Cathie Wood to Fed: You're Raising Rates too High

Wood has posited for months that the economy is suffering from deflation and is already in a recession.

Never let mediocre performance at your own job prevent you from telling others how to do their job.

Money manager Cathie Wood's flagship Ark Innovation ETF (ARKK) - Get ARK Innovation ETF Report has a five-year return totaling less than one-third of the S&P 500. Yet she has written an open letter to the Federal Reserve, criticizing its monetary policy.

Specifically, the Fed is "making a policy error that will cause deflation," Wood wrote, referring to the Fed's interest rate increases.

The Fed has raised rates by 3 percentage points since March and has indicated that plenty more is to come. Experts anticipate a 75-basis-point move at the central bank's next meeting, Nov. 2-3.

Wood has argued for months that the economy is suffering from deflation and is already in a recession.

The consumer price index jumped 8.3% in the 12 months through August, but she maintains that CPI is a lagging indicator.

Commodity Prices

"Commodity prices are leading indicators, upstream in the stages of processing," Wood said.

"Most commodity prices have peaked and, except for food and energy, are falling on a year-over-year basis, as shown [in the chart] below."

Ark Investment

She has said in the past that gold is the most accurate measure of inflation.

The rise of food and energy commodity prices is a big deal, Wood acknowledges. "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."

Looking at the downstream price picture, "inventory accumulation seems to be overwhelming manufacturers and retailers," Wood said.

"After grappling with supply chain constraints for more than a year, even world class companies seem to have … over-ordered merchandise." She cited Walmart (WMT) - Get Walmart Inc. Report, Target (TGT) - Get Target Corporation Report and Nike (NKE) - Get Nike Inc. Report. Rising inventories put downward pressure on prices.

Meanwhile, used car prices have dropped 13.5% year to date, Wood said. "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 lagging indicators: downstream inflation and employment, Wood said. "Both have been sending conflicting signals and should be calling into question the Fed's unanimous call for higher interest rates."

The CPI gained only 0.1% in August from July, and home prices fell 0.6% in July from June, she notes.

And on the employment side, while payrolls grew 263,000 in September, job openings fell 10% in August.

Underperformance

Ark funds have tumbled this year, as their technology stock holdings suffered from weak earnings. Wood has defended herself by noting that she has a five-year investment horizon.

And the five-year track record of Ark Innovation ETF could indeed give investors comfort up to May 9. The fund's five-year return beat that of the S&P 500 until then. But the five-year annualized return of Ark Innovation totaled only 2.96% through Oct. 7, far behind the S&P 500's 9.3% return.

Ark Innovation's share price has dropped 61% so far this year. And it's down 77% from its February 2021 peak.

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