Innovation In A Recession? | ITK with Cathie Wood

foreign [Music] [Music] foreign [Music] greetings everyone this is Kathy Wood from Arkham vest and this is employment Friday so in the summer August this year uh let's see fiscal policy monetary policy economic indicators market indicators and then a little about Innovation uh fiscal policy well uh we got a downgrade Fitch downgraded uh government debt this week and uh some some economists are treating that with with alarm and others uh others including strategists are treating it with a yawn and the truth is probably somewhere in between as is usually the case it really is a sign that our spending the government spending um in the last five six years has just been out of control and my reaction to it is you know hopefully this is a warning to the legislature and politicians generally that you know the the spigot is going to have to stop and it's interesting as I look in the GDP Accounts at the government line it's actually shrunk as a share of GDP and most of the spending uh is not in the GDP report GDP is a production of goods and services uh in uh in the U.S economy and a lot of the spending has moved off into social programs which are which are not part of GDP like say defense would be so I think that topic is is going to gain a lot of currency maybe they'll skip through it over the uh election year and campaign season as they usually do but I do think Fitch is warning us that we're going to have to deal with this issue in one way or another our point of view would be a policies that encourage very rapid growth because we're on the threshold of some technologies as you know we talk about them all the time uh really turbo charging growth and the the best way to get out of a debt problem is to grow out of it um so that's uh that's one thing um the other thing that happened that was kind of interesting from a fiscal policy point of view especially now that we've entered uh the election campaign uh season was um movement in on crypto legislation in the house uh now we don't think it will get out of the house because Maxine Waters is head of the financial services committee and is not pro crypto but crypto or as art Laffer would say could you please use a different word like digital assets legislation we do think that it will become an election year issue and the fact that it's even stirring in the house at this uh at this point in time and becoming a conversation we think is going to work to the benefit of of crypto and what's very interesting is whereas we thought we had a bipartisan issue uh uh in crypto uh the the the side seemed to part especially with Elizabeth Warren siding with the banks interestingly and uh unbelievably uh that uh that we need we need to be very careful in this realm uh we should not trust it uh uh so we thought there was a a there was a partisan divide evolving but we are seeing some Democrats uh coming back to these bills there were two uh that were voted well one has been voted on already and it got six votes from the Democrats uh and the the next one uh that one was on Market structure the next one is on stable coins and apparently uh that will have uh many more than just six votes uh from the Democrats so this could be come uh yet again a bipartisan issue which we think it it should be Innovation solves problems uh and uh this this crypto legislation uh would really put in place the layer of the internet that no one contemplated in the early days of the internet because it simply was a place to exchange information nobody thought about Commerce or financial services and so we think it's important and it will take a lot of the cost of financial services out of the system so then on monetary policy which is somewhat related we we think for example Bitcoin is the first Global private meaning no government oversight digital rules-based monetary system in history it's a very big idea uh and uh art Laffer is becoming very excited about this notion that we could be going back to a world of private money so before 1913 when the FED came into the existence money was private and we've done a podcast you can look for it on our FYI podcast about this period of time and uh and while I have always thought it was characterized by booms and busts um and it was uh what art says is those booms and busts happen very quickly six week six week uh periods of time before they'd clear up uh the booms and busts that have evolved since the FED uh took control uh have been many years in the making and then when they happen they are extremely destructive so uh just putting in a plug for that anyway on monetary policy this time around uh chairman Powell in his testimony to Congress uh basically used the word restrictive to describe monetary policy which is a big step I I thought at least and he wasn't thinking about it in terms of the money supply and as you know we've been talking about the money supply falling on a year-over-year basis and in fact if you go back into 2021 you'll see that the money supply really hasn't gone anywhere in two years this is extremely unusual and negative year over year as as I've said on all of these calls since uh M2 growth turned negative uh early this year that we have not seen since the 1930s and we've also seen a collapse in bank's willingness to lend they're very worried about the health of the economy and they're facing even more Capital restraints we've learned in recent days so monetary policy is restrictive but chairman Powell was referring to real rates when he said that so the FED funds rate is at roughly five and a half percent now and CPI inflation that's headline inflation is three percent that's two and a half percent real rates uh and if you look back you'll see that that uh rate that uh real rate two and a half percent uh was the peak right before 0809 uh so that's uh that's somewhat concerning but more concerning to me is that the inflation rate is coming down so rapidly now uh that what if we're at five and a half percent on the FED funds rate and zero on