Cathie Wood’s Expectations for Inflation, Recession, Markets, China, and Jobs

8/9/2022

Economy

0 min read




Image: Bloomberg TV (August 8, 2022)

Why Cathie Wood Thinks We Will Emerge from A Recession More Quickly than Others

Cathie Wood, the founder, and CIO of Ark Invest, was asked in an interview, “Is the Fed going to continue hiking rates, or are they going to stop and turn around and come back down next year?” Her response was not initially uplifting, but as she explained why her firm has evaluated the current economic growth trajectory and what the future may bring, the fund manager, that focuses on innovative sectors, was actually optimistic.

Are Jobs Strong?

Wood brought up July’s huge unexpected increase in Non-Farm Payroll and contrasted it with the Household Employment numbers (a broader-based survey). She reminded the Bloomberg interviewer that Household Employment “…has been flat to down for the last four months.” She added, “If you look at [unemployment] claims, we’ve never seen a faster increase.” She thinks people don’t weigh in the fact that we are up 50% off the low in unemployment. Cathie Wood also mentioned that large numbers of people are being laid off, then she referenced a Challenger survey that reported layoffs are up 55-60% year-over-year.

The reason she gave for the layoffs is inventory levels. “We have a massive inventory glut.” She believes the push to hire is ending and unwinding.

Is Inflation a Non-Issue?

Cathie Wood had been on record as previously saying, “deflation is more of a concern than inflation.” She was asked if she still feels this way. “I still think that because the evidence is piling up. Now the CPI and to some measure the PPI, both of those are lagging indicators.” She emphasized, “The Fed is driving policy off lagging indicators.”

What she prefers to look at is the price of commodities used for building and growth like copper. She said that copper took a decisive break to the downside (20%), but the decrease hasn’t yet fed into the inflation indexes. Wood says a better measure of where inflation is headed is gold. “Prices [Gold] peaked August 2020, we’ve been in a trading range, we’re at the low end of the trading range now.” She believes if the Fed continues to tighten, her firm’s expectation is the dollar will turn back up, and commodities will continue
to fall.

The next inflation report is due Wednesday (August 10). An Econoday consensus estimate puts July headline inflation at 8.7%, cooling from 9.1% in June.

Are We in a Recession?

“Yes, we believe we are in a recession.” Wood told the interviewer. She explained that the economy receded for two consecutive quarters, which is the beginning of the definition. Three consecutive declines in leading indicators would suggest the same, she explained. “Our point of view is this is going to be a severe inventory recession, but we don’t have the systemic excesses like we did pre-2008, 2009 in the mortgage market.” She explained that while many economists use the inverted yield curve and say it indicates a recession next year, she believes we will be coming out of our current recession next year.

What’s Going on in China?

Cathie Wood says the big question is what is going on in China? She offered that perhaps the commodity prices unraveling has to do with the Chinese economy, especially their growth-inhibiting policies and real estate problems. She thinks China’s economy is going to be more difficult for them to control than they anticipated.

Why Stay Invested?

She was asked if it makes sense to move to cash since there are possible trouble spots on the horizon. In classic, confident optimism, Cathie Wood responded, “We are going to stay 100% in innovation.” Her reason is innovation is going to be a critical allocation in the years ahead. She explained, “Innovation saves time. Innovation solves problems.” She then listed the current problems, as supply chain, and energy, and food price increases. “Better, cheaper, faster, more productive, more efficient, more creative, is going to win,” she exclaimed.

Wood thinks most asset allocators are short the innovation categories. Her idea of the sector is not current day high tech Nasdaq 100, but what Nasdaq used to be in the 1990s.

The Federal Reserve will reverse course on interest-rate policy next year by yanking down borrowing rates in the face of weaker activity in the US economy, disruptive-tech investor Cathie Wood told Bloomberg TV.

“We’re getting all kinds of signals that the economy is very weak,” which will prompt the Fed to start rate cuts in 2023, she said Monday.

Take Away

The well-followed manager always has strong convictions, they are often contrary to popular opinion. These forecasts have both served her firm and investors well and have caused disappointment when the volatile innovative sector is giving back gains.

She said that she will stay 100% invested as the industries and companies her funds are most heavily weighted in will be the kind of companies that help resolve issues weighing on consumers and economies today.

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Paul Hoffman

Managing Editor, Channelchek

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