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- Michael Burry warned surplus inventory leads to price cuts, slimmer profits, and pressure on stocks.
- Maersk just reported a shipping slowdown as customers are focused on destocking.
- The shipping giant's earnings suggest "The Big Short" investor's call was at least partly right.
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.
"Shipping volumes remained weak due to continued destocking particularly in North America and Europe," the company said. "The inventory correction observed since Q4 2022 appears to be prolonged and is now expected to last through year end."
In other words, many of the shipping giant's customers ordered fewer goods last quarter, and focused on offloading their bloated inventories instead. That trend fueled a 50% drop in sales within Maersk's ocean division to $8.7 billion, which pulled its overall revenues down 40% to $13 billion.
The darkening backdrop led Maersk to slash its estimate for growth in global container volumes this year. It now expects a decline between 1% and 4%, down from a range of 0.5% growth to a 2.5% decline.
Burry, the investor of "The Big Short" fame, appears to have seen the downturn coming. He highlighted the "Bullwhip Effect" last year, which refers to an increase in consumer demand reverberating up the supply chain, causing retailers and wholesalers to overstock, and manufacturers to overproduce in preparation for a flurry of orders.
Burry also described the trend as "Just in Case" supply-chain management, or companies producing and stocking more goods in anticipation of a future surge in demand. The excessive supply results in heaps of surplus inventory, which forces retailers to cut their prices or be left with heaps of unsold goods. They also order less additional inventory to the detriment of companies like Maersk.
The Scion Asset Management chief noted last summer that American households were saving less, racking up credit-card debt, and cracking open their nest eggs to keep up with inflation and higher interest rates. He warned they would exhaust their savings by last Christmas, hammering companies' profits, causing a "disinflationary overstock consumer recession," and tanking the prices of stocks and cryptocurrencies.
Households' pandemic savings have lasted longer than he expected. But the fact that Maersk is seeing its customers cut back on shipping in order to reduce their inventories could signal that consumer spending is now under pressure as Burry predicted.