Cathie Wood: The problem is deflation, not inflation

Consumer prices jumped 8.2% in the 12 months through September, and the Federal Reserve is raising interest rates.

Famed investor Cathie Wood, chief executive of Ark Investment Management, reiterated her view Nov. 8 that deflation is the big economic concern, not inflation.

She noted in a webinar that her kind of investing, which she calls "innovation strategy" is hurting. That's because with inflation and interest rates soaring, "investors' time horizons have shortened dramatically," she said. "And that has damaged long duration strategies" like hers.

Companies in the innovation technology areas that Ark focuses on now have a market capitalization of $7 trillion, and that will jump to $210 trillion in the next eight to 10 years, Wood predicted.

This is the "flip side of the late 1990s," she said. Then, technology stock prices were soaring, but the technology wasn't ready, and prices were high. Today, it's the opposite. So it's "prime time" for her strategy, Wood said.

The recent drop of commodity prices proves that the risk from here is deflation rather than inflation, Wood said. Some commodity prices have slid 30% to 85% from their peaks.

And that will flow into consumer prices, she said. The consumer price index soared 8.2% in the 12 months through September.

PATRICK T. FALLON/AFP via Getty Images

Other Deflationary Factors

Two key elements of inflation -- wages and housing prices – are going down, Wood said. "Inflation isn't embedded." Used car prices are down 10% from their peak and can slip 25% to 50%, she said.

Also, retailers will have to discount their prices to liquidate bloated inventories, Wood said. "There's demand destruction caused by rising interest rates and also supply increases caused by higher prices."

In addition, the technologies she champions are pushing prices down, Wood said. For example, artificial intelligence (AI) training costs are down 60%. And AI will affect every industry, she said.

Wood also repeated her view that the Federal Reserve is going overboard in raising interest rates. The central bank has lifted rates by 375 basis points since March. Reports from Fed regional banks indicate output is disappointing and inflation is coming down, Wood said.

Declines in CPI

We're probably close to monthly declines in CPI, and there will likely be declines in year-to-year numbers within six to nine months, Wood said. "Then there will be talk of outright deflation."

When interest rates and inflation shift downward, investors will shift back to innovation technology stocks, she said.

Meanwhile, the mid-term elections are likely to bring a much more conservative Congress, Wood said. That will likely "mean a lot of gridlock, which may not be a bad thing for markets."

The election results could produce a shift in regulatory policy, she said. "Republicans encourage all kinds of energy production to get out of inflation and protect national security." Cryptocurrency policy may turn more friendly to the industry, Wood said.

She also thinks we'll see "more friendly fiscal and monetary policy.