Ark Investment Management‘s Cathie Wood has weighed in on bond yields, which have now become one of the biggest concerns of the market.
Monetary Policy Restrictive: On the recent episode of the “In The Know With Cathie Wood” podcast aired on Saturday, Wood shared a chart of the differential between the 10-year and two-year Treasury notes, which showed a negative reading or a yield curve inversion.
A negative reading suggests the shorter-term interest rates are higher than the long-term rates, which wasn’t normal, she said, adding that it has been more than a year since the yield curve has remained inverted.
When the yield curve inverts, it signals that the economy is either in a recession or not far from a recession, the fund manager said.
“We would say we are in a rolling recession for the past year-and-a-half,” she added. Wood sees it as a harbinger of slower economic growth and lower inflation than most people believe.
There is a 100-basis-point or one percentage-point inversion now, similar to what was seen in the 1980s when the long-term bond yield was much more than now, Wood noted. This showed that the current monetary policy is much more stringent.
A 100-basis-point inversion on a 4.5%-5% interest rate is much more serious than the same 100-basis-point inversion on a 15% interest rate, she said.
Deflationary Signal: Metal prices were recently going down relative to gold, with the purchasing power of gold going up, said Wood, as she shared a chart showing the metal/gold ratio vis-a-vis 10-year bond yield. That signals that the current situation isn’t inflationary, she said.
“We would love the Fed to pay attention to this one.”
In contrast, ahead of the early 2000s, which saw the tech and telecom bust and the ensuing recovery, monetary policy was extremely easy due to the Russian default and the Y2K issue, Wood said.
She noted that metal prices shot up, and gold lost a lot of purchasing power, resulting in an inflationary situation. The Federal Reserve was tightening against it and this resulted in the mortgage crisis and the Great Financial crisis, she added.
Since then, the two have mirrored one another, Wood noted. After this the Fed began taking interest rates 22-folds in a little more than a year’s time, she said. This suggests that this is a deflationary signal or at least disinflationary, she added.
“This suggests to us that these long-term interest rates are going to drop fairly significantly as we enter a harder-than-expected landing and they could drop below 2%,” Wood said.
— Brandon (@0x_brandon) November 6, 2023
Technology Could Salvage Growth: The U.S. federal deficit as a percent of nominal GDP is now at about 6% even without a recession, Wood noted.
The best way to contain the deficit is through rapid growth and this happened in the 80s and 90s, which saw spectacular growth due to the coming of age of technologies, she noted.
Wood said the deficit turned to a surplus during Bill Clinton’s administration.
Although hopeful, the fund manager said she feels that spending plans put in place after the COVID-19 pandemic may have been overdone.
Produced in association with Benzinga
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