A Surprising Take On Inflation You Might Have Missed…
Pop quiz… What do Jack Dorsey, Cathie Wood, and Elon Musk have in common?
No, this isn’t a setup for a joke.
About a month ago, I was scanning “Fintwit” – or financial Twitter – and came across an interesting discussion between three prominent voices from the tech world surrounding the topic of inflation.
It all started when Dorsey, CEO of Twitter, shared his thoughts:
Hyperinflation is going to change everything. It’s happening.— jack⚡️ (@jack) October 23, 2021
That’s where Cathie Wood, founder and CEO of Ark Invest, decided to weigh in. In case you’re not familiar with Cathie Wood, she made her name with Ark by launching a series of ETFs around different areas of innovation. In 2020, her flagship Ark Innovation ETF (Amex: ARKK) returned nearly 150%. Wood is a fixture on outlets like CNBC, and she draws a lot of polarized opinions. But one thing is for sure, when she speaks, people listen.
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
Enter Elon Musk, the world’s richest man:
I don’t know about long-term, but short-term we are seeing strong inflationary pressure— Elon Musk (@elonmusk) October 26, 2021
For context, recall that the topic of inflation has been on the lips of just about every pundit for months now. Just recently, we learned that the consumer price index (CPI) jumped 6.2% on a year-over-year basis in October. If you’ll recall, last month’s reading was 5.4% in September. It’s also the largest annual increase we’ve had in 30 years.
The core CPI, however, rose 4.6%, compared to the expected number, which was 4%. Core CPI strips out food and energy prices, which the good folks at the Bureau point out can be more volatile.
So it’s not surprising that these prominent figures would have strong opinions on the issue. But if an online exchange between these three wasn’t interesting enough, here’s something to chew on…
When Wood refers to the velocity of money, she’s referring to the frequency at which dollars are used to purchase domestically- produced goods and services. In other words, how many times does a dollar change hands within a given amount of time?
If I buy a car from you, and then you use that money to pay for a new deck on your house, and then your contractor uses that to buy a boat, then that’s typically seen as a sign of a healthy economy.
There’s just one problem. According to the Federal Reserve Bank of St. Louis, the velocity of money has done nothing but decrease since the financial crisis of 2008.
Source: St. Louis Fed
In a follow-up thread of tweets, Wood proceeded to explain why she thinks that is and how she believes the long-term pressures of rapid technological innovation will be deflationary. You can read her full reasoning here, but it essentially boils down to this…
Wood said that since the financial crisis, many companies took a short-term focus by taking on debt to finance buyback and dividends while offering “increasingly obsolete” goods at discounted prices. That’s been good for consumers, but what came at the expense of that is… you guessed it… innovation.
That set the table for “creative destruction,” because a new wave of companies has come to the forefront of the market. As Wood argues, they’ve innovated in substantial ways that fundamentally change the way we live our lives and offer stellar returns for long-term shareholders. Not only that, but it could be the reason why inflation has been relatively tame in the past — and it could also keep a lid on inflation, and even drive prices down, in the long run.
The Bottom Line
There’s more to Wood’s argument, and I haven’t done it full justice. And it certainly doesn’t do anything for us right now. But it’s certainly worth considering further. Regardless of where you fall on the debate, it’s interesting food for thought…
One thing that’s not in debate, however, is that it’s always a good idea to add a little bit of protection to your portfolio. By positioning yourself in the right mix of stocks that zig when the rest of the market zags, you could not only protect yourself, but also profit immensely…
That’s where my colleague Dr. Stephen Leeb comes in. He’s just released an explosive report detailing what the government, the financial media, and the analysts on Wall Street aren’t telling you about inflation. He makes the case for why it’s is the single greatest threat to your wealth right now — and that you need to act now to protect your home, your savings, your investments, and your retirement.
In addition to his warnings, Dr. Leeb also reveals six investments that could soar over the next few years as inflation takes root — and they’re not all what you might think… Go here to check out his report now.