- ARK Investment Management’s Cathie Wood claims that the U.S. Federal Reserve will not raise rates as aggressively as markets have priced in.
- Wood’s flagship ARK Innovation ETF is down 45% year-to-date, and suggests that inflation could start to decline, giving the Fed sufficient cover to dial down its aggressiveness on tightening, providing a potential bump for risk assets.
It’s only when the tide washes out that you can see who’s been swimming without a bathing suit on.
With the prospect of the most aggressive policy tightening by the U.S. Federal Reserve since Paul Volker was chairman of the central bank, professional money managers who had prospered during the loose money good times are now having to contend with what the new policy landscape will look like for their funds.
And no preacher of the rolling good times has been as pervasive as Cathie Wood, who claims that the Fed isn’t going to hike rates as much as markets are currently betting.
Wood’s view flies in stark contrast to the rest of Wall Street, with some financial institutions gearing up for rate hikes as high as 0.75% at each turn.
The CEO and founder of ARK Investment Management, Wood has struggled recently amid fear of inflation but believes that markets have overpriced the prospect of Fed tightening.
Speaking via video at the Seedly Personal Finance Festival in Singapore, Wood expects inflation to end its spike and then decline in “dramatic” fashion, which she claims will provide the Fed some breathing room to dial back the aggressiveness of purported rate hikes.
To be sure, such an idealized scenario would help Wood’s flagship ARK Innovation ETF, which is down a whopping 45% year-to-date and has been nursing billions of dollars in outflows over the past six months.
Wood claims that there could be “a surprise in terms of interest rates not going up as much as the market has priced in.”
But is there anything outside of self-interest to Wood’s optimism on softer policy stance and inflation suddenly disappearing?
There could well be.
For starters, much of the demand for industrial commodities like oil, nickel and copper, as well as foodstuffs like wheat, come from the world’s second largest economy, China.
But with Beijing insisting on zero-Covid whole-city lockdowns, and refusing to ease its monetary policy aggressively or deploy fiscal measures to shore up its rapidly slowing economy, that demand could soon taper off as China pushes ever-closer to the brink of a recession.
Forget 5.5% target economic growth, at the rate Beijing is locking down cities with populations the size of entire countries, and with containers waiting aimlessly at empty ports as well as factories sitting idle in industrial megacities, China would be lucky to get away with even low single-digit expansion.
And that could provide the release valve that’s needed as the U.S. Federal Reserve faces off with the highest level of inflation in four decades.
Already concerns about demand for oil from China have put a lid on further rallies, while both bonds and stocks are sagging.
With Russia now making moves to possibly further its invasion not just to the Donbas in eastern Ukraine but also to the south as well, there is the prospect of a prolonged conflict in the region.
All of which are increasing global recessionary risks and not reducing it.
While the Fed is concerned about inflation, it remains to be seen if it will risk tanking the economy just so that the price of a loaf of bread isn’t inordinately high.
Yes, Wood may be using her pulpit to preach her own beliefs of the market, but there may be some method to the madness in her views on what the U.S. Federal Reserve may do next.
