Regular readers have heard the story more times than most probably care to recall. I dare say some of you are tired of it by now.
But, I welcome new readers to the site every day, and in addition to being totally true, if not all that interesting, the story does work as a lead-in for all things Cathie Wood. And on Monday, there was Cathie Wood news. So, I’ll briefly retell the story. If you’re tired of it, just remember that someone out there is reading it for the first time.
I knew Cathie Wood before Cathie Wood was Cathie Wood. “Knew” is a misnomer. She wouldn’t remember me. We met one time, in a room full of people, and I was (easily) the least important person there. It was a quaint launch event for Ark held on the second (maybe third) floor of a nondescript address in Manhattan. I only attended because a friend of mine in advertising never missed an opportunity to network. For whatever reason, she thought it might be beneficial if I tagged along. I despise networking, mostly because it involves interacting with other people, and I don’t harbor a particularly optimistic view of humanity.
There were tables set up around the room and each one had marketing material discussing a different investment theme. I wandered around long enough to take full advantage of the free drinks. My friend introduced me to someone called Cathie. I shook her hand, thanked her for the drinks, and promptly left. I muttered something totally unnecessary like “that’s never going to be anything,” as I stumbled off towards Grand Central to catch the Harlem Line to the Tuckahoe station.
Shortly thereafter, I stopped attending events of any kind. A few months later, I moved to the island I’ve called home for the past six (going on seven) years. As I receded into the sunny shadows of beach exile, Wood became a celebrity. It’s hard to believe, but Wood is now so famous that she can write open letters to the Fed and be reasonably confident that at least someone at the Eccles building won’t say “Cathie who?”
Below, find the letter she penned on Monday, and published for the world (including and especially Jerome Powell) to read. Frankly, it’s not bad. Coming from me, that’s a compliment.
Via Cathie Wood
In ARK’s latest “In The Know” video, out of concern that the Fed is making a policy error that will cause deflation, we offered some data for our “data-driven” Fed to consider as it prepares for its next decision on November 2. In the face of conflicting data, the unanimity of the Fed’s last decision to increase the Fed funds rate by 75 basis points was surprising.
In this summary, we delineate first the upstream price deflation that is likely to turn into downstream deflation. Then, we focus on the two variables — employment and headline inflation — upon which the Fed seems to be making its decisions. In our view, both are lagging indicators.
Commodity prices are leading indicators, upstream in the stages of processing. Most commodity prices have peaked and, except for food and energy, are falling on a year-over-year basis, as shown below. Without question, food and energy prices are important, but we do not believe that the Fed should be fighting and exacerbating the global pain associated with a supply shock to agriculture and energy commodities caused by Russia’s invasion of Ukraine.
Downstream, inventory accumulation seems to be overwhelming manufacturers and retailers. After grappling with supply chain constraints for more than a year, even world class companies seem to have overruled their automated enterprise resource planning (ERP) systems and over-ordered merchandise.
In the face of single-digit sales growth, inventories at Walmart and Target increased 25.5% and 36.1%, respectively, during the most recent quarter. Nike’s recent quarterly results suggest that the inventory imbalances have worsened. Despite sales growth of only 3.6%, Nike’s inventories increased 44.2% globally. In North America and on ships in transit, its inventories increased 64.8% and 85.0%, respectively!
In the auto sector, used car price inflation as measured by the Manheim used value index peaked at 54.2% on a year-over-year basis in April 2021 and made another run to 46.6% in December 2021, but have dropped 13.5% year-to-date and now are down 0.1% year-over-year. [1] Facing inventory losses, used car dealers are likely to disgorge more inventories, which could push price inflation deeply into negative territory.
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.
During September and early October, the Fed felt vindicated in its tough stance by reports that inflation as measured by both the CPI and PCE Deflator [2] excluding food and energy increased 0.6% (7~-8% annualized) and that the PPI [3] excluding food and energy increased 0.4% (~5% annualized). Including food and energy, the CPI and PPI fell 0.1% (~1% annualized), however, while home prices as measured by the Federal Housing Finance Agency (FHFA) fell 0.6% (~7-8% annualized).
Reported on the employment front during September and early October, initial claims for unemployment insurance declined and nonfarm payroll employment increased 263,000, but job openings as measured by JOLTS [4] fell 10% or 1.1 million, manufacturing employment as measured by the ISM Purchasing Managers Index [5] contracted, and Challenger involuntary job separations soared 67.6% on a year-over-year basis. [6]
Unanimous? Really?
Could it be that the unprecedented 13-fold increase in interest rates during the last six months — likely 16-fold come November 2 — has shocked not just the US but the world and raised the risks of a deflationary bust?
[1] Data from Bloomberg and company earnings calls.
[2] The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the US and various geographic areas. https://www.bls.gov/cpi/. The Personal Consumption Expenditures Index (PCE) is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. The PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior.
[3] The Producer Price Index (PPI) program measures the average change over time in the selling prices received by domestic producers for their output. The prices included in the PPI are from the first commercial transaction for many products and some services. https://www.bls.gov/ppi/.
