Cathie Wood, the CEO of ARK Invest, raised concerns about a potential deflationary cycle, citing a significant drop in commodity prices.
What Happened: Wood, in her letter to investors on Wednesday, pointed out the surprising downtrend in commodity prices since 2008. She highlighted that the Bloomberg Commodity Price Index is currently at the same level as in 1984, indicating a potential deflationary “Kondratieff wave.”
Kondratiev waves are long economic cycles, lasting 40-60 years, marked by alternating periods of high and slow growth, linked to the technology life cycle.
Wood also discussed the yield curve, which has been flattening for over a decade and inverted for more than two years. This, she suggested, further supports the notion of a deflationary Kondratieff wave.
“Characterized by decades-long waves of inflation and deflation, the concept of a wave continuing today might be associated not only with technologically enabled innovation but also with China exporting deflation to resuscitate its economy,” Wood wrote.
By “exporting deflation,” Wood refers to China selling products to the U.S. at lower prices, made possible through government subsidies.
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The CEO noted that the unemployment rate has risen from 3.4% to 4% since January 2023, and several sectors of the economy, including housing, autos, and commercial real estate, have already entered a recession. She also highlighted the decline in the Index of Leading Economic Indicators, which has not been seen since the Global Financial Crisis.
Wood believes that the economy is gradually slipping into a recession and that the yield curve will only normalize with significant easing by the Federal Reserve.
“In our view, the economy is continuing its slow recession roll, and not until the Fed eases significantly will the yield curve normalize,” Wood wrote.
Why It Matters: Wood’s warning of a potential deflationary cycle aligns with her previous predictions. In January, she forecasted a deflationary environment for 2024, despite record highs in the S&P 500 and technology stocks.
Wood’s recent letter also coincides with her forecast of a potential shift in the equity market, and strategic change in her company’s flagship fund ARK Innovation ETF ARKK, favoring small-cap stocks over large-cap tech companies due to the Federal Reserve’s current “restrictive” monetary policy.
Wood’s concerns are echoed by former Dallas Fed President Robert Kaplan, who predicts a potential rate cut in September, and New York Fed President John Williams, who hints at a potential rate cut in the coming months if the recent slowdown in inflation persists.
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Cathie Wood Photo courtesy Benzinga YouTube and Shutterstock
This story was generated using Benzinga Neuro and edited by Kaustubh Bagalkote