Cathie Wood says forget inflation, deflation is the real enemy after the Fed hiked rates too far, too fast: ‘Investors are worrying about the wrong thing’ (2024)
Cathie Wood, ARK Invest’s founder and CEO, is known for her big—and often risky—bets on “disruptive” technology companies. From Tesla to Zoom, she’s taken chances on some of the most high-flying, growth-focused companies on the planet—and had several big wins along the way. Over the past few years, though, many of her favorite picks have been vulnerable to rising interest rates as the Federal Reserve has moved to rein in inflation. Simply put, rising borrowing costs have crippled many of the unprofitable tech stocks that Wood relies on. But the good news is the pain may be coming to an end, she says—both for her fund and for the economy.
Not long ago, Wall Street’s biggest fear was “sticky” inflation. The idea was that consumer price increases might stagnate around 4% to 5% due to the tight labor market, entrenched inflation expectations, or even demographics, forcing Federal Reserve officials to keep interest rates “higher for longer” in order to achieve their 2% target inflation rate.
But Wood never bought the sticky inflation argument. She’s repeatedly made the case that technological innovation will lead to an era of rising productivity and falling prices while criticizing Fed officials for unnecessarily crippling the economy (and clipping her fund’s wings) with rate hikes. That’s why after the latest cooler-than-expected inflation report shocked Wall Street this week, leading stocks to surge, Wood said she wasn’t surprised at all—and consumers should expect deflation from here on out.
“The bigger risk here is deflation, not inflation. And we’re seeing more and more signs of it,” Wood told the Wall Street Journal in a Tuesday interview. “I actually think that investors are worrying about the wrong thing.”
Wood points to fading airfare, car, and commodity prices as evidence that inflation is turning to deflation across the economy. To her point, the Dow Jones Commodity Index, a broad measure of commodity futures prices, is down more than 7% over the last 12 months, and 21% since its March 2022 peak. And Tuesday’s consumer price index (CPI) report showed that despite the United Auto Workers’ strike, both new and used car prices declined in October, while airfare prices sank 13.2% year-over-year.
In a separate interview with Bloomberg this week, Wood argued that the reason deflation is now appearing in the economy is that the Fed has gone too far with its more than 20-month-long interest rate hiking campaign meant to tame inflation.
“I think the Fed’s overdone it. I think we’re going to see a lot more deflation going forward,” she said. “I would not be surprised to see CPI going negative at some point next year.”
Mounting deflation calls
While Wood is known for making bold claims and predictions—including arguing Tesla stock will surge to $2,000 per share by 2027 and Bitcoin will hit $1.5 million just three years later—she’s not alone when it comes to forecasting deflation.
Walmart CEO Doug McMillon said on the retail giant’s third quarter earnings call Thursday that dry grocery and consumables prices may “start to deflate in the coming weeks and months,” leading to a broader deflationary trend in the economy.
“In the U.S., we may be moving through a period of deflation in the months to come," he told analysts, adding that he’s "happy about it."
Home Depot’s management team sang a similar tune in their third quarter earnings call on Tuesday as well. "I think the most important observation we've made is that the worst of the inflationary environment is behind us,” CFO Richard McPhail said, adding that “retail prices are settling in the market."
A deflationary savior for a leaking ARK?
ARK Invest’s Wood said this week that she is pleased with the recent deflationary trend, which should benefit her portfolio of tech and other growth-focused stocks.
After an incredible run of success during the first year of the pandemic, Wood’s flagship fund, the ARK Innovation ETF, has dropped 70% from its January 2021 peak. Amid the Fed’s aggressive interest rate hikes, soaring borrowing costs and the rise of alternative investment options for the retail crowd in Treasuries and Bonds have hit ARK Invest’s growth focused holdings hard.
Wood has often criticized the central bank in the past few years of underperformance at ARK Invest, arguing that officials made a “serious mistake” with the pace and size of their rate hikes, creating an “earthquake” for the economy—and her firm’s strategy.
But the veteran Wall Street investor said this week that ARK Invest is now “in a very good place” to take advantage of the shifting tides in the economy. “Technology is deflationary. And so they know how to operate in a deflationary world,” she told the Wall Street Journal of her funds’ “disruptive” tech holdings.