[4] The Job Openings and Labor Turnover Survey (JOLTS) program produces data on job openings, hires, and separations. https://www.bls.gov/jlt/.
[5] The ISM® Report On Business® – Manufacturing (PMI®) and Services (PMI®) – are two of the most reliable economic indicators available, providing guidance to supply management professionals, economists, analysts, and government and business leaders. The reports are issued by the ISM Manufacturing and Services business survey committees. The ISM® Report On Business® continues to be consistent and accurate in indicating the direction of the overall economy, in addition to the manufacturing and services sectors. https://www.ismworld.org/supply-management-news-and-reports/reports/ism-report-on-business/.
[6] Challenger, Gray, & Christmas, Inc. investigates, researches, analyzes, and shares insights on the job market and workplace. https://www.challengergray.com/about-us/.
Self serving to be sure… but not necessarily wrong.
I actually don’t think it’s about her performance at this point. I mean, anyone who was inclined to abandon ark (get it?) already did. And while she’s well known enough for someone in an official capacity to take brief note, she’s not a Bill Dudley or someone whose opinion is going to sway policy one way or another, which she knows. I think she really and truly believes this. And in some respects, she’s right.
I’ve listen to a couple of her weekly call so I agree she believes it. And, to be fair, I’m biased b/c I basically agree with her projections.
The war certainly screws up Europe re. food and energy and that’ll keep showing up in inflation numbers but it’s hard to disagree a recession is coming/already there in Europe. The US is more insulated from the war so may manage a soft landing.
As an investment manager, she should be writing to the investors in her funds and explaining the actions she is now taking to revise her investment strategies (if she has any to share) and make some money for her investors.
As an avid reader of your site, I am dismayed (somewhat) that this article is here. But, after seeing the headline, could not resist the read.
I guess every site, even the best of them, needs a little click-bait headline every once and a while 🙂
And to clarify, very much enjoyed the read, and the details of your encounter with CW.
It’s not click bait. I honestly don’t know what you’re talking about. Cathie Wood wrote an open letter to Jerome Powell. Would you be similarly “dismayed” if I drew your attention to a hypothetical open letter from David Einhorn? Were you dismayed in November of 2018 when I talked about Stan Druckenmiller’s open letter to the Fed penned with Kevin Warsh? Were you dismayed when I documented Bill Ackman’s Fed criticism over the summer? If you were you didn’t say so. If you weren’t, why not? Because if we’re going by performance over an eight-year lookback, I’m reasonably sure that Cathie had years good enough to make Einhorn, Druckenmiller and Ackman look like rank amateurs.
Also, she writes to investors in her funds all the time. On Twitter, on Ark’s site, and she’s a regular on financial television and at any conference anyone invites her to.
Forgive me, but this reminds me a bit of the Stephanie Kelton derision I get sometimes. Just because you don’t like her or don’t agree with her, doesn’t mean you get to claim that she isn’t writing, talking and speaking to people all the time. If anything, there’s too much Cathie. The idea that there’s a shortage of Cathie Wood soundbites is so laughable I don’t even know what to say about it. You can say a lot about Cathie, but one thing you most assuredly can’t say is that she isn’t vocal with investors. I mean, come on, my friend. Give me (and her) a break.
I will happily take “pause” over “pivot”.
“I despise networking, mostly because it involves interacting with other people, and I don’t harbor a particularly optimistic view of humanity.” Thanks. I will maintain my subscription until I can no longer read.
Cathie Wood’s mistake: She relies on logic and data. Only fear w/ greater impact than the embarrassment he’s currently experiencing will shift Powell’s decision-making in a new direction. The rest of the Fed is riding along in their groupthink echo chamber.
I remember reading your post the first time you said this about Cathie. I also vividly recall, and will never forget, that last post of yours on SA- frightening, but in an “opened my mind” sort of way that is simultaneously both good and unsettling.
Great stuff- mostly happy for you that the past (almost) seven years have worked out so well for you. Secondarily, as part of your readership, I (and I am going out on a limb here- but I think I can safely say this on behalf of many of your readers) have greatly benefited from your prolific and insightful writing.
I’d like to think there is a bit of symbiosis going on- but I am pretty sure you would do well even without us (your readers).
Wonder what she would say about the coming railroad strike? Is there a way to spin that as deflationary?
I don’t doubt she believes the Fed is making a huge mistake (any more than she doubts she’s a trend-spotter par excellence). But let’s also remember she’s talking her book here.
And what would you call every single hedge fund investment “idea” conference ever convened? Everyone, everywhere is talking their book every time they open their mouths. And not just in the market context either. Life is just one long book-talking exercise. We’re literally hardwired to talk our own book in every conceivable context. The second you stop talking your book is the second something bad is probably going to happen, whether it’s a banana peel or a falling piano.
Yes, pretty much.
I think it is a fine letter, if I were to write an open letter to the Fed myself the message would be lost in the profanity I would feel compelled to use.
