Cathie Wood Sees Financial Trouble, Praises Bitcoin
Famed money manager Cathie Wood, CEO of Ark Investment Management, has repeatedly said 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 interest rates – 3 percentage points since March. She said it all again in a webinar on Tuesday.
“What worries us is not that the Fed has raised interest rates,” Wood said. “We wanted them to go away from zero. It was not sustainable.” But the Fed has taken a “sledgehammer” approach when something softer would do, Wood said.
If the Fed raises interest rates by 75 basis points on 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 interest rates in the early 1980s, she said. And inflation had then built up for 15 years, while this time only 15 months have passed.
Of course now the increase would be to 4% from 0.25% and then it was to 20% from 10% – a much bigger figure.
In any case, “this is not 1970s-style inflation,” Wood said. “It is a war-driven inflationary shock on the supply side. I don’t think a sledgehammer is necessary.”
Leading indicators
And indications of deflation are starting to show, she said. The Fed is focusing on “headline” inflation and unemployment numbers, Wood said. But she sees them as hanging indicators.
Commodity prices are leading indicators and they are falling, Wood said. The most important commodity is gold. “People buy it as a hedge against inflation,” she said. Gold fell to a two-year low of $1,644 on September 23.
Other commodity prices are also falling, “which will ultimately feed into consumer prices,” Wood said.
Another deflationary factor is rising inventories for companies like Walmart (WMT) Goal (TGT) and Nike (NKE) , Wood said. These bulging inventories will lead to price cuts.
Used car prices have also started to decline – down 14% so far this year, Wood said. She wouldn’t be surprised if those prices eventually fall by 50%, reversing increases from earlier in the pandemic.
Also pointing to deflation is the inverted yield curve, Wood said. It is when short-term bond yields are higher than long-term yields, an inverse relationship to the typical relationship.
Two-year Treasuries yield 4.29%, compared with 3.89% for 10-year Treasuries. “The yield curve indicates recession, and we think we’re in a recession,” Wood said.
Cryptocurrencies
Meanwhile, Wood offered a defense of cryptocurrencies. Bitcoin and others have outperformed major stock market indexes, she said. That may be true for the past three months, in which bitcoin fell 4.7%, compared to 7.8% for the S&P 500.
But so far this year, bitcoin has plunged 60%, compared to a 24% plunge for the S&P 500 — a big difference.
In any case, Wood said cryptocurrencies are showing “new leadership for the next bull market.” That leadership “shows the end of the bear market,” she said.
Wood apparently believes it will be soon. “The Fed will get a strong signal that it has gone too far, too fast,” she said. “We think we are nearing the end of the rate hike cycle.”
