Massive deflation, not inflation, will be a problem as commodities drop, says Ark's Cathie Wood
(Kitco News) While many in the marketplace fear runaway inflation, Ark Invest founder Cathie Wood said that the problem ahead would be "massive deflation" as commodities drop.
"We are setting up for a massive period of deflation," Wood told Bloomberg. "In a V-shaped recovery, businesses are way behind consumers. Consumers were buying all of these goods. That's all they could do because they were stuck at home. They were buying non-durable and durable goods that could be shipped to them."
Businesses did not see this kind of demand coming during the coronavirus. In response, they ended up doubling, tripling, or even quadrupling orders, Wood highlighted.
"Disproportionate percentage of the market basket of consumers was in goods for the past year. And businesses have been lagging behind in terms of capital spending and inventories even before the pandemic," she said. "They were worried about inverted yield curves and China-U.S. trade conflict. So what's happening now? Double, triple, maybe quadruple ordering because they just can't get the goods. They were losing business to competition if they hadn't planned their inventories correctly."
There are three sources of deflation, and one of them will be a drop in commodity prices as consumers shift away from buying goods and towards buying services, she explained.
"Now that vaccines are here. And consumers are shifting away from goods towards services. The writing is on the wall," Wood pointed out.
Just look at lumber and copper: "We have seen lumber correct 30% in the last week. This is the beginning of that. Copper is now starting to correct. And I believe that commodity crisis went too far too fast as businesses were scrambling and panicking."
This could trigger deflation as businesses decide to cancel these tripled orders.
"That is only cyclical deflation. We didn't expect it to start now. We expected it to start later in the year. But it makes sense. Those double and triple orders are going to be canceled. The prices were too high. And we are probably going to see a drop in commodities," Wood explained.
The other two sources of deflation are technological innovation and the disruption it causes.
"When you see AI training costs dropping 37-50% per year. These are massive deflationary forces that are going to hit every part of the economy. AI is going to be everywhere. That is good deflation," she added. "Bad deflation is going to hit those companies that are going to be disrupted by all of the innovation that we talk about all the time. Based on DNA sequencing, robotics, energy storage, artificial intelligence, and blockchain technology."