© Reuters
Investing.com – Cathy Wood, CEO of ARK Invest, Nicknamed the Money Tree by Wall Street, Says Fed Could Trigger Deep Recession, Ignoring Deflationary Trend
Cathy Wood, CEO of ARK Invest, says the Fed could cause an economic downturn commensurate with the Great Recession of 1929 because it ignores deflationary trends.
The worst since World War I
According to Wood, the current financial situation is similar to what it was in 1920. “During World War I and the Spanish flu, supply chain and other shocks drove inflation above 20%.
At its worst in June 1920, inflation peaked at 24%, but then dropped sharply within a year to -15% in June 1921.
“We wouldn’t be surprised to see broad-scale inflation turn negative in 2023,” Cathy Wood added in a series of tweets.
Liquidity trap
Cathy Wood said the University of Michigan consumer survey has hit an all-time low below the levels set in 2008-09 and 1979-82.
Wood added that these data confirm the preparation of a liquidity trap like the ones that occurred during the Great Depression when massive monetary stimulus failed.
Preparation for the recession
Wood says it’s clear we should brace ourselves against the depression that occurred in the 1920s, given the conflicting data and the stark difference in these outcomes.
The Fed should at least discuss the potential risks associated with its current policy, Wood added, rather than voting unanimously.
Before the 1920s, the world was at war – World War I – and suffering from a pandemic – the Spanish flu.
While both have had a more serious impact on the global economy, today’s combination is a powerful resonance that could lead to much lower-than-expected inflation and a boom in innovation, Wood said.
During World War I and the Spanish flu, supply chain and other shocks pushed inflation to 20% at its worst in June 1920.
Inflation peaked at 24 percent but then fell sharply in one year to -15 percent in June 1921. We wouldn’t be surprised to see broad-scale inflation turn negative in 2023, Wood said.
Historical overview
The Fed was founded in 1913 and braved its first bout of severe inflation, raising interest rates more than twice from 4.6% to 7% in 1919-1920.
Faced with much lower inflation this time around, the Fed raised interest rates 16-fold, a huge mistake in our view, says Cathy Wood
Federal goal
If inflation falls below the Fed’s 2% target and economic activity disappoints, interest rates are likely to surprise below expectations next year, carrying this century into 2020.
From August 1921 to September 1929, it doubled at an annual rate of 25%.
Had the Fed not pivoted, the situation would have been more like 1929, with the Fed raising interest rates in 1929 to curb financial speculation.
And then, in 1930, Congress passed Smoot-Hawley, imposing tariffs above 50% on more than 20,000 goods and sending the world economy into the Great Depression.
Ignore the feds
Unfortunately, today has some echoes of the same thing, with the Federal Reserve ignoring deflationary signals and the Chip Act could hurt trade perhaps more than we realize.
Much like the reaction to Smoot-Harley, economists have paid little attention to the potential impact of the chip law, according to fund manager Ark.
