Cathie Wood has an idea.
Don’t worry. It’s not a pitch for flying taxis that run on Mr. Bubble or Mars landers made from recycled Starburst wrappers.
“I’ve never seen inventory surges like this in my career,” Wood told Bloomberg Television on Wednesday. “And I’ve been around a long time.”
She was referring, of course, to tens of billions of dollars worth of excess “stuff” accumulated by some of America’s largest retailers last year amid insatiable demand for consumer goods (figure below).
Suffice to say “just in time” is dead. It’s all about “just in case” now. In 2022, that stuff may be harder to move as shoppers dial back discretionary spending in the face of rising food and gas prices.
At least one prominent equities analyst, Morgan Stanley’s Mike Wilson, spent months warning clients that the inventory problem was underappreciated. Those warnings were borne out in dramatic fashion last month, when retailers blindsided investors with a deluge of guidedowns, margin shortfalls and cautious commentary on bloated inventories.
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On Tuesday, Target stunned analysts with a second profit warning in three weeks. I called it an ominous sign for the US economy. At the least, it suggests discounts are coming and that could crimp profitability at a time when margin headwinds are myriad.
On the other hand, it could be a relief to beleaguered consumers. As a handful of readers were keen to point out, discounts wouldn’t be the worst news right now, considering inflation is public enemy number one.
If that’s your position, Wood agrees. “This inventory issue highlights the cyclical reason we’ve been saying we think inflation will unravel,” she said.
Wood was emphatic: Deflation, not inflation, is the bigger risk to the economy. “You’re talking over a longer time horizon?” a skeptical sounding Ed Ludlow wondered. Wood raised a finger, as if to silently scold Ludlow for any incredulity he might be harboring. “I’m talking about now too.”
She veered off into EVs and autonomous transportation (as is her wont), but I’d be remiss not to mention Wood’s remarks. The mainstream financial media belatedly picked up on the inventory problem and it’s the topic du jour in macro circles. SocGen’s Albert Edwards called it the elephant in the room.
But what you don’t hear much (if anything) about is the read-through for inflation. If America’s largest retailers are sitting on a mountain of excess inventory, and if other companies join Walmart and Amazon in admitting they may have overestimated their hiring needs, it’s at least possible the air could come out of the inflation balloon much faster than anyone is currently willing to suggest. Well, anyone other than Wood, that is.
Janet Yellen and Jerome Powell spent the better part of 18 months insisting inflation was “transitory.” They were wrong. “[We] could have used a better word,” Yellen admitted on Tuesday, in yet another mea culpa. Now, both Yellen and Powell are convinced inflation will be with us for an extended period of time. Considering how wrong they were last year, why should we assume they’re right now?
In any case, Wood isn’t exactly an impartial observer. She’s the Icarus myth personified. Her funds are the quintessential long-duration play. They suffered what, for any hedge fund, might be career-ending losses amid the epochal macro regime shift that hit richly-valued tech shares hardest.
Wood, though, is arguably more popular than ever. She’s also defiant. Or, if that’s not quite the right word, call her undeterred. In April, she predicted inflation would peak and then fall “dramatically.” She also said the Powell Fed is “playing with fire” by hiking rates into the teeth of a burgeoning economic slowdown.
All nine of Ark’s ETFs have logged double-digit declines this year, and across those funds, assets are down almost 50%. In an incredible testament to the strength of Wood’s cult following, all of that drop is attributable to performance. On net, flows into Wood’s funds are positive in 2022.
Although I would like to believe her, i don’t see an inventory buildup at Target affecting the price of gasoline, groceries or rents
I agree with frank.morison, I’m no economist, but the war is going to drag on and gasoline and grocery prices will remain elevated.
Also, bringing in another topic H likes to bat around — low income folks are already going to Dollar General instead of Target. And I doubt that Target has excess inventory in groceries — it has excess inventory for things that people with large bank accounts probably already have. I don’t know, maybe I’m a little out of touch, but for people with large household savings who own stocks aren’t buying their clothes or furniture or kitchen items at Target.
She’s predicting deflation only because she wants it to happen so badly. She’s probably fully aware that she’s being perceived as an impartial observer.
I recently read the book Bull!. There’s alot of resemblance between her “true tech believer” attitude and that of Mary Meeker, the dotcom queen. In the end, it seems that people are more forgiving to the fall of true believers vs to skeptics who “lost faith”.
I must admit I’m fascinated and puzzled by the net inflows into the Ark funds this year, particularly considering both performance and the dour nature of market sentiment. To continue to pour cash into the Ark funds in this environment means the investors are blindly optimistic or have such a long term view that risking severe paper loses in the near future is not a major concern. The latter might be what many would define as smart money.
Well, Avi Gilburt seems to think if we can rally here that we will be going to S&P 5150-5500.
If retail inventories are so high, why are there still so many empty shelves at every single retailer I go to? Inventories of what exactly are high? As noted above, retail inventories don’t impact energy prices and they don’t manifest food crop production. She’s lost all credibility for me.
There is a “solid smattering” of data points consistent with a fast fade thesis in inflation – not just at the retail end of the spectrum. Some raw commodities are fairly weak already – spot copper flat for a year, lumber basically obliterated in recent months. Mfg PMI data has been weakening – rising inventory and decreasing unfilled orders-to-shipment ratios. If inflation reacts more quickly to a cyclical fade this time around, then it certainly won’t be the first macro trend to unfold in overdrive during the pandemic era.
The birth rate in the US is dropping significantly. Only half of women aged from 30-45 have children- which is down significantly from prior decades.
Reasons include the following: Women deciding to pursue careers instead of creating families, the fear over the future of global warming/state of the world, the overall expense of having children- particularly educating them and the related cost of buying a home in a neighborhood with good public schools.
Deflation from declining population growth will definitely be an issue in the US.
With respect to the world population growth, I am reading more and more from people who think that with the education of women, global birth rates will be lower than previously forecasted. Jordan Peterson thinks global population will peak closer to 9B.
Longer term- deflation is not inconceivable.
Stagflation? Also, you can have inflation for non-monetary reasons. Also, war is way more inflationary than a pandemic…What I think we need to see more of is a global perspective on our problems…I think it is natural to avoid thinking about scary things- but the scary things are coming to us. So- right wing anti knowledge populism, Nostalgia for the late 1800’s to early 1900’s (Erdogan, Putin, Charles Koch, Xi- jinping, etc…)Famine (generally, a man made phenom) What I try to remind myself is that being a real bastard doesn’t mean you’re competent….Lastly, even if we on where we are headed, nobody knows what the path there will look like, even the major protagonists.