CA - The Journey From Monetary Shock To An Innovation-Led Economic Boom

2024-03-08 10:10:00 ET

Summary

• In little more than a year through July 2023, the U.S. Federal Reserve shocked the financial system.
• The Fed still seems to be fighting the inflation war that we believe ended in 2008, the equity market has been somewhat unsettled this year.
• After what we have characterized as a “rolling recession” in the last few years, the damage is not likely to cascade uncontrollably.
• Once the cyclical correction is complete, we believe AI should continue to take off will lead to super-exponential growth.

By Catherine Wood

Summary — The Journey Back

Last year began the journey back from what we believe will be deemed one of the biggest mistakes in monetary policy history, a journey that should continue to favor growth stocks generally and disruptive innovation specifically. While the rally in the US equity market during the last year rewarded a narrow subset of stocks, we believe it will broaden out during the next year as inflation and interest rates surprise on the low side of expectations.

In little more than a year through July 2023, the U.S. Federal Reserve (the “Fed”) shocked the financial system with an unprecedented, and unexpected, 24-fold surge in the Fed funds rate ^{[ 1]} from 0.25% to 5.5%. Fed’s moves did arrest the price shock caused by COVID-related supply chain bottlenecks and pushed commodity prices, as measured by the Bloomberg Commodity Index (BCOM), back into the deflationary trend that has been in place since the Great Financial Crisis (GFC) in July 2008, as shown in the first chart below. Today, BCOM is trading at the same level as it was more than 40 years ago in the early eighties, suggesting that the Fed’s fears about inflation are misplaced. In our view, deflation should be the concern. Indeed, adjusted for inflation as measured by the Producer Price Index (PPI), BCOM is lower than its level when the US abandoned the gold-exchange standard in 1971, as shown in the second chart below....

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