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Almost everyone thinks massive inflation is coming, including Buffett, Dalio, Burry, and even normal citizens like you and me. With so much attention around rising consumer prices, many investors have concluded that inflation is here to stay. Cathie Wood is seeing something completely different. New economic data is showing that inflation is rapidly decelerating, and may only continue to quickly decelerate. This video will go in-depth on Cathie Wood’s contrarian stance and how the US economy is rapidly weakening.
From a broad perspective, it makes a lot of sense for inflation to start decelerating. Stimulus checks are no longer being given out. The Federal Reserve is starting to enter discussions to taper off as soon as this year. The delta variant is rapidly spreading across the US. Decelerating inflation, also known as disinflation, sounds logical because of the reasons I just mentioned. Recent economic data for the month of August also points towards disinflation. The most notable report that recently came out was significantly lower nonfarm payrolls. The number of nonfarm payrolls represents how many workers there are in the US, excluding farmworkers. Nonfarm payrolls are compared month over month or year over year so that economists can see the strength of the labor market. In the month of August, economists were expecting the labor market to be incredibly strong. The change in non-farm payrolls was expected to be higher by 733,000 in August compared to July. Contrary to expectations, non-farm payrolls only increased by 235,000. That difference is absolutely mind-blowing. Economists are usually off on their estimates, but not by that much. This is a strong signal that the economy is starting to weaken. There are several reasons why this could be happening. The two most obvious factors are that the chip shortage is worsening and the delta variant is quickly spreading. Both of these factors may be hurting employment numbers in the short term. Additionally, there could be a more frightening factor at play, which we’ll talk about soon. We can clearly see that the delta variant and the chip shortage are both serving a role in lowered employment numbers.
There could also be one more factor at play, which is that the economy is starting to weaken. Cathie Wood has been warning about a deflationary crash for a while now, and it may be starting to kick in. Auto sales are quickly declining, as total vehicle sales have gone from 18.7 million in April to 13.4 million in August. This is partly caused by the chip shortage, but may also be because of the transition to electric vehicles. As I’ve covered in a previous video, electric vehicles have taken off during the pandemic. The rise of EVs could be playing a role in slowing auto sales, particularly sales from legacy auto. Another factor at play is the growing inventory in consumers’ homes. Many people have already purchased vehicles during the pandemic to avoid mass transit. Because consumers purchased vehicles, chances are that they won’t need to purchase another vehicle for a while. All of these three factors, which include the chip shortage, EVs, and consumer car inventory, are slowing the overall auto market.
Outside of the auto market, inflation is definitely starting to cool down. M2 money, which is a tracker for the total money supply of the dollar, is currently decelerating by a substantial amount. M2 money growth has slowed down from 27% year over year in February all the way down to 12% year over year in August. This may seem like a large drop-off, but it’s only the beginning of much more to come. The money supply of the dollar is still growing at a rapid pace but is also quickly decelerating. Based on the current sentiment, it’s likely that the money supply will continue to decelerate even more. One potential catalyst for a further slowdown is the infrastructure bill coming in lower than expected. Consumers are very concerned with inflation and increasing US debt levels. This creates a situation that is the opposite of a self-fulfilling prophecy. Because US citizens are worried about inflation, politicians are now incentivized to control government spending.