Cathie Wood Warns Of 1929 Great Depression Scenario If Fed Doesn't Pivot, Says Inflation Could Turn Negative In 2023

The October inflation print gave investors a reason to cheer, given its implications for the Federal Reserve’s monetary policy. Ark Invest founder Cathie Wood took to Twitter Saturday to offer her take on the inflation outlook.

A Serious Policy Mistake: Inflation is unwinding, Wood said. If her deduction is true, the economy could be heading back to the future with the “Roaring Twenties,” the last time several general-purpose technologies, namely the telephone, electricity, and the internal combustion engine, evolved at the same time, she said, adding the setup is remarkably similar.

Prior to the Roaring Twenties, there was World War I and the Spanish Flu, Wood noted.

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," the money manager said.

The fallout of these two adverse developments have been a supply chain shock and other challenges that pushed inflation to over 20%, with inflation peaking at 24% in June 1920 and then dropping precipitously in a year to -15% in June 1921, she said.

“We would not be surprised to see broad-based inflation turn negative in 2023,” she added. Wood called out the Fed’s current monetary policy stance as a “serious mistake.”

While noting that the Fed raised interest rates less than twofold from 4.5% to 7% in 1919-20, she said the current Fed has increased interest rates 16-fold despite much lower inflation.

Fed Ignoring Deflationary Signals: If the Fed does not pivot now, a situation similar to the one seen in 1929 will play out, Wood said. She noted that the Fed raised rates too quickly in 1929 to put an end to financial speculation.

Inflation is easing??? LOL

The slight drop this month in YoY inflation is an artifact of the math calculation of YoY, not easing of inflation. Example:

Eggs cost $1/dozen 2 October’s ago..

Eggs last October cost $1.50/dozen - that is 50% inflation YoY

Eggs this October cost $2.00/dozen - that is only 33% inflation YoY.

both years had a 50 cent increase in eggs. But, don’t you just feel a whole lot better now that, in my example, inflation is easing!!

Cathy Wood’s Twitter bio states, “Founder, CEO and CIO
@ARKinvest. Thematic portfolio manager for disruptive innovation, mom, economist, and women’s advocate.”

The current federal funds rate is 3.75%, which by historical standards is not high. The government’s current annualized inflation rate of 7.7% is high by historical standards. The current 1 year treasury rate is 4.59% Savers should be able to earn a 2-3% risk premium over the inflation rate for use of their money. Yet at 4.59% the US Treasury is paying US citizen buying 1 year bonds 5-6% less than the inflation rate plus risk premium. In fact a US citizen loaning funds to the US Treasury for 1 year will lose over 3% to inflation plus taxes paid on the interest income. Treasury debt is not a good investment.

So who is buying the debt, at interest rates well below the inflation rate, in this period of high inflation? Since the Covid crisis began the Federal Reserve has bought nearly all of the debt issued by the Treasury. In other words the Federal Reserve has printed money out of thin air to monetize the huge government deficit and this money printing has resulted in high inflation. The Fed is buying that debt at below market interest rates which has resulted in treasury securities being sold at a rate (4.59%) 3 to 4 percentage points below the inflation rate. Small savers are losing their savings as a result.

The economy will not normalize until the Federal Reserve allows market rates to return. Cathy Wood wants the Federal Reserve to return to easy money, monetizing the US government debt by buying it at below market rates. This subsidy of interest rates through money printing will allow the federal government to continue run trillions of dollars of deficit spending each year. She is not a voice for fiscal responsibility or low inflation.

Inflation at 7.7% is still high by historical norms. Wood suggestions that one month of declining inflation means the Fed should allow interest rates to drop and provide easy money for her wealthy clients, while allowing average savers to lose money to inflation on their purchases of federal bonds or on money invested at 2-3% in savings accounts.

The alternative, let rates rise to market levels and let small savers earn a risk premium over inflation on the savings they lend to banks and government.

Is Cathy Wood, (thematic portfolio manager for disruptive innovation, mom, economist, and women’s advocate) truly a friend of the middle class or is she another wealthy liberal who has found a way to accumulate significant wealth through the government’s easy money policies in recent years?

Large eggs @ Aldi were $3.21 / doz. a few days ago, down from $3.63 (IIRC - I might have missed the highest peak) a little over a month ago. They have been holding at or above $3.20 for a few weeks now. A year ago they were a little over $1.00.

Cage free, etc., are $3.60- something up to $3.99 (at Aldi.) Wally World, last I checked was closer to $5.

Our local food banks were saying a couple months ago that adjusted for qty’s, their costs were already up 30% this year.

So, I understand your excellent example, but I also don’t believe the gov’t numbers (applying to much more than eggs, of course).

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