Cathie Wood says forget inflation, deflation is the real enemy after the Fed hiked rates too far, too fast

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.

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