Cathie Wood got it Wrong | ArkInvest

everyone meet kevin here is kathy wood

wrong about inflation in this video

we'll discuss and we'll talk about the

three types of inflation camps that

exist now you might think wait a minute

i thought there were only two i thought

there was either the inflation camp or

the non-inflation camp well it goes a

little bit more deep by the end of the

video i want to know which camp you're

in because there are three and you gotta

know what they are and it's helpful to

know is kathy right about what she says

but first i want to just quickly mention

that this video is brought to you by

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get right into kathy wood without any

other delay check this out kathy wood

responds to jack dorsey from twitter and

square when jack dorsey says

hyperinflation is going to change

everything is happening now in this

video we're going to really pick apart

kathy wood's argument here she says that

hey look in 2008 and 2009 when the

federal reserve started printing money

she thought that inflation was going to

take off but she said she was wrong

because the velocity of money or the

rate at which money turns over declined

taking away that inflationary sting and

intuitively that seems right it would

seem that if i had five dollars

and i spent it on a hot dog and that hot

dog vendor spent it and then whoever

received that money spent in and so on

and so forth and that chain happened 10

times then we would create 50 of value

but if that chain only happened five

times we would create 25 of value and it

would make sense that the 10 times

version would create more inflation

right

so it kind of makes sense when kathy

wood says oh well yeah the velocity of

money is down there's not going to be

inflation we're good

but wait a minute

is that historically accurate

and is that actually how the velocity of

money is calculated

well let's answer exactly that right now

so the easiest way to understand the

velocity of money is not trying to over

complicate it i think most of the time

when we hear this phrase we're like this

is ridiculous i cannot pay attention to

this i do not want to pay attention to

this this is insanity but it's really

not that difficult because take a look

at this

there are three things that you got to

know and they're really really easy

number one let's throw down the size of

the economy measured in how much money

we spend okay about 21 trillion dollars

per year

roughly we're going to do rough

estimates to show you an example here

okay this is known as the gdp

the gross domestic product you don't

even really have to know that all you

have to know is okay size of the economy

measured by the sum of all the things

that are spent 21 trillion dollars got

it sounds good okay cool now let's

divide that by how much money exists

well we could use something complicated

like the m2 money supply or different

measures of money supply like how much

money is in savings account checkings

accounts retirement blah blah blah blah

or you could just go with the example

and go there's probably somewhere around

seven trillion dollars floating around

out there okay cool got it got it all

right well now if i divide these two the

size of the economy by roughly how much

money is floating around out there which

again could be approximated by m2 or m3

it doesn't matter we're keeping this

simple here then you're going to get a

velocity of money of three

this means

a

21 trillion dollar economy was created

by seven trillion dollars circulating

three times each

now that doesn't actually mean that

every dollar i spent circulated in the

economy three times

like you could have spent a dollar and

it could have circulated 30 times and i

could have spent a dollar and it could

have circulated one time it's just a big

fat boring average and so when you look

at the velocity of money chart and

people are like oh my gosh the velocity

of money is going down and when the

velocity of money goes down that means

we're probably not going to have

inflation right

as much as i'd like to agree with that

simplistic argument

it might be historically wrong we're

going to talk about that history in a

moment and here's where you could start

getting a little sussed out by kathy's

argument you ready to get sussed out

let's go back to this math for a moment

let's say i print

three trillion dollars tomorrow like i'm

jay pow and i just got this magic money

printer and i print three trillion more

dollars and we've got a similarly sized

economy

is that me or does that all of a sudden

mean there's no inflation

well let's do the math take a look at

this

okay

we are now going to say that there are

10 trillion dollars of money supply

which 21 the size of the economy divided

by 10

means money supply is actually two point

where money velocity is actually 2.1

wait a minute

the more money was printed

the more the velocity of money went down

instantly it's kind of like jerome

powell came in with a big punch bowl and

it's like hey you were using a small

punch bowl earlier which meant when you

took punch out of it you were taking a

bigger percentage of it now you got a

big punch bowl and you're taking out

less of a percentage we we need your

money to circulate less in other words

right we need your juice to affect less

of the big pie because we just just got

you a bigger punch bowl and everybody

likes the party so we got to keep the

party going more punch

okay don't worry so much about that the

point is wait a minute if we print money

automatically the velocity of money goes

down all right well now take a look at

this here's the united states

outstanding debt look at it last 20

years from 2020 right here

straight up and the velocity of money

the last 20 years

straight down oh my gosh it literally

makes sense

you print more money the velocity of

money goes down it's that freaking

simple but wait a minute what does that

tell us about inflation

well inflation's nowhere in this

equation

bingo inflation is actually not in the

equation of the velocity of money

inflation might literally have nothing

to do with the velocity of money but

wait a minute we should fact check this

because intuitively if my money

circulates less that would imply less

inflation remember that hot dog example

we did yeah well what does history tell

us

and if the velocity of money doesn't

affect inflation then what actually does

is kathy right is she wrong what's going

on well i'm going to answer that right

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sponsoring this video okay now what does

