Why Deflation Will Occur Not Inflation

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Is your organization among the many that have predicted looming inflation? Well, Cathie Wood, the founder of Ark Investment holds a contrary opinion. According to Wood, the world will experience “massive deflation” rather than inflation as commodities drop.

In an interview with Bloomberg, Cathy explained the global economic environment is setting up for an extended period of deflation. She explained that 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.”

Previously, the world saw range-bound oil losing its market value with a hedging inflation while gold was spurred to a range of higher records with inflation/deflation expectations as global central banks sought further stimulus.

However, stakeholders in the world of economics advised on the need to enhance energy efficiency strategies and other measures that minimized the effects of fuel prices on the dollar. The measures upheld by governments like advising corporations to cut costs as a compensatory mechanism played a crucial role in compensating the inflationary effects associated with oil, according to Cathie Wood.

Cathy’s ideology could be a clear representation of what happened with the inflationary effects of oil.  Cathy reveals that businesses were never prepared to meet the product demands they got from their consumer segments when the effects of the pandemic were at a record high. As such, retailers ended up increasing their product orders.

In Cathy’s words, 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. They were worried about inverted yield curves and the 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.”

A critical review of Cathy’s rhetoric and business trends during the coronavirus era presents two key sources of deflation as highlighted below.

#1 Plunging Commodity Prices

Consumer segments sought a “safe haven” to cushion their commodity stores by making lump sum purchases during the pandemic. Consequently, the global scenario will experience an extraordinary shift as consumers move away from buying goods to the purchase of services. In particular, the integration of vaccines has made consumers to develop a “carefree” mode while shifting away from the purchase of goods to buying services.

Cathy uses copper and lumber to explain this paradigm shift: “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.”

#2 Technological Innovations Are Deflationary in Nature

It is true that the world has experienced immense technological innovations and disruptions over the years. Look at how innovations like artificial intelligence, robotics and virtual systems have been adopted worldwide.

Cathy explains that “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.” Indeed, technology is valuable because it helps to eliminate costs in various aspects. It is supposed to cut down hours and add efficiencies across the board.

Similarly, there are businesses that will experience bad deflation with the technological innovations being experienced across the globe. in particular, bad deflation will be the talk of the day for organizations that will be disrupted by technological innovations.

Wood’s ARK Funds Are Losing Steam

But this is a narrative that can helps to fit her holdings. Indeed, while it is a rational view and can make sense, it is also necessary to look at other views in the market as well. At the present moment growth stocks, such as the one that Wood invests in are losing quite a bit of value. The reason why they are losing value is because of inflation concerns. As noted earlier, inflation can harm growth stocks that require cheap money to burn and grown. If cheap money, or low interest rates are taken out of the picture, that can have a harmful effect on growth stocks.