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- Michael Burry's warning about mounting pressure on household budgets is looking prescient.
- JPMorgan banker Bob Michele said businesses and consumers are "burning cash in a big way."
- Americans are weathering a painful mix of historic inflation and much higher borrowing costs.
Michael Burry warned last year that US consumers would run short of money in the face of historic inflation and surging borrowing costs. That's exactly what's happening now, a top JPMorgan executive told Bloomberg on Wednesday.
Burry — the investor of "The Big Short" fame — noted Americans were saving less, racking up credit-card debt, and burning through the cash they stashed during the COVID-19 pandemic. He predicted those trends would eventually lead to a slump in consumer spending and a decline in corporate profits.
Bob Michele, the chief investor of JPMorgan's asset-management arm and the bank's global head of fixed income, flagged the intense financial pressure on consumers and businesses, and said it helped fuel the recent banking turmoil.
Both Silicon Valley Bank and Signature Bank collapsed in March due to a tidal wave of deposit withdrawals, while First Republic Bank's customers yanked more than $100 billion out of the lender last quarter. The deposits weren't only pulled because people feared their bank could fail, and because they could get a better return elsewhere, Michele said.
"They occurred because businesses and consumers are burning cash in a big way," he said. "It's the higher price of everything, and it's the higher cost to finance everything."
Consumers depleted their deposits in part because they had to cover the higher costs of groceries and other essentials, he said. Similarly, businesses withdrew cash as the interest rates on their debts have doubled or tripled from a year ago, he continued.
Households — especially poorer ones — have "blown right through" their pandemic savings, leaving their deposit balances below pre-COVID levels, Michele noted.
"They're not frittering it away on stuff, they're spending it to live off of," he said, adding that credit-card usage has also soared as people struggle to service their debts.
The elite banker also sounded the alarm on the current chaos in the regional-banking industry.
"It's somewhat naïve to say that this is just limited to First Republic," he said. "I think it is a crisis," he added, questioning how smaller banks will fare once emergency-relief programs end.
Burry and Michele's warnings underscore the multiple headwinds buffeting the US economy. In a bid to curb inflation, the Federal Reserve has lifted interest rates from nearly zero to about 5% over the past year or so.
Higher rates translate into bigger monthly mortgage payments, credit-card bills, and car-lease costs for households — which have already seen their budgets squeezed by spikes in food, energy and housing costs in recent months.