history tell us about the velocity of

money because right now you know this so

far it's kind of like wait a minute wait

a minute kathy woods says velocity is

going down but when we do the math

velocity doesn't seem to have anything

to do with inflation but we should fact

check this we should see if there's a

pattern in history okay we can do that

let's go to history so let's start with

the 1970s we had extremely high

inflation in the 1970s go to cpi look at

this

1970 starting in 1973 massive peaks of

inflation 10 11

very very volatile here you go down to

six percent then you go all the way up

to 14 15

and you come crashing back down so look

for between 1973 and about 1983 this was

cpi what did it what did the velocity of

money do between 1973 and 1983 right

here in this period

very little

very very very little movement so you

had mega high inflation the highest

inflation that you've ever seen

and the velocity of money didn't

skyrocket which

if kathy wood is right that we're not

going to see inflation because the

velocity money is going down

then then it would make sense that if

we're seeing hyperinflation the velocity

money would be going up but we didn't

see that here we did see the velocity of

money have like this giant tumor of an

explosion over here in the 90s but what

did inflation do in the 90s if kathy

wood is right then as the velocity of

money goes up

we should see more inflation right well

what happened in the 90s ah crap

inflation went down

literally wrong like wrong no

correlation in the 70s between the

velocity of money inflation no

correlation in the 90s between the

velocity of money and inflation

and what about the next period of 2010

to 2020 well the velocity of money was

kind of stable i i'd say relatively flat

you could probably draw a pretty

relatively flat line through here with

the exception of maybe 2015 here so

pretty flat and what happened to the

velocity of money was the velocity of

money flat

no the velocity of money plummeted which

if the velocity of money plummeted we

should have seen inflation uh plummet

but it really didn't it kind of stayed

consistent and consistently low like

probably somewhere around 1.75 percent

so

you've kind of seen it all here you've

seen that the math

doesn't agree with kathy wood

that the velocity of money that we look

at the charts of velocity of money don't

seem to have anything to do with

inflation

the 1970s the 1990s and the 2010s

indicate the velocity money has nothing

to do with inflation

so using the charts for a law the

velocity of money to try to understand

like are we going to see inflation

probably a really bad idea

because they're broken that doesn't work

now again intuitively it makes sense if

i have more money

and my money is going to circulate in

the economy more then it would make

sense that prices would go up right

because i could i could create more

demand

but that would be measured in gdp growth

see remember when we were selling hot

dogs if the hot dog market it creates 25

dollars of power that goes into the gdp

equation

which means we have a bigger numerator

in that gdp equation which take a look

at how that could potentially work you

jump back over here

and let's say the velocity of money

which really we're let's just get rid of

that because velocity money doesn't seem

to have anything to do with inflation

let's go back to the numbers that we

originally had which was 7 billion or 7

trillion circulating velocity of money

of 3 and a 21 trillion dollar economy

well let's say my money went a lot

further and instead all of a sudden

there were

20 we had a 28 trillion dollar economy

okay well the economy grew

and

in this case the velocity of money went

up yeah that's true but did that mean we

had inflation or did that just mean the

economy grew

well in this case we could just compare

the united states gdp to what inflation

has done and if we look at the gross

domestic product

for the united states we get this chart

right here

this is the gdp which you really only

see falls during a recession which makes

sense people are spending less money

during a recession imagine that

otherwise it's like straight up

and inflation

is literally anything but correlated to

gdp

like it don't care

so so far every possible way i can look

at measures of how

gdp or the velocity of money is related

to gdp

kathy wood's argument fails it fails

every single time

and again intuitively it seems like it

should make sense

but maybe when people spend more money

gdp just goes up

which kathy wood is expecting gdp to go

up but that doesn't necessarily mean

we're gonna have a lot of inflation or

no inflation or deflation there's no

correlation that i can find

so instead it seems like inflation is a

little bit harder to predict

inflation really comes down to supply

and demand and that's why we have such

crazy debates in fact right now there

are a lot of fears that a coveted

resurgence in europe could spill over to

america during the winter leading to new

lockdowns and new restrictions

potentially on manufacturing which means

we might worsen supply chain constraints

and even if demand is constant supply

goes down well if supply goes down

because of manufacturing constraints or

shipping constraints again well then

