EXCLUSIVE: Cathie Wood Flips The Script, Warns Of Looming Deflation

While many investors and economists are preoccupied with the specter of inflation, Ark Invest founder Cathie Wood is out with a more contrarian view.

‘Wood Predicts ‘Harder Landing’: In an exclusive interview with Benzinga CEO Jason Raznick on "The Raz Report," Wood lays out a perspective that challenges conventional wisdom: The real economic risk isn’t inflation — it’s deflation.

“Has your overall strategy changed with these higher interest rates that we’re in right now?” Raznick asked. Wood’s answer was unequivocal, saying she expects interest rates to “fall, and surprisingly so,” which is opposite of the "higher for longer" interest rate environment to which the Federal Reserve alludes.

“Take a look at some of these earnings reports,” she said, “the headline will be, ‘Oh, they beat their revenue and earnings.’ But if you look deep into it, the guidance has been falling for a long time, and many companies are showing little to no nominal growth.”

In other words, while the numbers may look promising, Wood said digging into it underlines an unsettling trend. "Nominal revenue growth is diminishing, and by some measures, real revenue growth has been negative for the last two quarters on a year-over-year basis."

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“There’s going to be a harder landing than most people think,” Wood said, adding that inflation went from 9.1% in June of last year to a little over 3% in July. Money growth has been negative on a year-over-year basis since the beginning of the year, something that will impact the economy with a lag, she said.

The consumer is already at a breaking point, Wood said, using Domino’s Pizza Inc DPZ as an example. Back in February, Domino's Pizza CEO Don Meij admitted to making a mistake in trying to raise prices in an attempt to fight inflation, which resulted in a loss of units and a 20% blow to its profit margin.

PepsiCo, Inc PEP and Coca-Cola Co KO are further examples, Wood said, noting that the byproduct of near double-digit price increases has been negative unit growth. “Well, these are manufacturing companies; that kills productivity,” she said, warning of a cycle that could set in.

With credit card debt being at historic highs, Raznick questioned the impact on Wood’s investment strategy.

It's "not a problem until delinquencies start ramping,” she said, adding this is likely to come as unemployment rises and companies see declining profit margins.

She cited a report Ark Invest received indicating that consumer delinquencies are rising much faster than anticipated, potentially foreshadowing a troubling trend.

Benzinga’s Take: Wood’s deflation-centric viewpoint offers a crucial alternative lens for investors. With companies like Domino’s, Pepsi, and Coca-Cola serving as canaries in the coal mine, there’s evidence that nominal and real growth are under considerable stress.

Wood’s perspective — which is reflective of her overall investment thesis — underscores the need for investors to look beyond inflation as the only economic bogeyman. It suggests rethinking traditional valuation models and understanding the nuanced threats and opportunities that deflationary pressures may present.

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Photo courtesy of Ark Invest.