On Monday, venture capitalist Cathie Wood rejected Twitter and Square founder Jack Dorsey's hyperinflation theory.
Following Jack Dorsey's Friday evening tweet that "Hyperinflation is going to disrupt everything," Ark Invest's founder and CEO took to Twitter to clarify her contrarian view on deflation. It's happening right now." After the holidays, Wood anticipates that her hypothesis will start to yield fruit.
"When the Federal Reserve began quantitative easing in 2008-09, I expected inflation to soar. I was mistaken. Instead, velocity - the annual pace at which money is exchanged - fell, removing the inflationary sting. In a tweet, Wood stated, "Velocity is still decreasing."
While many market players are concerned about growing expenses, the aggressive investor expects deflation due to a fall in commodity prices, the collapse of companies that have lagged in innovation, company stockpiling, and the introduction of innovation trends. "Now, we believe that three causes of deflation will be able to counteract the supply chain-induced inflation that is causing havoc on the global economy." Two of the sources are secular or long-term, while the third is cyclical. "Technologically assisted innovation is the most significant generator of deflation," Wood remarked on Twitter.
According to the portfolio manager for ARK Innovation, artificial intelligence training expenses are reducing by 40 percent to 70 percent per year, which she considers a "record-breaking deflationary factor."
"Velocity and disinflation, if not deflation, occurs when costs and prices fall. If consumers and businesses anticipate prices will decline in the future, they will hold off on purchasing goods and services, slowing the velocity of money," she explained.
According to Wood, S&P 500 companies that do not spend sufficiently in the future will be a deflationary factor in the economy due to "creative destruction."
"Many corporations have catered to short-term oriented shareholders who seek profits/dividends after the tech and telecom crash in 2008-09, stretching their balance sheets to pay dividends and buy back shares, effectively manufacturing earnings per share. They haven't invested enough in innovation and will be forced to service their debts by selling more obsolete goods at a discount: deflation, "she said in a tweet.
Wood, who has previously argued that these companies are putting the major stock market averages in peril, refers to them as "value traps."
The third component that should lead to deflation is product stockpiling due to the outbreak and supply chain bottlenecks. Many corporations have been overordering supply, according to Wood, because the economy is prepared to shift to the services sector as the economy opens up.
"Businesses are still scrambling to catch up, possibly double- and triple-ordering beyond their needs," she noted, "since they shut down and were caught flat-footed as goods consumption took off during the coronavirus outbreak."
"As a result, once the holiday season is over and businesses are faced with surplus inventory, prices should fall." China's crackdowns are one of the reasons why some commodity prices, such as lumber and iron ore, have already plunged 50%. "The oil price is a psychologically significant aberration," Wood added.
After a stellar 2020, when Ark Innovation returned roughly 150 percent, Wood earned a reputation for herself. Although the fund is down 2% in 2021, it has received over $5.7 billion in inflows this year.
