Cathie Wood counters Jack Dorsey's hyperinflation warning, says prices to unwind after holiday season

Cathie Wood, founder and CEO of ARK Investment Management LLC (File image: Reuters)

Ark Invest founder Cathie Wood has countered Twitter chief executive officer Jack Dorsey's warning on hyperinflation, saying prices would begin to drop following the holiday season.

The holiday season in Northern America and Europe usually lasts till the onset of New Year. "Once the holiday season passes and companies face excess supplies, prices should unwind," Wood said in a tweet on October 25.

Her remarks on Twitter referred to a tweet of Dorsey, in which he suggested that economies across the world would be hit by hyperinflation.

"Hyperinflation is going to change everything. It’s happening," Dorsey had said on October 24, adding that it would affect all countries including the US.

Dorsey's warning assumed significance as he used the term hyperinflation instead of faster inflation -- which many analysts have been recently referring to. By hyperinflation, he apparently warned of an extreme hike in prices that could severely hurt GDP growths and damage currencies.

Also Read | Nomura warns of 1% jump in India's inflation if commodity prices remain high

In 2008-09, when the Fed started quantitative easing, I thought that inflation would take off. I was wrong. Instead, velocity - the rate at which money turns over per year - declined, taking away its inflationary sting. Velocity still is falling. https://t.co/tFaXSaCKqS

— Cathie Wood (@CathieDWood) October 25, 2021

According to Wood, who is counted among the top innovation investors, the world had seen a deflationary trend amid fears of massive inflation following the 2008 financial crisis.

"In 2008-09, when the Fed started quantitative easing, I thought that inflation would take off. I was wrong. Instead, velocity - the rate at which money turns over per year - declined, taking away its inflationary sting. Velocity still is falling," she said in a Twitter thread.

Three sources of deflation

"Now we believe that three sources of deflation will overcome the supply chain-induced inflation that is wreaking havoc on the global economy. Two sources are secular, or long term, and one is cyclical. Technologically enabled innovation is deflationary and the most potent source," Wood added.

Artificial Intelligence, which she described as a "record-breaking deflationary force", will see a 40-70 percent drop in annual rate.

"When costs and prices decline, velocity and disinflation - if not deflation - follow. If consumers and businesses believe that prices will fall in the future, they will wait to buy buy goods and services, pushing the velocity of money down," she said.

"Creative destruction", i.e. companies catering to short-term oriented shareholders will be the second major sources of deflation, Wood suggested.

"The second secular source of deflation could be creative destruction, thanks to disruptive innovation. Since the tech and telecom bust and the Global Financial Crisis in 2008-09, many companies have catered to short-term oriented shareholders who want profits/dividends now. They leveraged their balance sheets to pay dividends and buy back shares, “manufacturing” earnings per share. They have not invested enough in innovation and probably will be forced to service their debts by selling increasingly obsolete goods at discounts: deflation," her tweet read.

The third major factor of deflation would be extra-stockpiling, as businesses have ramped up their current supply considering the pandemic and supply-chain bottlenecks.

"The third and most controversial source of deflation is cyclical. Because businesses shut down and were caught flat-footed as goods consumption took off during the coronavirus crisis, they still are scrambling to catch up, probably double- and triple-ordering beyond their needs," she noted.

As a result, once the holiday season passes and companies face excess supplies, prices should unwind. Some commodity prices - lumber and iron ore - already have dropped 50%, China’s crackdowns are one of the reasons. The oil price is an outlier and psychologically important.

— Cathie Wood (@CathieDWood) October 25, 2021

Wood's counter to Dorsey's hyperinflation claim comes in the backdrop of Federal Reserve chief Jerome Powell acknowledging the challenge of inflationary trends in the American economy.

The inflation pressures "are likely to last longer than previously expected", he said, adding that they may run "well into next year". Powell suggested that the the Fed may soon begin to retreat from the extraordinary measures that were rolled out to aid the economy amidst the pandemic. Critics have blamed the support measures for triggering the current inflation cycle.