⚡ Cathie Wood’s Warning on Stocks & Inflation (Supercut)

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cathie wood recently released her latest
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episode of in the know a monthly video
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series where she talks about stocks
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economics and advanced technologies she
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offered a ton of great insights around
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the possible future of rate hikes
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earnings calls for amazon and facebook
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and what investors could be missing in a
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few pretty important markets these
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insights really require digging into the
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data and as a result i recommend
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watching the original episode in full
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but if you're short on time i created a
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super cut of the highlights and added
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the right charts and sources for context
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if you want to skip to a certain topic
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or you just want my take on what kathy
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would just said timestamps are enabled
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for your convenience your time is
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valuable so let's get right into it
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starting with the supercut it's very
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interesting that
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companies
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and people are setting up funds to bet
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against innovation that's really
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interesting i think history tells us you
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shouldn't bet against innovation but we
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are getting the description of
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innovation stocks and i'm talking about
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true disruptive innovation here we're
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hearing
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many out there dismissing these
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strategies
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as oh those are just stay-at-home
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strategies they were
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successful during the coronavirus
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because they solved some problems we had
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because of the coronavirus they're also
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called
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profitless tech strategies
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well i can tell you there are a lot of
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very
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profitable very rapidly growing
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companies in this innovation space
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and i i've been through them with you
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before but just for those who are new
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they are dna sequencing adaptive
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robotics energy storage artificial
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intelligence and blockchain technologies
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each platform alone
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we believe has started to grow
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exponentially they are converging as
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well and the convergence we believe is
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going to cause explosive growth and cash
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flow dynamics the likes of which we
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believe we've never seen before what
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we're seeing on the monetary and fiscal
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front right now many people after
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today's employment report
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are beginning to think that 50 basis
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points is the number that the fed will
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basically telegraph that it means
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business and that it's going to head
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inflation off at the pass if they do
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however we think the stars are aligning
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in such a way that they will get the
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message very quickly that they don't
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need to do much more they might want to
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do the 50 basis points just to say okay
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we're done for a while what's
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interesting about the market's reaction
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to
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this possibility
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is that strategists out in our world are
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now
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trying to leapfrog each other saying
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okay i think it's at least three more
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tightenings after that or four
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i've even heard all together seven the
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reaction you've seen in the equity
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market recently is fear i think that the
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fed is going to go too far too fast
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because the economy is quite weak i
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think the fed could do it overdo it
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quite quickly and yet we look at what's
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going on with oil prices right now quite
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differently we do not believe that it is
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an indicator of inflation we believe
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it's a taxi increase it's it is a supply
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shock that is true demand has not passed
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uh where it was pre-covered so shortfall
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in supply but it's a tax and it's it's a
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terrible tax on the lower income
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uh groups there probably is more
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weakness brewing than many economists
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and strategists i believe right now what
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we are also focused on is that uh loss
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of purchasing power is feeding through
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to retail sales so retail sales in the
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all-important december month were down
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1.9
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on the heels of a
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0.2 percent increase in november with
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inflation at 0.4.5.6
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those numbers that retail sales number
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would in real terms taking inflation
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away have been down
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two and a half percent and in november
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also down
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so consumption is falling
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in uh the next few months we'll probably
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uh see some sort of rebound we most
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surely will because auto sales popped up
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in in january we were also focusing on
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what uh companies like facebook and
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amazon are saying amazon reported
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yesterday it's sales on a year-over-year
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basis we're up only nine percent now it
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was up against a very tough comparison
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and i think on a two-year basis we've
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still got solid growth but still nine
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percent is even lower than the lowest
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point during uh the 0809 crisis which
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was 14 and a half percent true
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amazon is a little bit more mature of a
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company right now but nine percent i've
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never seen out of out of amazon it was
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facing tough comparisons in uh the
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quarters prior to now and we saw nothing
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like that nine percent facebook is
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suggesting that for many reasons its
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sales growth in this quarter will be
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somewhere in the 3 to 11 range this is
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the lowest ever it's never been in
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single digits facebook has we think some
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competitive problems but it did point
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to weakness in the retail sector as did
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google in in its report so we look to
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the consumer sentiment surveys to give
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us a sense of where we're going from
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here
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and if we did get another uh university
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of michigan consumer sentiment survey
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and it fell again to a new low it's
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lower than at any time during 2020
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during the coronavirus crisis and it is
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heading for lows that we haven't seen
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since the 0.809 prices so the consumers
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doesn't like this loss of purchasing
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power deeply buried in the survey
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there is a part that says or ask the
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consumer is now a good time to buy a car
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but it is it has dropped to a new low
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46.
