Cathie believes the Fed is going to far and is going to wreck the economy and the markets. Believes the Fed is looking at lagging indicators, and that looking elsewhere would show that inflation is already getting under control. Interesting read.
“The Fed seems focused on two variables that, in our view, are lagging indicators –– downstream inflation and employment ––both of which have been sending conflicting signals and should be calling into question the Fed’s unanimous call for higher interest rates,”
Since Ark is a fund that focuses on highly-leveraged tech companies it is the most vulnerable to interest rate raises. It’s no surprise that Cathie Wood is one of the first to try to stop the Fed.
We currently have excessively low unemployment. That by itself is an inflationary pressure. If the Fed even just stops raising rates, we will get more inflation. As long as there are bottlenecks in the supply chain, we will get inflation.
And I fully agree that the article is coming from a biased standpoint. I would just take it as a sign of the expected “taper tantrums”.
Coming from an industry that depends on low interest rates, her lack of credibility here is something that can’t be overlooked. Which is not saying that she is necessarily wrong, although I believe she - and you - are wrong this time.
I’ve posted my thoughts enough times that I’m not going to go into them in detail again. But this time inflation is different. At least it is different from the bouts of inflation over the last 35 years. It’s the rarer version of inflation caused by supply constraint rather than excess demand. And that is combined with a decade of unsustainably low interest rates.
Interest rates must rise to curb demand while fiscal policy helps with the supply issues - or we wait for the supply issues to work themselves out on their own. AND interest rates must rise to get off the floor they’ve been on for the last decade and back to a healthy level for the longer term.
If we don’t raise rates and keep them up, inflation will not go away. This is a road we’ve been down before, although it’s been a while. Looking out the front window is good, but acting like the road has changed just because we didn’t like the last trip down it is a recipe for disaster.
I thought you might have noticed: interest rates are not on the floor where they’ve been for the last decade. They’re nowhere close to the floor. They’ve tripled in a matter of months, with the following effects:
Housing starts are down 25% as of August, probably more as of September. Housing sales are down for the 7th month in a row, corresponding nicely with the Fed’s interest increases.
New business applications are down 10% over a year ago, and have pretty much flatlined for the past 6 months.
Commodity prices are down, in spite of the loss of Ukraine food stocks. Energy prices are down, in spite of the Russian war. Building materials prices are down, in some cases significantly.
I’m not sure if Cathie Wood is advocating for a return to 0% rates, or just, as I am, a moderation in the rate of increase, still likely winding up about 2% higher than it is today (0.5 + 0.5 + 0.25 + 0.25. Etc. and seeing how it works out. It seems you are advocating standing on the brakes with all your might, and hoping you don’t slam your passengers into the windshield in the process.
Better to focus on her argument, that the Fed is backward focused, than impugn the motives of the person making the argument.
Let’s go to the source and not the editorial about the source:
Her argument that commodity prices are a leading indicator and that, absent food and energy, they have all peaked and started to come down is valid.
There is the real risk that if the Fed is too aggressive, they will make the coming recession so much worse - that the cure will be worse than the symptoms that currently ail us. We of course saw this in the summer of 2006 when the Fed was still hiking rates based on lagging data (got to as high as 5.25%) and again waited WAY TOO LONG to start to lower rates in September of 2007 and had to drop them by .5%, followed by a couple of quarter point drops, then a 75/50/75 cut. If they had stopped increasing sooner, and started decreasing sooner, the financial crisis would not have been as bad.
Absent a black swan event, the Fed should NEVER have to move rates more than a quarter per month. They should have started raising rates last year at this time by a quarter - and I am of the opinion that their is a greater risk of harm in jacking them up by another .75% in one month instead of simply doing .5% in November and tacking on another .25% in April/May next year if it just isn’t quite enough (heck, they waited from this time last year until March to start even .25% so what is another month). You end up at the same rate but you do it more measuredly.
Yes, they’re off the zero bound. Tripling something that’s ridiculously low can still leave you low. As you mention later, we still need to get to something between 4% and 5% for the long term. And rates may need to go higher for a while.
Yep. Such is the nature of rising mortgage interest rates. Housing volume slows and prices get soft. This is a patch of the economy where a bit of fiscal actions might help. Maybe some subsidies for low income housing, or interest subsidies for first time home buyers. Certainly, you didn’t think that sub-3% mortgage rates would last forever?
That’s fine. Mostly. Unemployment is very low. Now is not the time to start a new business, with a couple of possible exceptions that could be helped with fiscal policy.
Yet they’re all still quite a bit higher than two years ago. Of course, they’re not going back - the inflation that has already happened isn’t going to get unwound. Plus, I’d take some exception to that claim for energy prices. I’m paying more for gas than I ever have.
If rates need to be higher, the sooner we get there the better. Until they get to 2% over inflation (or whatever your preferred target difference may be) they are still stimulative. And the last thing the current economy needs is more stimulation. Moderating the increases can happen once we get to that target difference.
Yes, I am. Because that’s a cliff ahead. Hitting your head on the windshield is a lot better than going off the cliff. If we don’t thoroughly control inflation now, we’ll have a much harder time tamping it down six months from now, and waiting until the six months after that makes things even worse.
Just because she has that particular axe to grind (get it? Axe Capital?) doesn’t mean she’s wrong. Many in the investment leadership world are beating that war chant as well, and there’s some truth to it. Inflation was an artifact of 1.) a first-ever in modern times pandemic & shutdown, 2.) leaving the Covid relief money dam gates open a little too long (in hindsight) 3.) ZIRP money 4.) Fed buying MBS (QE999) way too long. Now, all 4 things are stopping / reversing at once after Powell is “shocked, shocked” that inflation spiked? With a war impacting the global price of oil, all near and dear to everyone’s daily lives? Sending the economy into another recession just because they can, doesn’t mean they should!
No! A thousand times no. The economy (and the market) prize stability. This herky-jerky movement up and down is a perfect recipe for disaster.
Yes I am. Because that’s a cliff ahead.
Really? Do you know how often we’ve had inflation of 10% or greater?
It’s happened several times, in 1941 and again in 1946 (the first not war-related, the 2nd, like this one, a supply constrained inflation as GIs returned but products were not yet available), in 1974 (OPEC), and in 1979 and 1980. Only the last two were “a cliff”, the others passed quite peacefully, as did the 6’s, 7’s, and 8’s of the 60’s.
The 1946 inflation is instructive, it was 18%! Yet without major intervention it quickly reverted to 8% the next year and 3% the year after that. (Treasury rates jumped from 0.5% all the way to…1%!)
You are imagining a cliff. There is a danger, yes, but the cure proposed can actually be worse than the disease. And will be if the “tough talk” turns into “rough and tough action.”