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kathy wood has made no secret of her belief that deflation is here and it's here to stay she's been a vocal advocate of the idea that inflation is just transitory that it will disappear before the end of the year and that deflation will then take over now this is something that a lot of people struggle to understand and it's easy to see why the headlines that cnbc and bloomberg seem to be putting out recently make it seem like the only price pressure is inflationary housing prices are up 20 in a year the money supply is up 30 in a year wage growth was up over 3 in the last quarter alone that's the highest increase we've had for over 20 years by all accounts it looks like prices are rising across the board which is pretty much the definition of inflation so why does cathy think deflation is the more likely outcome well that's what we're here to find out but really quickly if you're new here subscribe to the channel we're putting out loads of content just like this constantly that you don't want to miss out on the fed itself is focused on core pce that's the deflator the inflation rate uh for for consumption and uh it has moved up to 3.4 percent uh and i would say it could go to 5 i thought i thought maybe it would top out at 4 percent but there has been a head of steam at work here and we're seeing rents go up dramatically and that's influenced by house prices going up at least how it's measured in in the inflation gauges we've seen oil prices against our expectations shoot past seventy dollars the economy is flying and we're in the sharpest rebound from any recession according to the national bureau of economic research the sharpest rebound from the shortest recession and the sharpest recession uh in post-world war ii history uh so uh it would make sense we're out of the woods uh for monetary policy to normalize and in a stealth-like way it might be doing just that uh i was surprised to see that the rate of growth in m2 has dropped from 27 in february uh to uh 13.8 percent and it's a pretty sharp fall so the rate of money growth is decelerating quite rapidly so kathy clearly agrees with the consensus that inflation is here right now inflation over the last month alone was point nine percent which is the highest we've seen for over 20 years kathy also made a point of specifically mentioning that prices are up according to measures like the pce not just the cpi so she's clearly aware of the data the interesting thing that kathy said however is that the rate at which the money supply is growing is shrinking last year the money supply grew by 28 whereas it was only 14 in february that's pretty much a 50 decrease and to kathy that signals that the start of tapering by the fed is here and that in the long run that tapering will reduce the effects of inflation she also mentioned how unusual the last year was we saw the sharpest market crash in history followed by the sharpest market rise in history people were locked in their homes yet were still being paid by their employers or were still receiving checks from the government in pretty much every country in the world household savings rose over the last year people were pretty much forced to save their money as they just weren't allowed to get out and spend it now that the economy is back open people have rushed out to spend their savings which is causing demand push inflation now this is inflation but it was also expected this jump in economic activity is essentially people making up for the lack of spending over the last year by spending more this year and by the end of 2021 all of our savings will have probably disappeared and we'll be back to our normal spending habits as you know we we have a bias based on our research on innovation to focus on deflation because uh and technologically enabled innovation is inherently deflationary so we we have that bias but i will tell you with the cpi reports that we have gotten ppi as well much higher than expected i would have expected the bond market to continue to sell off and interest rates therefore to go up instead since the end of march the 10-year treasury bond yield has dropped from 1.74 to 1.43 no matter how strong the economic data have been uh how high the inflation numbers have been and so the the bond market is sniffing something out i believe the bond market is signaling there are more deflationary pressures brewing out there uh we believe than most uh investors appreciate i've just mentioned the good deflation associated with innovation but the other side of that is creative destruction and the deflation that will hit companies who have leveraged up to buy back shares manufacture earnings growth have not invested enough in getting ready for the new world and believe me every sector is going to be transformed and so they will face significant pricing pressure as their products really go obsolete eventually what could be making the difference in terms of the dollar going up is this notion that um the terms of trade are not going to turn as much against the united states in the form of higher corporate tax rates and in fact this 15 minimum tax will hit everyone in the world now it will hit disproportionately some of the very profitable tech companies who have been able to manage taxes globally to very low levels but that again it's true for everyone so at the margin maybe that is why the dollar's going up so kathy right there gave us the real reason that she thinks inflation fees are overblown and deflation is the real threat bond prices now bond prices are entirely dependent on market conditions and in a market that has seen runaway inflation bond prices are expected to fall this is pretty much economics 101 it's something that we've known about for decades and it's something that economists like kathy wood have used to accurately predict how our market will perform in the future the only problem is that bonds are not selling off like we would expect we are seeing inflation yet bonds are not falling and kathy thinks this is due to the bond market detecting strong deflationary pressures that we can't see with our naked eye now kathy is quick to mention that she doesn't know that this is the case for sure she can't see the future just like everyone else and it's possible that bonsai performing better than expected because the us has stronger economic forecasts than other countries it looks as though biden's planned tax raises aren't going to be as radical as earlier thought which is great for american business it also looks as though the worldwide minimum corporate tax rate of 15 is going to limit some offshore enough profits by the world's largest companies leading to more tax being paid in the countries where the revenue is made which will be great for the us government it means more tax money for them the us has also vaccinated an awful lot of people which has allowed it to open up more of its economy faster than other countries have so the bounce-back effect that the us will see and already is seeing will be