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uh it is lower than the low
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in 0809 which was roughly a hundred
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and precovet it was running at 150. so
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it's about a third of that and it just
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dropped to a new low
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now this flies in the face of what we
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saw in january auto sales
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moving up quite strongly from 12.4
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million units in december to 15 million
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in january and what we believe has
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happened there is the various automakers
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had been building up inventories just
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waiting to put in chips they are now
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saying that that chip shortage is
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alleviating uh so there have been people
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waiting for uh their orders to be
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delivered but if this survey is right
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there's not going to be much follow
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through i will say that the other thing
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we're focused on is inventories
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and in the face of the consumer feeling
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this way we are paying uh extra
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attention to inventories so for december
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retail inventories went up four point
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four percent think about that four point
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four percent in december a big holiday
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month after a two percent increase the
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prior month now four point four percent
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again you annualize things to get a
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sense of the drama here if this were to
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continue and it won't but you know
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that's the equivalent of 50
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plus
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increase at an annual rate and nothing's
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growing at that rate right now
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we're also seeing wholesale inventories
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backing up continuing to back up 2.1
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percent after a 1.7 percent the prior
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month and in the gdp report that was
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reported for the fourth quarter we saw a
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massive increase in inventory so the
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real gdp increased 6.9
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but 4.9 percentage points of that was
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inventories real final sales were about
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two percent so after a 0.1
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increase in the third quarter so real
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demand here is quite sluggish partly
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because what real disposable personal
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income is falling purchasing power is
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falling capital spending is also doing
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pretty well and i think automation is
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going to surprise on the high side of
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expectations as companies try to
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try to counter
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the input cost inflation particularly
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energy
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and and other raw materials
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one of the reasons we are facing a shock
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in
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the oil industry
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is esg
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it is very well intentioned of course
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esg if oil companies stopped spending on
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fossil fuels in order to maintain a
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position in
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corporate pension plans and so forth oil
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prices would go to the moon now a lot of
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people
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laugh at the comparison to whale oil
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prices as we were shifting from whale
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oil for our lighting needs
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to fossil fuels but if you look at the
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history supply shock
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did occur because a whale oil
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manufacturers saw the writing on the
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wall and just pulled out in terms of
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investing and the price was extremely
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volatile
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i am very surprised to see
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oil above 90 90
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per barrel but that is causing a couple
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of things to happen here demand
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destruction and private shale oil
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producers are now ramping back up again
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equities as you know they did move to an
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all-time high but the internals of the
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market last year were not good the
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ratio of new lows to new highs was as
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high as it's been since 1999.
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in 1999 it was the value stocks that
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were hitting new lows as everyone was
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racing into the internet in this last
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year
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it has been
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our kinds of stocks that were hitting
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new lows
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as value stocks were hitting all-time
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highs as you know the right thing to
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have done during
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uh the late 90s when that ratio behaved
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that way was to move away from the new
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highs into the new lows and i think the
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same is true today and i'll just give
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you a preview of what may happen here
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you know i was very interested after
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ford said that the demand for its f-150
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lightning ev was so much stronger than
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than it expected its stock exploded i
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want our auto manufacturers to be very
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successful in the ev space but to see
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its stock
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jump
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to highs that it had not seen
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since 2000 what that move
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said to me is oh my goodness investors
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don't understand
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that 97 to 98
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of its sales base is gas-powered cars
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and we believe that the shift toward
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electric is accelerating here
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oil prices being one reason but also
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lower lower prices being another as
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battery costs come down we're also
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seeing a lot of confusion in the
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more mature growth area of innovation
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facebook is facing real competition and
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it tick-tock is the is of course the
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reason it's also
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under pressure because apple is not
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giving it or allowing it to have as much
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information about users and has put in
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place new privacy objectives and rules
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facebook was one of the stocks hitting
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all-time highs
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now i have spoken to
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some really good
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value investors who've been doing this
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all their lives and asked them if
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interest rates were to move into the two
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to three percent range let's say as
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measured by the long-term treasury yield
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which parts of the market given where we
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are now uh would be hit and the answer
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that i found most interesting and that i
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i think we've just
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seen in facebook
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is it would be the more mature growth
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companies that are facing some
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competition and not the the super growth
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companies that are just entering into
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their exponential growth trajectories i
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often use that
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during the tekken telecom bubble i saw
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investors you know falling all over each
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other trying to one-up each other to get
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a bigger tech position because tech in
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the
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indexes had moved to 35 percent so we
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saw many portfolios with 40 50
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tech again they needed to outperform
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that
