unfortunately, this excessive supply of inventory results in price-cutting by retailers who are left with heaps of unsold goods. In turn, retailers reduce their orders for additional inventory, negatively impacting companies like Maersk. The inventory crunch that Maersk is currently experiencing further confirms Burry’s warning about the consequences of excessive inventory in the market.

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The American Consumer and the Economy

Michael Burry’s warning is not solely tied to the inventory crunch. Last summer, he highlighted the financial struggles of American households and their impact on the economy. Burry observed that American households were saving less, accumulating credit-card debt, and dipping into their savings to keep up with inflation and higher interest rates. He predicted that these households would exhaust their savings by Christmas, which would significantly impact companies’ profits, resulting in a “disinflationary overstock consumer recession.” Burry also suggested that such circumstances would cause the prices of stocks and cryptocurrencies to plummet.

Although households’ pandemic savings have lasted longer than Burry expected, Maersk’s customers reducing shipping activities to reduce inventories could indicate that consumer spending is now under pressure, aligning with his predictions. The delayed impact serves as a reminder that economic consequences often unfold over a longer period and can manifest in unexpected ways.

Conclusion

Maersk’s second-quarter earnings report aligns with Michael Burry’s warning about an inventory crunch in the market. The company’s experience of shipping slowdown and decreased sales due to destocking confirms the negative consequences of excessive inventory highlighted by Burry. The concept of the Bullwhip Effect and “Just in Case” supply-chain management further reinforce the potential pitfalls of overproduction and overstocking.

Moreover, Burry’s concerns about the financial situation of American households and its impact on the economy have taken longer to materialize but may be surfacing now. The fact that Maersk’s customers are reducing shipping activities to manage their inventories suggests that consumer spending is now under pressure as predicted by Burry.

As the market continues to grapple with the aftermath of the pandemic and economic uncertainties, it is crucial to heed the warnings of seasoned experts like Michael Burry. The inventory crunch serves as a reminder of the delicate balance between supply and demand in the global economy.

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