Famed money manager Cathie Wood, chief executive of Ark Investment Management, has said repeatedly for months that the economy is headed for deflation and is already in recession.
Part of that argument is that the Federal Reserve has gone too far in raising interests—3 percentage points since March. She said it all again in a webinar Tuesday.
“What concerns us isn’t that the Fed has been raising rates,” Wood said. “We wanted them to move away from zero. That wasn’t sustainable.” But the Fed has taken a “sledgehammer” approach when something softer would do, Wood said.
If the Fed raises rates 75 basis points Nov. 2, as investors and economists expect, that would represent a 16-fold increase since the Fed began moving in March, Wood noted.
Meanwhile, the Fed under Paul Volcker only doubled rates in the early 1980s, she said. And inflation then had been building up for 15 years, while this time around it’s only been 15 months.
Of course now the increase would be to 4% from 0.25% and back then it was to 20% from 10%--much bigger numbers.
In any case, “this isn’t 1970s-style inflation,” Wood said. “It’s a supply side, war-driven inflation shock. I don’t think a sledgehammer is necessary.”
Leading Indicators
And indications of deflation are starting to show, she said. The Fed focuses on “headline” inflation and unemployment numbers, Wood said. But she views those as lagging indicators.
Commodity prices are leading indicators, and they’re falling Wood said. The most important commodity is gold. “People buy it as a hedge against inflation,” she said. Gold dropped to a two-year low of $1,644 Sept. 23.
Other commodity prices are sliding too, “which will ultimately feed into consumer prices,” Wood said.
Another deflationary factor is rising inventories for companies such as Walmart (WMT), Target (TGT) and Nike (NKE), Wood said. Those bulging inventories will lead to price cuts.
Used car prices also have started descending — down 14% year to date, Wood said. She wouldn’t be surprised if these prices ultimately drop 50%, reversing their rise from earlier in the pandemic.
Also pointing to deflation is the inverted yield curve, Wood said. That’s when short-term bond yields are higher than long-term yields, a reverse of the typical relationship.
Two-year Treasuries yield 4.29%, compared to 3.89% for the 10-year Treasury. “The yield curve indicates recession, and we believe we’re in recession,” Wood said.
Cryptocurrencies
Meanwhile, Wood offered a defense of cryptocurrencies. Bitcoin and others have held up better than major stock market indices, she said. That may be true for the last three months, in which bitcoin fell 4.7%, compared to 7.8% for the S&P 500.
But year to date, bitcoin has plunged 60%, compared to a 24% slide for the S&P 500 — a huge disparity.
In any case, Wood said cryptocurrencies are showing “new leadership for the next bull market.” That leadership “shows at the end of the bear market,” she said.
Wood apparently believes that’s coming soon. “The Fed will get a strong signal that it has gone too far, too fast,” she said. “We think we’re near the end of the interest-rate-increase cycle.”
