Cathie Wood, CEO of ARK Investment Management LLC, has reacted to Twitter Chief Jack Dorsey’s warning that inflation can and will “happen shortly in the United States, and hence the globe.” “When the Fed initiated monetary stimulus in 2008-09, I anticipated inflation would soar,” Wood responded on Monday. “I was mistaken. Instead, velocity (the pace at which currency turns over annually) fell, removing the inflationary impact. The velocity is still decreasing.” She claims in a lengthy Twitter conversation that the price rises affecting customers should subside after the festive season owing to 3 drivers of deflation.
The first component, as per Wood, is “technologically facilitated development” such as artificial intelligence. She observes that AI training expenses are falling at a pace of 40% to 70% per year. She referred to it as a “record-breaking deflationary factor.” “When prices of goods fall, velocity as well as disinflation, though not deflation, follows,” she explained. “If individuals and companies anticipate that costs will decline in the future, they will postpone purchases of commodities and services, slowing overall money velocity.” According to Wood, the second cause is “creative destruction” as a consequence of radical innovations.
“They used their accounting records to distribute dividends and rebuy stock, effectively manufacturing earnings on each share. They have not invested sufficiently in innovations and will most likely be compelled to service their liabilities by selling more outmoded items at reduced prices: deflation.” Wood’s last source is the over-ordering and hoarding of commodities as a consequence of the COVID-19 pandemic and distribution network constraints.
“Because companies got caught off-guard when the demand for products increased during the coronavirus pandemic, they are now rushing to catch up, possibly double-, and perhaps triple-ordering exceeding their requirements,” she adds. “As a result, after the holiday season is over and businesses have extra inventories, prices should fall.” She notes that commodities prices, such as timber and iron ore, already have fallen by half, and that the oil price is “an aberration and symbolically significant.”
According to Wood, global oil consumption is lower than in 2019 and “least likely to return to its previous peak, partially because its price has broken a streak of lower highs and is above the USD 77 per barrel achieved in 2018, thereby destroying demand.” “On the supply side, ESG (Environmental, Social, and Governance) rules have compelled energy businesses to shift capital expenditures away from mature fossil fuels and toward immature renewables.” Meanwhile, following their near-death experience in 2020, banks have denied fracking businesses money,” she adds. “As a result of the near quadrupling of oil prices since the trough last year, electric car adoption has increased, laying the seeds of a severe oil price decrease in the longer run.”
Tesla CEO Elon Musk reacted to Wood’s post, saying, “I don’t know about the long-term, although we are witnessing tremendous inflationary pressure in the immediate term.” Dorsey did not respond in kind, although he did share Musk’s message. Wood reacted to Musk’s tweet in a different thread, stating that she thinks “the enormous and merging deflationary factors linked with AI, energy storage, robots, genetic sequencing, and blockchain will bend the curve.”