Why Cathie Wood Says Record-Breaking Inventories Could Lead To Weaker Prices

Popular investor Cathie Wood who runs the investment firm Ark Investment Management said on Thursday that record breaking inventories at top U.S. retailers such as Walmart Inc WMT and Target Corp TGT could lead to weaker prices amid declining consumer sentiment and spending.

What Happened: A Tesla Inc TSLA bull, Wood was responding to a tweet in which billionaire entrepreneur Elon Musk was quoted as comparing the recent inflation surge to the government printing “a zillion more dollars than it has” while the “velocity of money held constant.”

“Walmart’s inventories increased 33% in nominal terms on a year-over-year basis, translating into 20%-25% in real or unit terms, as Target’s inventories increased by 42% and 30%-35%, respectively,” Wood wrote in a Twitter thread.

“In my 45 years in this business, I have never seen such inventory excesses.”

The consumer sentiment has dropped to a level not seen since the 2008-2009 global financial crisis, Wood said, citing the University of Michigan.

“Consumers are rebelling against their loss of purchasing power.”

Consistent with this line of thinking, credit default swaps - the price of insurance policies against default as measured by Markit - are surging, the yield curve is flattening - portending disappointing growth and/or lower inflation - and stock prices are plummeting. — Cathie Wood (@CathieDWood) May 19, 2022

See Also: Elon Musk To Cathie Wood: Not Sure About The Long Run But Inflation 'Pinching Hard' Short-Term

Inflation And Worsening Consumer Sentiment: Consumer sentiment declined by 9.4% from April to the lowest since 2013, reversing gains realized last month, data from the University of Michigan’s sentiment index showed.

About 36% of consumers attributed their negative assessment to inflation, the University of Michigan’s survey of consumers director Joanne Hsu said. 

Ark Invest's Wood said: “Now that the growth in M2 has declined to low single digits at an annualized rate during the last few months, if the velocity of money does decline, then we will be facing the risk of price deflation.” 

M2 is a measure of the money supply, a metric that has grown to record levels in recent times. 

The Last Word: Wood, who has a large exposure to equities of companies like Tesla, Zoom Video Communications Inc ZM and Block Inc SQ, said short-term supply chain bottlenecks may have been caused by businesses “over-ordering” while government stimulus was flowing freely.

The U.S. is currently battling the highest level of inflation seen in four decades, spurring the Federal Reserve to hike rates. Wood has previously said she expects deflation to play out in the near future.