What Michael Burry’s ‘Winter Is Coming’ Tweet Is Really Saying About the Global Economy

The backdrop for the film The Big Short, which is based on a true story, is the subprime mortgage crisis that triggered the 2008 financial meltdown.

In The Big Short, the protagonist judges that this credit-fueled edifice is dangerously fragile and makes a fortune by shorting it.

The real-life inspiration for that character is Michael Burry.

Michael Burry, who is also the founder of the hedge fund Scion Capital, has been issuing warnings about the market lately.

Michael Burry is arguing that winter is coming for the economy.

The core of the evidence he cites comes down to one thing.

An increase in consumer credit balances means people are making heavy use of credit—borrowing more.

Just as you have to pay back what you put on your credit card the following month,

Burry appears to be worried about how much credit people are using and the moment when all of that has to be repaid.

The chart above shows US revolving consumer credit from 2000 through 2022.

Installment loans and mortgages are non‑revolving credit, while credit cards and overdraft lines are revolving credit.

Back when you could practically get a mortgage in your dog’s name, and today,

the amount of revolving credit people are using is at similarly elevated levels.

Burry explains this situation as the result of the money sprayed by central banks in the wake of Covid—the so‑called helicopter cash.

The spending habits formed in a period when there was so much money sloshing around that you could spend freely and still have some left proved highly addictive, and that is what underpins today’s level of revolving credit.

Even if your unpaid credit card balance keeps growing, in theory you just pay it off.

It’s money you’ll earn in the future anyway, and as long as all debts are eventually repaid, what’s the problem?

But it’s hard to believe that the founder of a hedge fund is fretting about winter on the back of nothing more than a nagging observation that “people are using their credit cards a lot.”

It’s because both the level of savings and the savings rate in the US have fallen to the floor.

Personal savings in the US are at their lowest level since 2014,

and the US savings rate, which briefly hit 33.8% right after 2020, now hovers at just over 5%.

Yes, in principle you can pay it back later.

If you keep saving steadily while using your credit card, you can cover the bill when it comes due next month.

But if you’re not saving at all and still swiping your card, paying that bill becomes much harder.

Revolving consumer credit is climbing toward record highs, while the savings rate is scraping the bottom.

That can be read to mean people are not spending simply because they’re addicted to consumption, but because life becomes difficult unless they tap credit right now.

For people living day to day on credit to endure this situation and get back to saving, they need to earn substantially more money.

For them to earn more, companies have to grow and pay out fatter paychecks.

But hold on: growth means generating higher sales than before.

If you tell companies to go out, make more money, and grow, their response would probably be something like this:

It is extremely difficult to grow when liquidity is being drained from the system. Survival alone becomes the priority.

That is why it is so important that the people and businesses who need to hang on actually manage to hang on.

This also helps explain why equities rallied so strongly this time when CPI inflation came in below expectations.

Rates are rising and excess liquidity is being withdrawn, yet the savings rate is low and credit usage is high.

Putting this together, we can interpret Michael Burry’s tweet as follows:

That is why he wrote “Winter is coming,” not “Winter has come.”

There is one key question I would pose to AWARE subscribers.

Can consumers endure the current situation without leaning on their credit cards?