inflation by the end of this year uh which we believe is a real possibility that would be that would be a five and a half percent real rate and we haven't seen those since the 80s when the Fed was all about uh fighting the return of double-digit inflation uh that's not where we are right now uh so uh I think that what's going to happen in the next few months as inflation continues to come down uh is that more and more people will be talking about this real rate which is uh really starting to mount and I think it was healthy to hear chairman Powell uh refer to monetary policy as restrictive uh so uh half of uh half of the solution is understanding the problem uh if he thought monetary policy was still too easy that would be a big problem um so if you look at M2 you can go back to August of 21 and see the same level uh and uh the other thing that I think more and more people are are discussing is what Milton uh Friedman taught everyone uh and that that is that monetary policy impacts the economy over and and these are variable time periods I think at times you use six months to 18 months well right now we're at about that 18-month period and uh we haven't hit a clear-cut recession we've had rolling recession certainly housing and Autos uh manufacturing and and so forth but we haven't hit the big one the recession and uh in fact what's happening to many people's surprise is inflation is coming down faster uh than they have expected a lot of people were of the view Like Larry Summers and I think he's still there that we are closer to a 70 style inflation than most people think we disagree entirely and I think many people who follow Larry and others are surprised to see inflation coming down so quickly and so we're hearing talks of the Goldilocks economy Goldilocks economy meaning uh soft Landing in response to money uh monetary policy and inflation coming down to that two percent area and then we're on our merry way but if money and monetary policy money interest rates do impact the economy over an 18-month period uh well here we are this if this is the start what could that mean um well it could mean a couple of things how would we we get our soft Landing well if prices went down and companies were willing to accept lower margins without firing people right now they're hoarding people and we can see that from the latest employment report but if if they were willing to accept much lower margins as prices come down then I think we'd have a soft Landing because the unemployment rate would not go up now I don't think that's going to happen um I I'm very pleased to see inflation doing what we thought it was going to do but it only means that monetary policy is that much tighter and I do think that companies now grappling with margin pressure are going to start making tough decisions about employment especially if the grips of monetary policy get stronger as real interest rates go up one of the things that uh I mentioned in our last call and that we're still noodling over is this Divergence between uh GDP uh gross domestic product here in the United States and GDI gross domestic income now they should equal each other over time they're they're an identity but they're measured very differently and in fact the income measure is much easier to get at because tax documents are the source of a lot of a lot of the data and so in the first quarter uh last time I mentioned to you that on a year-over-year basis GDP was up this is nominal GDP was up 7.2 percent in the first quarter and GDI was up only 4.5 percent I think I should have also uh read out the numbers uh at a seasonally adjusted annual rate so quarter to quarter um annualized and on that basis GDP is a sick was up 6.1 percent in the first quarter but GDI was up only 2.2 percent so this is a huge discrepancy I don't think we've ever seen this big a discrepancy and it is going to sort itself out and if we're right uh what that means is that the resolution will be uh revisions in lots of economic data down uh during the next six to nine months um now in terms of the economy so economic indicators uh the reason I'm focused once again on this discrepancy between GDI and GDP is because what we're hearing from companies is very different from what the GDP statistics are telling us in many cases um but before I get into that I'll just go through today's employment report um it fell below expectation so non-farm payroll increased 187 000 the expectation was 200 000 so not too far off the mark But when you adjust for the downward revisions to previous months uh the net was 137 000 jobs now as has been the case for the last well year and a half almost um other measures of employment are contradicting uh the non-farm payroll this time it's household employment household employment was negative I think in May uh to the tune of three hundred thousand but it's coming back and it was up 268 000. so lots of cross currents but one thing we are seeing and I think is really important is the average work week is going down uh so it went down three tenths of a percent in this in July and what that tells us is that companies are still hoarding labor they're afraid to let employees go because they had so much trouble attracting them in the last uh in the last couple of years uh especially in and around covid uh so I I do believe that they're going to face severe margin pressures as they hoard labor and their pricing power diminishes even more so uh I believe that the average work week has not been this low since at one point in 2020 during covid so that gives you a sense of the the labor hoarding the the employers don't want to lay people off they'll just give them fewer hours to work average hourly earnings were were up 0.4 percent that was a little higher again the Feds Watching that um others who are very focused uh and and remember the 70s style inflation are focused on wages because wages went up and pushed through into inflation because monetary policy accommodated money supply growth certainly wasn't negative at any point during uh during