Cathie Wood’s Deflationary Expectations May Become Reality
Before Fed Chair Powell realized inflation might not be transitory, during the Fall of 2021, Cathie Wood sounded alarm bells about the risks of great deflationary pressures not being far off. The renowned hedge fund manager and founder of ARK Funds stood far apart from her peers with this forecast. Since then, the disruptive technologies investment expert has indicated the Federal Reserve should stop raising interest rates because the economy is poised for deflation rather than inflation. As most of the world has come to accept the notion that inflation may be a problem for years to come, her thoughts have been dismissed by most economists as wishful thinking.
Wood has not budged on her position, and it may serve her and her customers well. Investment success often comes with pointing yourself in a different direction than the loud narrative is pointing you. But, in the end, you have to eventually be right, and others then have to change their tune to match the once contrarian view – after all, you will need late-comers to buy your position from you.
I have to confess, as a lifelong Fedwatcher, market analyst, and cynic, I didn’t think there was a chance in the world that she could be right. Since her October of 2021 comments, not a long period of time, We’ve all witnessed a dramatic leap in technology that reduces costs, is easy to adopt, and is progressing at an exponential rate.
Cathie Wood may not be as wrong as most people thought, perhaps she is even right. Here are just some examples of when she spoke out about her deflationary outlook:
2022-10-10: Wood wrote an open letter to the Federal Reserve accusing it of stoking ‘deflation’ and looking at the wrong economic indicators.
2023-02-02: Wood gave a speech at the Sohn Investment Conference where she said that she believes deflation is a bigger threat to the US economy than inflation.
2023-03-08: Wood appeared on CNBC’s Squawk Box where she said that she believes deflation is “the biggest risk” to the global economy.
Cathie Wood has been quoted as saying:
“Deflation is the biggest risk to the global economy.”
“The rise of artificial intelligence is leading to a productivity boom, which is driving down prices.”
Less related to disruptive technologies providing businesses a more efficient means, Wood has also argued:
“The decline of globalization is leading to a decline in demand for goods and services.”
“The aging population is leading to a decline in consumption.”
“Deflation is not a bad thing. It can lead to a more sustainable economy, with lower interest rates and less debt.”
In November of 2022, ChatGPT was unveiled by OpenAI. Most everyone paying attention, including those in related tech businesses, were stunned at how far along the technology is and the potential for quickly advancing AI platforms. Currently, ChatGPT is trained on a dataset large enough that it can generate text, translate languages, write different kinds of creative content, and answer your questions in an informative way.
In 2023, ChatGPT was released to the broader public, it broke records for sign-ups and it has continued to grow in popularity. It is now used by a wide range of people, including students, writers, and businesses. This is still a beta version they are using and getting excellent results.
While generative AI for text is only one next-generation technology, example; this still under development tool alone is world-changing powerful. And it has the potential to dramatically alter the way we interact with computers – all of which can lead to dramatic gains in efficiency and productivity. Efficiency and productivity are ingredients that can stave off inflation, they can even bring prices lower – we know this because we experienced it for decades following the tech revolution.
ChatGPT and other OpenAI products are still beta tests of a text program from one institution. I understand OpenAI products can also write computer code, create graphics, and carry on a conversation. Where will OpenAI take their products next, how will the products take part in machine learning and then serve to better themselves, and how many other companies are dreaming up and developing new sources to enrich out lives at lower expense?
While Artificial Intelligence may or may not be able to lower the price of a dozen eggs, it can increase output across many industries or reduce expensive labor needs. I see examples of this in the office and at home where a search using ChatGPT can more precisely provide a response to a query than a Google internet search.
Take Away
Investors are often hurt by their ego, preventing them from rethinking and reevaluating. When exposed to new information, it’s good to take the time to reevaluate the probability of being incorrect or correct in one’s outlook.
It’s too early to know if Cathie Wood will turn out to be correct in her inflation forecasts. She lives and breathes high tech and I’m sure gets early behind-the-scenes glimpses of what has yet to come. For me, it is now easier to see how new business solutions could possibly unfold to a point where deflation becomes an issue in the world economies. I’m not sold on the idea, but I am not dismissing it as impossible either.
Managing Editor, Channelchek
Sources
https://ark-funds.com/articles/commentary/q3-2022-commentary-from-arks-cio/