Cathie Wood Reiterates: Key Economic Issue Is Deflation, Not Inflation

Cathie Wood, chief executive of Ark Investment Management, reiterated her view that the economy is in recession.

Renowned investor Cathie Wood, chief executive of Ark Investment Management, on Tuesday reiterated her view that the economy already is in recession.

In a webinar, she said that as far as prices go, deflation is the problem, not inflation.

Wood isn’t impressed with the 9.1% increase in consumer prices through June. That’s a “lagging indicator,” she said.

Fiscal policy is one deflationary force, Wood said. The growth of federal outlays is dropping sharply. Economists have compared the current period to the 1970s. But in that period federal-spending growth never fell, she said.

On the monetary front, in addition to the Federal Reserve’s interest-rate hikes, M2 money-supply growth has eased from 27% in 2020 to probably 5% in July, Wood said. It could be down to 1% growth by the end of the year. “Monetary policy is restrictive,” Wood said.

True leading indicators for inflation show it’s not a worry, Wood said. One of those indicators is gold. It peaked in August 2020 and has traded in a range of $1,700 to $2,000 an ounce since then. It’s now standing around $1,800.

That doesn’t point to increasing inflation, she said. Also, copper peaked last year, and oil crested in March of this year.

No More Pricing Power

Meanwhile, companies got used to having pricing power through the covid pandemic, Wood said. “They didn’t think sales would capitulate, but they did,” she said. “Inventories have blown out. For example, builders are now stuck with home inventories.”

Companies have only one way to get rid of their excess inventory, and that’s by cutting prices, Wood said. It’s already happening at Walmart  (WMT) – Get Walmart Inc. Report, Target  (TGT) – Get Target Corporation Report, and others. “That will show up in inflation numbers,” Wood said.

As for recession, leading indicators have dropped three straight months, which for more than 40 years has been a sign of recession, Wood said.

Nonfarm-payroll numbers, which have shown strong growth in recent months, are a lagging indicator, she said. “The leading indicator is household-employment numbers, which have dropped almost 200,000 in the last four months.”

Fed Pivot

In addition, initial unemployment claims are up more than 55% from their March low, she said. “The Fed will probably meet that with a pivot [away from rate increases] within three to six months,” Wood said. It has been focusing on “lagging indicators for employment and inflation.”

The yield curve’s inversion also points to recession, Wood said. An inverted yield curve occurs when short-term Treasury yields exceed long-term yields. The two-year Treasury recently yielded 3.28%, compared with 2.8% for the 10-year Treasury

The economy is in “a significant inventory recession,” Wood said. “But it’s nothing like the systemic recession of 2008-09. It’s a garden variety recession. We think the economy will come out of it in 2023, when most economists expect a recession to begin.”

One positive deflationary force is tech, Wood said, and that’s the area where she makes her investments. “Innovation solves problems.”

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