the 70s uh so 0.4 percent and we're hearing about these uh settlements either before or after strikes very big numbers 10 percent for in for some of the airlines um and perhaps uh other manufacturing Industries I've heard 10 8 to 10 percent uh a number of times well the difference between here in the 70s is yes monetary policy accommodated uh those wage increases and uh and we ended up with double-digit inflation monetary policy is not accommodating these wage increases and so that what that tells me is there are severe margin pressures uh awaiting the companies that are agreeing to uh these kinds of settlements as far as other indicators uh in the labor market we do have some leading indicators uh temporary employment is falling and uh we had Robert Half which is temporary help for um CFOs so temporary CFOs temporary controllers uh higher and higher level uh positions their revenue dropped uh 12 in the second quarter Manpower which is much broader based Light Industry administrative and so forth its Revenue dropped four percent so that gives you a sense uh at the margin that Labor uh is softening the job openings came out lower than expected and continued to fall in the technology space is very interesting we're continuing to hear and read about uh job losses there and in listening to the earnings reports of the season um I think the the there the technology companies especially those in Silicon Valley uh seem to have all gotten the same message which is you know what uh a i is so powerful and is going to introduce so much efficiency and productivity uh that we should lay people off because uh we we will keep our Competitive Edge that way sure the advertising Market was a reason a soft uh online uh Market uh Market marketing and advertising was a reason uh last year but they're continuing to shed jobs as some of those indicators come back in terms of online advertising picking up a bit and uh I do think this is going this sentiment is going to Cascade through through many Industries we think artificial intelligence is applicable applicable to all Industries uh and and bringing in efficiencies and productivity gains so we think that's also going to become a major source of loosening in the labor market um we will know when that's happening from initial unemployment insurance claims they have started up and they had gone up to 250 to 260 000 from roughly one hundred and eighty thousand and now they've backtracked to 225 000. so um we don't see this full-blown hey we we better uh keep our uh efficiencies up especially if we can't rely on pricing anymore um and and and lay some people off the GDP report was a a a nice eye-opener uh the this this is where I think a lot of economists had an aha moment real GDP was higher than expected but it wasn't because of consumption consumption was up only 1.6 percent real GDP is up 2.4 percent because investment was up 5.7 percent and um and government spending was up 2.6 so there was that stimulus in there uh Pro stimulus programs still getting into the GDP especially through uh infrastructure um and the investment is being helped by onshoring here in the United States uh and that will be a buffer that will be a buffer uh against a severe recession um but we do see the consumer slowing down and inflation was 2.2 percent at an annual rate that's the GDP deflator the broadest base measure in the U.S 2 point two percent so we're just about where the FED wants to be on its metrics but they are lagging indicators um and you know we have some real life earnings reports uh to inform us here as well um I'll mention uh Costco Costco uh if if we listen to John Lilly who is one of uh the contributors uh at our brainstorm every Friday and he's the former CEO of Pillsbury very sensitized to inflation deflation in the food space uh takes lots of trips to Costco to check out the scene and he believes there's outright deflation taking place uh and that and that you may not see it in terms of the listed price uh but in terms of all the discounts and Deals uh that you can get he says that's quite Telltale uh ConAgra came out and just looking through its report it's uh Revenue was up 2.2 percent disappointing uh the refrigerated and frozen food section was down 1.1 percent in terms of Revenue and uh the CEOs said you know uh it's we've watched the consumer grapple with budgets and inflation uh really hitting budgets and up until now they were trading down to store brands or generic brands uh but now they're just foregoing and maybe just pulling out of their freezer and waiting for prices to come down so pulling out of their own inventory uh that they probably built up during covid uh at home uh and then we have CSX a rail and I I look at Transportation companies both Trucking and rail negative uh negative negative Revenue growth so CSX minus three percent and you know it's been very interesting to go through this earnings season and to hear the media say oh better than expected better than expected what happens during a quarter is companies throw out hints and analysts take down their numbers and companies lower expectations to such a level that they beat them and you'll see oh 70 80 percent of all companies are beating their revenues and earnings yes that's because they've come in so much based on various kinds of guidance um and then there's this true inflation gauge that I mentioned it too is down to two eight two nine percent this is a daily metric you can pull up just to see what the real inflation measure is based on I think it's 10 million measurements over the course of a month so uh I think the real world is informing economists more than economic statistics are they are quite confusing um so let's go on to markets now what are they saying well the equity Market is buying into this soft Landing uh you know inflation coming down interest rates coming down uh it's looking over whatever the FED is doing or saying now and is basically saying hey these inflation rates are coming down so rapidly that the FED will have to follow them especially