The Fed risks a 1920s-style Great Depression, warns ARK Invest’s Cathie Wood

It is not the absolute increase in Fed rate hikes that poses the danger, since they remain within historic norms. Rather it is their extremely rapid pace that threatens to completely derail the economy and end the “Roaring Twenties” period of prosperity forecast by the celebrated tech investor.

“If the Fed does not pivot, the set-up will be more like 1929,” ARK’s founder, CEO and chief investment officer wrote on Saturday.

“Unfortunately, today has some echoes of the same. The Fed is ignoring deflationary signals.”

By her calculations, the then-newly created U.S. central bank hiked from 4.6% to 7% over roughly two years through 1920 when confronted with inflationary pressures from World War I and the Spanish Flu a century ago.

Despite inflation currently running substantially lower than the annualized 24% at that time, Wood says the Fed has already hiked 16-fold from 25 basis points to 4%. 

Under Chair Jay Powell, Fed governors in the FOMC policy-setting committee also went from pumping billions of freshly minted dollars into the U.S. economy all the way into March to now shrinking the money supply since June in a move known as “quantitative tightening”.

Moreover, it raised interest rates at a blistering pace, in part through four straight 75 basis point hikes culminating in its most recent November 2^nd meeting.

Adjusted for inflation, however, policy is still very accommodative in economists’ books: with consumer prices running at an annualized pace of 7.7% in October, so-called real rates remain deeply negative. That means the interest burden on debt lessens over time as the currency quickly depreciates.

Fed governor Christopher Waller consequently said the central bank still had “a ways to go” before the tightening cycle was over. “This isn’t ending in the next meeting or two,” he said speaking in Sydney on Monday.

Heavy losses in flagship fund

Markets for now have breathed a sigh of relief.

After the October inflation print came in lower than feared, the benchmark S&P 500 equity index surged 5.5% on Thursday to record its biggest one-day rally since April 2020. 

The tech heavy Nasdaq Composite that better reflects Wood’s investment portfolio gained 7.3% that same day, its best session since the first wave of the pandemic hit two years ago in March.

Fed critics like Wood have said policymakers like Chair Powell are committing the cardinal sin of driving ahead while staring through their rear-view mirror.

In other words, they rely too heavily on backward-looking data when steering the economy, rather than leading indicators that predict where consumer prices will be in the immediate future.

“The University of Michigan’s Consumer Sentiment Survey is at a record low, below levels hit in 2008-09 and 1979-82,” Wood explained. “We would not be surprised to see broad-based inflation turn negative in 2023.” 

Wood has enjoyed near celebrity status thanks to her prescient bets on disruptive tech trends like robotics, artificial intelligence and the shift to clean energy. Her fund management firm is known for intentionally recruiting its analysts not primarily from financial backgrounds, but from Silicon Valley, to stay ahead of the pack.

Nevertheless the Fed’s shift to fighting inflation has been toxic for the high-growth, high-risk tech stocks she has long favored. Wood’s flagship ARK Innovation exchange-traded fund, which manages some $7.6 billion in assets, has lost 60% of its value since the start of 2022.

The losses have been so acute that the fund is now only worth some 11% more across a 5-year period compared to a 66% rise in the broader Nasdaq Composite during the same period.

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