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index and of course that was exactly the
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wrong thing to do
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but it was mass psychology it was a very
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interesting time today we have the same
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thing going on in reverse we have
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investors shying away in fact running
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for the hills uh and the hills in this
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case are their benchmarks everyone needs
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to get close to that benchmark and they
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all look alike if you look at the top 10
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in nasdaq top 10 in s p the overlap is
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astonishing these benchmarks have really
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i think done a disservice to the
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allocation of capital but that said
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investors are
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running for the hills uh when when
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there's volatility fear around inflation
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and interest rates and we think that
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that decision is going to prove to be
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just as incorrect as uh the decision to
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move
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on mass in in the late 90s the consumer
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is reacting violently
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to this
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loss of purchasing power so i don't
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think it's going to feed inflation i
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think it's going to feed this uh
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negative sentiment that the consumer has
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been feeling so the big theme of this
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episode of in the know is not being able
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to see the forest for the trees
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commentators are labeling all growth
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stocks as stay-at-home stocks or
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profitless tech strategies instead of
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looking at these stocks business by
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business looking at only the top-line
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gdp number instead of digging into the
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data and seeing that over two-thirds of
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that gdp growth was actually attributed
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to building inventories even during the
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holiday season when these sales should
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be at their strongest seeing auto sales
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go up for a month and attributing it to
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demand when in reality the chip shortage
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caused the backlog of orders that are
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just now getting filled many of these
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indicators are lower now than they were
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at their bottom in march of 2020 and
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back then the fed was quick to step in
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the danger now is that the fed might
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keep raising interest rates too far too
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fast making today's relatively weak
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economy even weaker by the time these
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subtle data points impact the highest
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level numbers like gdp it could already
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be too late to course correct based on
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kathy wood's commentary i think there
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are a few easy things that we should
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keep track of to assess overall economic
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health the health of the market and the
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mass psychology of investors that she's
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talking about first let's talk about
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consumer sentiment if people feel their
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dollar isn't going very far they're
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going to stop spending or at least slow
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it down that would show up in consumer
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sentiment earlier than it shows up in
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actual earnings reports there are a few
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great places to track consumer sentiment
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depending on how deep down this rabbit
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hole you want to get kathy wood often
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cites the surveys of consumers by the
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university of michigan this survey gets
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deep in the weeds with questions about
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personal finance savings and retirement
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broad economic conditions and even
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sentiment around vehicle buying
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conditions which was nearing lows not
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seen since 2008 i'm not saying we should
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all be tracking every chart in this
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survey every month but it could be a
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good thing to bookmark and check in on
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whenever you're thinking about it taking
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things one level up we have cnn's fear
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and greed index this one is more about
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the market and less about the economy
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but it's a great daily roll up of
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different ways to think about the
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market's health the indicator on this
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fear and greed index that i want to
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point out is the very bottom one called
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stock price strength this shows the
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number of stocks hitting yearly lows
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versus those hitting yearly highs the
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worry here isn't just when the number of
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52-week lows outnumbers the highs it's
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actually when the market keeps going up
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while this is happening because that
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means the market's performance is
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getting concentrated into fewer and
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fewer companies which is a reasonable
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definition of a bubble so if you look at
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the plot of the s p 500 right above this
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which is trending upwards and compare it
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to the stock price strength chart which
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is trending downwards you can get a
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better sense of the overall health of
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the index the third and easiest to track
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sentiment survey is the american
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association of individual investors
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which only asks one question once a week
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what direction do aaii members feel the
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stock market will be in the next six
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months this last week the week ending
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january 26 2022 was actually the one
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year high for bearishness indicating
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that the pain may not yet be over but a
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lot of it could already be priced in the
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other indicator i want to point out is
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the one that i feel sits at the heart of
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kathy wood's thesis on the market which
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is the private inventory's contribution
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to real gdp this is the 4.9 percent that
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inventories are contributing to the
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overall 6.9 growth in gdp that kathy
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wood has mentioned which is near record
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highs when inventories stay high it
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means real demand is low which makes
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sense based on consumer sentiment being
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weighed down the other thing to point
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out is how spiky and volatile these
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inventory readings have been lately
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which to me means that supply chain
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issues are still very real so what i'm
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looking for now is for consumer
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sentiment to rise and stabilize stock
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price strength to get back to normal and
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for the contributions of the inventories
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to gdp to fall and stay down in my
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opinion if the fed really watched this
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set of indicators they wouldn't be so
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quick to sharply raise interest rates
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comment below or tweet me at ticker
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symbol u with your thoughts on these
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supercuts in general and on this episode
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specifically do you find these summaries
18:39
and sources helpful do you think kathy
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wood is right to look at inventory
18:43
buildups market health and consumer
18:44
sentiment or should investors be looking
18:47
elsewhere i'm excited to hear your
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thoughts either way stay long stay
18:50
strong and thanks for watching until
18:52
next time this is ticker symbol you my
18:55
name is alex reminding you that the best
18:57
investment you can make
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is in you