now that that chairman Powell has used the word restrictive in terms of monetary policy that is a setup and as I mentioned before I doubt is going to be soft because I think the margin Landing is going to be hard and if companies are willing to accept it um then and not lay off people then the economy will not go into a recession but I don't think that's going to be the case I do think they're going to cut labor because the full impact of monetary policy has yet to be felt if it's an 18-month lag up to an 18-month lag we could be given that the last rate increase was um uh in the last 10 days uh we would we could be experiencing the impact of tight monetary policy uh for the next 18 months the fixed income markets uh are basically uh moving up and and I mean the yields are moving up in response to a stronger than expected economy so that real GDP growth number and less and they're responding less to the lower than expected inflation and we know there are a lot of Traders positioned on both sides some believe that the interest rate the long-term treasury yield is going to break out from the base that we've been in since October well the base is longer than that for for about a year and a half last October we peaked at 4.34 percent uh yesterday we got into I think it was 413 414 and today uh Friday employment report weaker than expected uh the yields have come back in um we see the yield curve also narrowing in terms of its inversion we were at more than 100 basis points and that was trouble here in March and we had just gotten there again and now we're at 75 basis points more because long yields have gone up than short yields coming down and the spreads if you look at the corporate spreads corporate yields relative to treasury yields they're well behaved as well they are not saying yet that margin pressures are are going to be a problem but we think they will so we think those spreads depending on the industry will start moving up as the economy weakens commodity prices if you look at the the Bloomberg commodity price index it has gone from 140 uh that would have been in March of 22 when um Russia declared war against Ukraine and oil prices and food prices shot up so we got up to 140 and are now uh down to 105. um uh the the downturn actually started in 2008 when oil prices peaked we're down to uh 2005. um but if you look at the base of the last I'm going to say 40 years we're still in a Range it's a wide range but very recently the trend has been down and uh we don't think that Trend will be broken and then finally uh Bitcoin uh new asset class uh after the excitement about blackrock's ETF filing for Bitcoin uh in June which rocketed Bitcoin Beyond uh 30 000. uh it has uh come down a bit um around it's around 29 000 now uh and even more notable is the volatility has come down dramatically in fact we haven't seen this low of volatility since 2020 uh right before uh it embarked upon a major move um now sometimes volatility means uh that it's going to break down so when there's very low volatility you look for signs of is this going to break out or is it going to break down given our on-chain analytics um the we're we're on the bullish side and we just put out uh the Bitcoin monthly uh this week and um and you'll see those signals on balance they're very positive so the internals of the market uh the on-chain analytics are are telling us uh that we're probably if there's going to be a break either way it will be a breakout to the upside and as you'll remember the last highs were seventy thousand and this has been a market that has been moving uh uh it's been moving such that we have higher highs and higher lows uh with each cycle it's very volatile of course as we all know uh but higher highs and and higher lows means we're in a secular uh bull market and um if you'd like to understand more of the reasons why you should tune into the crypto brainstorm that we published uh with Bitcoin Park in Nashville Tennessee we are have partnered with them and we are holding a brainstorm every month and it will have a different cast of characters in The crypto ecosystem uh this this past one was fascinating for uh for me to be speaking with Yasin with uh individuals who are dedicating their lives to bitcoin and taking us into uh into that world in a way that I didn't appreciate so I highly recommend it and uh as far as anything else in the world of innovation very exciting week actually 10 days uh about 10 days ago there seemed to be a a super conductor uh breakthrough room temperature super super conductor and our chief futurist Brett Winton uh along with many others said you know this is probably fake uh that was and he gave it a 10 chance about a week ago of of being the real deal a real breakthrough uh today he and others I think the betting markets are up to 40 percent he and our team are in the 60 to 70 range and you and we may not see a commercialization of very much for quite a while uh so if you're looking for a breakthrough in earnings based on this in the next year or so uh uh no to that uh but but it might be bringing us much closer than even we thought uh to Quantum Computing uh which would change everything and we're doing a lot of research actually our crypto team started doing the research on Quantum Computing because it's quite relevant um to cryptography and uh so stay tuned we'll be uh talking a lot about that I love it when we get excited about new ideas AI has taken so much oxygen out of the room in the in the last six to nine months that uh it's refreshing uh to be talking about yet another major major breakthrough uh being possible here so with that happy summer have a wonderful August and we'll see you uh after Labor Day foreign [Music]

Channel: ARK Invest

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Keywords: innovation, investing, cathie wood, cathy wood, kathie wood, kathy wood, cathie woods, cathy woods, kathie woods, kathy woods, ARK, market news, fintech

Id: EWnj0_D2F2U

Length: 35min 35sec (2135 seconds)

Published: Fri Aug 04 2023