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Amidst the uproar in wall Street for the Federal Reserve's hawkish monetary policies, Ark Investment's head Ms. Cathie Wood has penned an open letter to the bank asking it to reconsider its existing policy. Ms. Wood has been a part of a growing list of hedge fund and investment firm heads that have openly criticized the Fed's purported war against inflation, and in her letter, she urges the organization to consider the facts that upstream prices have already started to fall and that causing the global economy pain simply due to high food and energy inflation is unwarranted. The letter builds on concerns raised by both Ms. Wood and Tesla chief Mr. Elon Musk, with the latter having outlined earlier this year that he had started to witness some deflation on the commodities front.
Cathie Wood Insists That Downstream Inflation and Unemployment Are Lagging Indicators That Are Unrepresentative of True Economic Conditions
The gist of her letter focuses on raw commodities to argue that inflation has already started to come down, and this drop will be reflected in end product (or downstream) prices soon. Ms. Wood uses the prices of commodities such as gold, silver, iron, oil, DRAM, corn and copper to outline that for most of these, the peak prices were either last year or in 2020. Since then, the prices have dropped significantly from the peak prices.
She then adds that inventories at major firms are at record high levels, as they decided to forgo forecasting models employed by enterprise resource planning (ERP) systems and instead made sure to over-order. These systems use statistical techniques such as time series forecasting and standard deviations to set out optimum inventory levels for companies, keeping in mind the costs of running out and having excess inventory.
According to her, there is a risk of significant price deflation in a short time period downstream in the supply chain simply due to the fact that companies have accumulated too much inventory. In supply chains, upstream refers to the back end (such as factories) of the chain, and downstream refers to the retail point (such as shops). Economic principles of supply and demand also list down high supply as driving down prices, since sellers have to lower the price to move more inventory off their shelves, and a lower price generally ends up attracting more buyers.
Ms. Wood states that inventories at Walmart and Target have increased by 25.5% and 36.1%, respectively, Nike's global inventories have increased by 44$, and inventories in North America and on ships have grown by a whopping 64.8% and 85%, respectively. She goes on to outline that use car prices have also dropped from their peaks of April and December 2021, which in itself is indicative of a worrisome trend.
This trend, simply put, is the worry that the car retailers who have procured their high inventories at high costs, might be willing to cut prices dramatically so that they can clear out their inventories as soon as possible to minimize losses. This, according to Ms. Wood, can "push price inflation deeply into negative territory."
Finally, the investment firm boss also takes direct aim at the Federal Reserve's Monetary Policy Committee (MPC). She insists that both downstream inflation and price indicators are lagging indicators, implying that their increases are not indicative of true inflation and the truth might have changed 'upstream' in the chain.
She points out that while the Federal Reserve's Committee touted inflation recorded by the Consumer Price Index (CPI), Personal Consumption Expenditure (CPE) Deflator and the Producer Price Index (PPI) as the reason behind September's massive 75 basis point interest rate hike, other metrics were singling that inflation is in fact coming down.
These, according to Ms. Wood were the CPI and PPI with the energy and energy prices, as the central bank had considered their data without the food and energy components. Fuel prices dropped across the U.S. prior to the data being released, which contributed to a small 0.1% drop in the metrics. She also cites the Federal Housing Financing Agency (FHFA) data, which revealed that home prices also fell by 0.6% as of the latest reading.
Turning her guns toward labor data, citing the Federal Reserve's preference for non-farm payroll (which measures the jobs added in non-agricultural industries such as technology) and unemployment insurance as inadequate, she concluded by outlining that:
". . . .but job openings as measured by JOLTS[4] fell 10% or 1.1 million, manufacturing employment as measured by the ISM Purchasing Managers Index contracted, and Challenger involuntary job separations soared 67.6% on a year-over-year basis."
JOLTS is the Labor Department's job openings and labor turnover survey, which shows the number of job openings and the number of people that voluntarily left employment. The Challenger survey shows the number of people that were fired, while the ISM index indicates the number of raw materials and other goods purchased by firms.
All these calls into question "unanimous" decisions by the MPC to hike interest rates, and according to Ms. Wood, the unprecedented interest rate hikes have shocked not only the U.S. but other countries too - especially due to the dollar being the reserve currency all over the globe.