Cathie Wood says forget inflation, deflation is the real enemy after the Fed hiked rates too far, too fast: 'Investors are worrying about the wrong thing' Cathie Wood, ARK Invest's founder and CEO, is known for her big—and often risky—bets on “disruptive” technology companies.
J.P. Morgan Research forecasts global core inflation will remain sticky at around 3% in 2024. “Although headline inflation is expected to drop, we look for a fading of goods price deflation.
Some financial observers, among them the German investment firm Wermuth Asset Management, have rung alarm bells because of the risk that the U.S. could soon face deflation. Commercial real estate is showing signs of weakness, while pandemic savings are drying up (and might even be gone).
Deflation is worse than inflation because deflation is an indication that the economy is not growing. The prices of goods and services fall down due to low demand in the market. This results in companies reducing their production which will lead to reduction in employee salaries and layoffs.
Inflation has pulled back significantly from its pandemic-era peak. In fact, some categories have fallen into outright deflation, meaning consumers are seeing the prices decline instead of rise. Deflation has largely occurred among physical goods rather than services, economists said.
The most recent example of deflation occurred in the 21st century, between 2007 and 2008, during the period in U.S. history referred to by economists as the Great Recession.
Our forecasts call for the U.S. economy to grow 1.6% in 2024 and 1.7% in 2025. But if the U.S. labor market merely remains as resilient as it has been since late 2020, U.S. growth could be half a percentage point stronger in 2023 and 0.7 point stronger in 2025.
China is a perfect example of an economy with deflation or dangerously low inflation. In 2023, China recorded a successive series of declines in its CPI, which began to fall in January 2023 and continued till July 2023, dropping from 104 points in January to 102.7 points in July.
In the past 60 years, the United States has experienced deflation only two times; in 2009 with the Great Recession and in 2015, when the CPI barely broke below 0% at −0.1%.
Similar price declines occurred in other countries; from 1929 to 1933, prices fell by 25 percent in Japan and 20 percent in Sweden. In contrast to the nineteenth century, a collapse in aggregate demand and credit channels, along with policy mistakes, drove deflation of the late 1920s and early 1930s.
To that point, China's core CPI has been under 1% for the last 22 months. The country's GDP deflator, a wide measure of domestic prices, clocked in at -0.5% year-over-year for 2023, suggesting that deflation is broad-based.
While it may seem worse for prices to rise than to fall, deflation is generally less favorable and is associated with economic contractions and recessions. A deflationary spiral may turn hard economic times into recessions and then depressions.
This deflation increased debt burdens; distorted economic decision-making; reduced consumption; increased unemployment; and forced banks, firms, and individuals into bankruptcy. The deflation stemmed from the collapse of the banking system, as explained in the essay on the banking panics of 1930 and 1931.
The Great Depression was the most severe economic depression ever experienced by the Western world. It was during this troubled time that the world's most famous case of deflation also happened. The resulting aftermath was so bad that economic policy since has been chiefly designed to prevent deflation at all costs.
1. The recession of 1920–1921: Following World War I and the 1918 influenza pandemic, the US economy experienced deflation as the prices of goods and services dropped for over a year. 2. The Great Depression: The Great Depression lasted from 1929 to 1939.
Global growth is projected at 3.1 percent in 2024 and 3.2 percent in 2025, with the 2024 forecast 0.2 percentage point higher than that in the October 2023 World Economic Outlook (WEO) on account of greater-than-expected resilience in the United States and several large emerging market and developing economies, as well ...
On the basis of these inflation forecasts, average consumer price inflation should be 3.3% in 2024 and 1.9% in 2025, compared to 4.06% in 2023 and 9.59% in 2022.
Prices were lower in March 2024 than March 2023 for three food-at-home categories: eggs, fish and seafood, and dairy products. In 2024, prices for most food categories are predicted to change at a rate below their 20-year historical average.
U.S. real GDP growth on an annual average basis will be 2.3 percent in 2024, 1.5 percent in 2025, and 2.2 percent in 2026. National job growth will weaken sharply to only 35,000 monthly gains in the second half of 2024, rebounding to 115,000 job gains by late 2025 as aggressive Fed rate cuts spur investment spending.
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