A Contrarian’s Point of View

Here’s a fun idea – instead of the inflation that we have seen over the past 6 months that is expected to continue to grow, we see the opposite…DUN DUN DUUUNNN… Deflation.

What Wood Cathie Do?

Cathie Wood, CEO or Ark Investment and financial guru, sees this as a likely outcome.

M2 money grew in 2020… really freaking fast. M2 money is essentially the amount of cash and cash equivalents in the economy (cash, checking deposits, and anything that is easily converted into cash). Obviously, a lot of that growth was on the back of covid stimulus checks and other quantitative easing efforts. However, M2 money growth is falling fast in 2020. M2 growth just came out for May at 13.8%, a massive drop from Aprils 27%. This has been reflected in increasing bond prices.  Many are looking at increasing bond prices and saying that it makes sense because the Fed is buying up billions of dollars of debt every single day. To that, Cathie asks, if the Feds stimulus is pushing bond prices higher, why didn’t we see that during the previous 12 months of stimulus? We have had Fed stimulus throughout the entire pandemic, but we are only now seeing the rise in bond pricing.

Some other reasons:

1. Commodities – lumber and copper prices are tumbling
   1. Oil is a different animal right now because OPEC is operating below capacity in order to prop up prices and make back the losses that it experienced during covid.
2. US Dollar – The US dollar is on a clear upward trend in value. Maybe this is because of Biden’s corporate tax plan coming in lower than expected.
3. Consumption – goods consumption is falling in 3 of the 4 primary measurements

Cathie believes that because of these forces, inflation is not going to be the problem many think it is. In fact, she thinks we may have the opposite problem… deflation.

On the other hand, there are other financial gurus including Ray Dalio and Michael Burry who believes the US will experience hyper inflation and the dollar will plummet in value… We will have to wait to see who is right.

The rates:

Mortgage Backed Securities are sitting pretty this morning – up 16 bps from Friday’s close and in the green for 5 days in a row. However, because of the uncertainty in the big news week ahead of us, we are holding a locking bias.