Cathie Wood Warns Of 1929 Great Depression Scenario If Fed Doesn't Pivot, Says Inflation Could Turn Negative In 2023

Zinger Key Points
  • Cathie Wood sees the current scenario as a strong echo of the "Roaring Twenties," which followed WWI and the Spanish flu.
  • The Fed has increased interest rates 16-fold in the current tightening cycle, a serious mistake, she says.

The October inflation print gave investors a reason to cheer, given its implications for the Federal Reserve’s monetary policy. Ark Invest founder Cathie Wood took to Twitter Saturday to offer her take on the inflation outlook.

A Serious Policy Mistake: Inflation is unwinding, Wood said. If her deduction is true, the economy could be heading back to the future with the “Roaring Twenties,” the last time several general-purpose technologies, namely the telephone, electricity, and the internal combustion engine, evolved at the same time, she said, adding the setup is remarkably similar.

Prior to the Roaring Twenties, there was World War I and the Spanish Flu, Wood noted.

"While both had a more serious impact on the global economy, today’s combination is a strong echo that could result in much lower than expected inflation and a boom in innovation," the money manager said.

The fallout of these two adverse developments have been a supply chain shock and other challenges that pushed inflation to over 20%, with inflation peaking at 24% in June 1920 and then dropping precipitously in a year to -15% in June 1921, she said.

“We would not be surprised to see broad-based inflation turn negative in 2023,” she added. Wood called out the Fed’s current monetary policy stance as a “serious mistake.”

While noting that the Fed raised interest rates less than twofold from 4.5% to 7% in 1919-20, she said the current Fed has increased interest rates 16-fold despite much lower inflation.

See also: Did The Drop In CPI Inflation Impact The Outlook For Interest Rates?

Fed Ignoring Deflationary Signals: If the Fed does not pivot now, a situation similar to the one seen in 1929 will play out, Wood said. She noted that the Fed raised rates too quickly in 1929 to put an end to financial speculation. Also, the Smoot-Hawley Tariff Act passed by Congress, levying over 50% tax on more than 20,000 goods pushed the global economy into the Great Depression, she added.

Tesla, Inc. TSLA CEO Elon Musk concurred with this view.

The Fed is ignoring deflationary signals, Wood said. She sees the Chips Act as harming trade.

“The University of Michigan’s consumer sentiment index is at a record low, below levels hit in 2008-09 and 1979-82, a setup for a liquidity trap like that in the Great Depression when massive monetary stimulus failed,” Wood said.

Given conflicting data and the stark difference in these outcomes, the Fed should debate the possible risks associated with its current policy, at the least, instead of voting unanimously, she added.

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