While the September CPI came in at 5.4% causing fear among some investors that inflation has persistence, Cathie Wood is not one of them.
The ARK Invest founder and CEO instead believes that deflation is in the cards, long-term, and - as with most things Wood does - this is down to technology.
In a series of Tweets on posted early Monday, the outspoken manager of the $21bn ARK Innovation ETF (ARKK) said technology, including artificial intelligence (AI), will encourage deflation over the longer term.
‘Technologically enabled innovation is deflationary,’ wrote Wood, whose flagship fund soared 152% last year, but was down more than 5% this year through Friday.
Now we believe that three sources of deflation will overcome the supply chain-induced inflation that is wreaking havoc on the global economy. Two sources are secular, or long term, and one is cyclical. Technologically enabled innovation is deflationary and the most potent source.
— Cathie Wood (@CathieDWood) October 25, 2021
She argued that AI training costs were dropping between 40% and 70% annually and that this was ‘a record-breaking deflationary force’ as AI was likely to transform every sector over the next decade.
‘Creative destruction, thanks to disruptive innovation’ will also exert deflationary pressures, she wrote. In this context, Wood complained about companies catering to the short-term desires of shareholders by borrowing money to pay dividends. Companies aren’t investing enough in the future, and are getting by ‘selling increasingly obsolete goods at discounts.’ This means deflation, she suggested.
She also argued that the inflation being seen currently was down to companies being caught out by high consumption during the pandemic, playing catch up and over ordering - ‘probably double- and triple-ordering beyond their need’ - and that once the holiday season is over, this excess supply will lead to prices falling.
Not only do some prominent economists such as Larry Summers disagree with Wood, but some technology moguls themselves are in the inflation camp. Wood’s thread was a followup to Twitter’s founder Jack Dorsey’s post in which he worried that hyperinflation has arrived. ‘Hyperinflation is going to change everything. It’s happening,’ tweeted Dorsey.
Hyperinflation is going to change everything. It’s happening.
— jack⚡️ (@jack) October 23, 2021
Wood noted that she was in Dorsey’s camp when the Federal Reserve first responded to the financial crisis more than a decade ago. But she now believes she was wrong because velocity -- the rate at which money moves through the economy -- has declined.
In 2008-09, when the Fed started quantitative easing, I thought that inflation would take off. I was wrong. Instead, velocity - the rate at which money turns over per year - declined, taking away its inflationary sting. Velocity still is falling. https://t.co/tFaXSaCKqS
— Cathie Wood (@CathieDWood) October 25, 2021
Wood on wood
As part of her thesis that prices will fall, Wood noted that lumber and iron ore ‘have dropped 50%.’
Lumber screamed higher earlier this year in response to demand for housing and sawmill shortages caused by industry consolidation after the housing crisis.
Addressing one of the most prominent inflationary indicators – the high price of oil – Wood called it an ‘outlier.’ She noted that the high price is ‘destroying demand,’ and mentioned supply side factors such as ESG investing mandates causing drillers to move to nascent renewables and banks to deprive frackers of funding as main drivers of current prices.
On the supply side, ESG (environmental, social, and governance) mandates have forced energy companies to shift capital spending from mature fossil fuels to nascent renewables. Meanwhile, banks have deprived fracking companies of funding after their near-death experience in 2020.
— Cathie Wood (@CathieDWood) October 25, 2021
West Texas Intermediate crude has pushed above $80 per barrel after sitting at $60 at the beginning of 2020, just before the start of Covid. Wood argued that the price rise seen by the commodity since the lows of last year could encourage electric vehicle adoption, ‘sowing the seeds of a serious oil price decline longer term.’
Wood’s ARK Innovation has more than 10% of its assets in electric vehicle maker, Tesla. The stock is up 29% this year, after a slow start, and has returned more than 150% on an annualized basis for the three-year period ending on Friday.
Wood previously made the case for deflation, briefly, in her debate with Rob Arnott at the Morningstar Investment Conference in September, though the focus of that discussion was the valuation of growth and technology stocks.
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October 26, 2021 at 12:47AM
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Cathie Wood makes the case for deflation - Citywire USA
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