The polarizing CEO of ARK Invest, Cathie Wood, says she “wouldn’t be surprised” if inflation turned negative in 2023.
Her remarks come days after the October U.S. year-on-year CPI print came in at 7.7 percent, down from 8.2% percent in September.
According to Wood, the current global macroeconomic setup is akin to the 1920’s.
“If inflation is unwinding, as we believe, then we could be heading back to the future, the Roaring Twenties, the last time several general purpose technologies evolved at the same time: telephone, electricity, and the internal combustion engine,” she said.
“Prior to the Roaring Twenties, the world was at war – WWI – and suffering a pandemic – Spanish Flu. While both had a more serious impact on the global economy, today’s combination is a strong echo that could result in much lower than expected inflation and a boom in innovation.
“As inflation dropped to -15 percent in June 1921, the Fed lowered interest rates from 7 percent in May 1921 to 4 percent in July 1922, tripping the switch for the Roaring Twenties.”
Between 1921 and 1929, the Dow Jones Industrial Average compounded at an annual rate of around 25 percent.
Interest rate rises a mistake
Cathie Wood also declared she believes the Fed’s recent interest rate rises are a “serious mistake”.
“Founded in 1913 and challenged by its first bout of serious inflation, the Fed raised interest rates less than two-fold from 4.6 percent to 7 percent in 1919-1920. Faced with much lower inflation this time around, the Fed has increased interest rates 16-fold, a serious mistake in our view
“If inflation drops below the Fed’s 2 percent target and economic activity disappoints, then interest rates are likely to surprise on the low side of expectations next year, ushering in this century’s rendition of the Roaring Twenties.
“We would not be surprised to see broad-based inflation turn negative in 2023.”
Cathie Wood: Fed must pivot to avoid Great Depression
Wood also urged the Fed to pivot, warning the global economy would be plunged into a new Great Depression if the current course of monetary policy isn’t reversed.
She believes the Fed is at a critical juncture where it could either loosen monetary policy and spark a 1920’s-like bull market, or continue on it’s current path and set off conditions like the Great Depression which began in late 1929 and lasted until 1939.
“Unfortunately, today has some echoes of the same (beginning of The Great Depression in 1929).
“The Fed is ignoring deflationary signals, and the Chips Act could harm trade perhaps more than we understand. Much like the reaction to Smoot-Harley, economists have paid little attention to the potential impact of the Chips Act.
“The University of Michigan’s Consumer Sentiment Survey is at a record low, below levels hit in 2008-09 and 1979-82, a setup for a liquidity trap like that in the Great Depression when massive monetary stimulus failed.
“Clearly, we should be rooting against Depression and for the Roaring Twenties. Given conflicting data and the stark difference in these outcomes, the Fed should be debating the possible risks associated with its current policy, at the very least, instead of voting unanimously.”
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