Investing.com – Cathy Wood, CEO of ARK Invest, nicknamed the Money Tree by Wall Street, says the Fed could cause a major recession, shrugging off deflationary trend
Cathy Wood, CEO of ARK Invest, stated that the Federal Reserve may cause an economic downturn proportional to 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 1920. “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% but then fell sharply in one year to -15% in June 1921.
We wouldn’t be surprised to see broad-based inflation turn negative in 2023, Kathy Wood added in a series of tweets.
Cathy Wood said the University of Michigan consumer survey has hit a record low, below levels seen in 2008-09 and 1979-82.
Wood added that the data confirms the preparation of a liquidity trap like the one that occurred during the Great Depression when massive monetary stimulus failed.
Given the conflicting data and stark contrast in these findings, Wood says, it is clear that we should prepare against a depression as happened in the 1920s.
Wood added that the Fed should discuss the potential risks associated with its current policy, at the very least, rather than a unanimous vote.
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, Wood said, today’s mix is a powerful resonance that could lead to much lower-than-expected inflation and a boom in innovation.
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% but then fell sharply in one year to -15% in June 1921, Wood said, “We would not be surprised to see broad-based inflation turning negative in 2023.”
The Federal Reserve was founded in 1913 and defied its first bout of dangerous inflation, less than doubling interest rates from 4.6% to 7% in 1919-20.
In the face of much lower inflation this time, the Fed raised interest rates 16 times, which in our view is a huge mistake, says Cathy Wood.
If inflation drops below the Fed’s 2% target and economic activity disappoints, interest rates are likely to surprise on the lower side of expectations next year, leading to this interpretation of the 1920s.
From August 1921 to September 1929, it doubled at an annual rate of 25%.
If the Fed does not pivot, the setting will be more like 1929, where the Fed raised interest rates in 1929 to quell financial speculation.
And then, in 1930, Congress passed Smoot-Hawley, put 50%+ tariffs on more than 20,000 goods and pushed the world economy into the Great Depression.
Ignore the fed
Unfortunately, today it has some echoes of the same, as the Fed ignores signs of deflation, and the Chip Act could hurt trade perhaps more than we understand.
Just like the reaction to Smoot-Harley, economists have paid little attention to the potential impact of the chip law, according to Ark fund manager.