H-Man, I agree with her commodities analysis but while some commodities may have peaked the jury may still be out on energy, The general public has a somewhat myopic view of inflation by dwelling on the CPI print while failing to grant any credence to other factors that influence inflation. It also seems the Fed has fallen into that camp by focusing on core. But right now if the Fed undershoots in responding to inflation, all hell will break loose in the markets. So probably better to give the patient a little more medicine than what may be called for. She knows her history and when the Fed does stop, the terminal rate will be above the core rate which is her greatest fear since that generally wrecks a market — ala an Ark with a serious leak.
What I still do not understand, given that I am sure CW is a very intelligent and knowledgeable investment manager, is the unwillingness to adjust her Invesment strategies.
CW is not in the league of a WB or a Bill Ackman. The latter lost 20% in his fund in 2015 after investing and doubling down on multiple occasions in Valeant Pharmaceuticals, turning a potential profit of 1 billion into a 4 billion dollar loss. He then apologized to his investors in 2017. And rethought and reworked his investment strategies. And staged a comeback that started in 2019 and that is still ongoing.
Herbalife. Netflix. I could go on, but that’s not the point. What confuses me a bit about the controversy is that these aren’t hedge funds she’s running. You’re not gated in there and you don’t have to submit a redemption request. Ark investors aren’t “partners.” They’re just ETF buyers. She doesn’t really have anything to “apologize” for or at least not in the same sort of way that a Bill Ackman might feel the need to apologize. I’ve read the Morningstar analyst complain about Ark (I’ve even quoted him here at least twice) but he too seems to be conflating a little bit. Active mutual fund managers and ETFs either perform well or they don’t, and when they don’t, they either get fired or they lose AUM. She can’t be fired (I don’t think), and if the funds see net inflows (or at least don’t see massive net outflows) then who’s to tell people they can’t invest with Cathie if they want to? I mean, it’s their money to lose and these are just ETFs. There are no shenanigans going on here. The macro and policy environment shifted, she’s made it clear she’s not going to do anything different, the stocks she’s buying aren’t working very well, and that’s pretty much the end of it. Yes, there’s something absurd about that, but then again, when you say something like “We’re buying nothing but gene-splicing, space taxis and Mars rovers in this ETF” that kinda limits your options. It’s not like you can just “pivot” to better, more fundamentally sound space taxi companies.
Where is her open letter to the Fed from a year or so ago telling them they were making a mistake by continuing with QE and keeping interest rates too low for too long?
If you fail to warn me about an underwater earthquake, does that mean you’re a hypocrite for telling me there’s a tsunami coming after the earthquake happens?
Or, better still, an open letter during 2020 thanking the Fed for the QE and low interest rates that fueled the 152% rise in the ARK Innovation ETF in 2020.
The letter seems to imply that the severe underperformance of the ARKK funds in 2021 and into 2022 is the Feds fault. And not a lack of risk management, lack of clear exit strategies for losing positions or doubling down on multiple high risk non-profitable companies in a rising interest rate environment.
To now say that deflation has taken hold and that inflation has been conquered … well that crystal ball is one only she seems to have.
It sounds like she’s urging Powell to stop mashing the brakes, maybe just tap them a bit. Doesn’t seem unreasonable. I’ve lost track, but I’m guessing that inflation is increasing at a slower rate.
I would disagree with the characterization that the Fed is “exacerbating the global pain associated with a supply shock to agriculture and energy commodities”. The supply shock is the only source of pain. When there is little stuff to go around, the stronger currencies and economies just have more leverage (by definition).
Liquidity in a monetary system must reflect the system’s ability to produce goods and services. The Fed is just responding to the supply shock as it must, lest people lose faith in the last thing everyone trusts: the dollar. The Fed is like a municipality that is limiting water usage when there is a drought: your main problem is the drought, the pain is coming from the drought. In this money-is-water-rights analogy, Cathie would be a water park owner.
One thing (and they’re many) that makes your Heisenberg Report unique is that your agenda is to share what you consider to be relevant news and information with what I consider minimal unbiased commentary.
I pay you to weed through voluminous amounts of information daily and report the things that you decide are important.
You have proven to me that you are a person I can trust.
I certainly understand that you’re just as human as the rest of us, as you have occasionally alluded to your past foibles.
Nevertheless, in this endeavor, sir, I believe that you stand above the rest in honesty and integrity. I think 14,000 others would agree.
I’m curious to know what Kathie thinks of asset prices if the fed does pivot, and where would commodities prices be afterwards?
I for one would vote with my money to ensure inflation and commodities prices are as high as ever until the dollar is obsolete.
One thing, which I hate to even utter the word is transitory, but impactful to inflation. Catastrophes. There are an awful lot of autos that will need to be replaced in Florida following Ian. Every car that took on 2 feet of water or more will need to be replaced. Not sure of the economic damage in Florida (not too overlook the lives lost and impacted by the hurricane), but there could be upwards of $100 billion of economic costs in terms of replacing cars, homes and repairing commercial properties. That won’t help create deflation.