stronger than that in europe for example longer term the combination of electric and autonomous electric uh vehicles we think is going to drive oil prices down as i've said now this is my point of view we haven't uh done uh the research uh to get us here yet but i think we could go down uh back down to uh where oil prices um landed after the cartel took over in the early 70s and they went from i think three dollars a barrel or four dollars to 12 a barrel wouldn't be surprised ultimately to see us back there especially as electric uh vehicles continue to take off and they are starting to take significant share uh and i think subsidies in china and elsewhere are are going to accelerate the shift towards electric vehicles so and and also helping it are the number of traditional automakers who are now uh have pulled out all the stops and they are are designing and producing electric vehicles because they're better cars they're better for the environment they're better performing uh it makes a lot of sense and most important for for the consumer from the consumer's point of view from an adoption point of view is their prices will continue to fall uh so again the deflationary undertow there and then the cyclical deflation well the bond market seems to say this is what's happening and if that is true uh because most people don't believe one and a half percent is a real interest rate uh they they've been normalizing i think in terms of the way uh multiples have worked out in in the market the equity market uh they've been um pricing or valuing stocks uh as though the normalized interest rate is somewhere around four percent um what if it's not what if it is half of that uh that that would be huge uh for secular growth companies uh especially because there's going to be so much confusion you have all of this innovation which is going to be very exciting and then you're going to have all of this destruction which is going to be pretty demoralizing it's going to be so important to get on the right side of change so you know part of our mission and value is to educate we know robots are coming to satisfy uh or to take care of wage inflation uh problems so first we heard why there might be deflation and now kathy has told us how there might be deflation and the short of it is technological advancements it's pretty common knowledge that technology gets cheaper over time a hundred years ago a radio was a very expensive piece of kit and most households couldn't afford one nowadays a radio can be picked up for a few dollars and pretty much everyone in the entire country can afford one the same can be said for buying cars and tvs or for going on a plane these things that at first inception were the peak of modern innovation are now common and that's all because they get cheaper every year manufacturers find more efficient ways to produce things and transport things and research things and the rate at which our technology advances has been accelerating since the inception of the internet now i've seen a few people get confused about this most notably the guys on the millennial money podcast and they all seem to bring up an example like the iphone they argue that an iphone today actually cost more than one did in 2016 and that one cost more than one did in 2012 so how could this be deflation at work and it's quite simple really the problem with this way of thinking is that an iphone today is not the same as an iphone in 2012 they may both be called iphones and they may both have the basic function of making phone calls but they are completely different and while one from 2021 might cost twice as much as one from 2012 he has a camera 10 times better and a thousand more features and a battery that holds five times as much energy the truth is that deflation has still taken place we are just buying products that are 100 times more advanced now kathy doesn't attribute all of the coming deflation to technology advancing she also sees oil prices falling as our dependence on oil continues to fall with the rise of electric vehicles and green energy and she sees the increase in the use of automation in our economy with robots and ais slowly replacing more and more jobs every year causing deflation in people's wages but the idea that really shocked me and something that after doing some more research on and really thinking about makes me think that kathy might be right after all is the idea that the normal interest rate has changed go back 30 or 40 or even 50 years and interest rates hovered between 5 and 10 they rarely rose above or below that range these interest rates meant it was expensive to fund development for anything and it made going out and starting a business and being truly innovative very risky and difficult what kathy predicts is that going forward a 1 or a 2 interest rate will become the new normal now why that might not seem like a revolutionary idea at first kathy believes that if true it would lead to the greatest deflationary pressures we've ever seen it would allow truly innovative companies like apple like tesla the absolute best of our countries to take out large amounts of debt to fund research and growth at a rate we've never seen before technologies like decentralized finance blockchain artificial intelligence superconductors quantum computing and even nuclear fusion would all benefit hugely from an economic environment where interest rates remain low forever this could create huge deflationary pressures if quantum computing becomes the norm every person would be able to afford a nasa level pc for a thousand dollars if nuclear fusion can be effectively harnessed the world's energy crisis would end the effect of this kind of advancement could be world changing and it could all be caused by something as innocuous as low interest rates now this is obviously a very optimistic outlook but kathy wood is a very optimistic investor and while i'm not sure if i quite agree with her that these deflationary pressures will overpower the inflationary pressures over the next year or so i do think that in the long run the real long run the next 20 years or even longer it's entirely possible that kathy is right about all of this i just think she might be a little bit premature i'd love to hear what you guys have to think is inflation or deflation going to win out here is kathy being too optimistic or not optimistic enough or am i just wildly wrong on all accounts let me know in the comments down below if you're new to the channel and you enjoyed the video then make sure to subscribe if you want to help spread the word then like the video leave a comment and youtube will do its part by putting this video out to more people just like you i've also recently started working with weeble a brokerage that has grown like crazy and there's a link in the description which will give you two free stocks each worth up to 300 if you sign up through there so be sure to check it out it's literally free money thanks for watching until next time
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