simple econ 101 says supply goes down

demand stays constant then price has to

go up price goes up if supply goes down

but demand is constant the only way

price would stay stable is if supply

fell but then demand also fell but we've

seen that's not how it works so

bottom line and then we're going to talk

about the three different paths we could

actually see with inflation inflation

seems to have nothing to do with the

velocity of money at least from the

research that we could do here

using the charts so if you're trying to

track what inflation is doing ignore the

velocity of money instead focus on

what's creating prices to go up and do

you think that the reason prices are

going to up is going to

be a consistent or sort of persistent

reason that inflation goes up that's

really really important because look

prices remember this always always

remember this prices of this monster

energy drink right here could go from

one dollar to two dollars and then we

had 100

inflation oh my gosh clickbait 100

inflation

prices doubled it's insane okay what

then happened the next year it went to

1.99

minus 1 oh my gosh deflation

right like you would have to have prices

go up every year year after year after

year after year after year to have

persistent

inflation and so you got to ask yourself

do you think that prices are going to go

up year after year after year after year

that could be for rents that could be

for food that could be for cars that

could be for chips that could be for

computers you might say yes and that's

fine if that's what you believe then you

are going to be in camp inflation which

basically says that unless the federal

reserve raises rates to stop people from

spending cheap easy money then we're

going to keep inflating because people

are just going to keep buying buying

buying buying and if anything they're

going to keep buying more on purpose

until rates go up because money's just

so cheap

possible that's camp one camp inflation

camp two is the deflationary boom camp

and this is where kathy goes see kathy

believes that no no no it's gonna be

easier to put this monster together and

ship it to you in the future we're gonna

have robots delivering this to your door

in the future is going to be cheaper

it's kind of like a 48 inch hdtv hd tv

in

hg tv too much real estate it's like a

48 inch tv in 2008 costing 2000 and

today you buy it on amazon for 300 right

that's deflation that's 15 of the cost

of what it used to be the other thing

kathy wood says is that companies that

don't learn how to adopt are probably

going to fail become obsolete and to

service their debt they're going to have

to cut prices

and she thinks when this happens we're

going to have productivity go up at the

surviving companies and we're going to

actually see gdp go up during a

deflationary time

so camp one is we're gonna have lots of

inflation and we're screwed unless the

fed raises rates kathy says inflation's

going to go down we're going to see

deflation over time thanks to innovation

and older companies going away but we're

going to boom because of that we're

going to have an economic mega rally

because we're going to have the most

efficient companies in the world

potentially we're going to

be spending money without concerns about

inflation we could have easy money

policies without being concerned about

inflation and we're going to boom

or you could be in camp ray dalio and

this is camp number three and this is

inflation's not going to last forever

it's going to go down but when inflation

goes down and turns into deflation

people are going to be motivated not to

spend their money which is going to

shrink gdp lead to fear and people

hoarding money waiting for lower prices

creating a deflationary spiral it's kind

of like hey if the car is fifteen

thousand dollars today and next year

it's twelve thousand five hundred

dollars and the year after that it's

eight thousand dollars i'll just wait to

buy a car unless obviously you have a

necessity a necessity but if you have

the choice if it's discretionary you

have the choice which for a lot of

people buying a new car is discretionary

you just buy a new car because you

freaking want one uh that's the american

way right then then uh but you might put

that off for deflationary purposes well

there you go now you might be in

a situation where we have a deflationary

bust because our economy starts

shrinking when our economy our gdp

shrinks we fall into recession when we

fall into recession the stock market

sells off and you got problems

so what did we learn in this video well

i think we learned a few things

number one

the velocity of money is not as easy as

we think it is we can't just look at the

chart of the velocity of money and go

that's it velocity money's going down

we're good you also can't look at the

chart of the velocity of money and go as

soon as this goes up we're screwed we're

going to go into hyperinflation

honestly the hype the velocity of money

should just not come up in discussions

anymore when we talk about inflation i'm

gonna make that a rule for myself no

more discussions about the velocity of

money because it's a too difficult to

measure b if the velocity money goes up

gdp goes up which doesn't necessarily

mean we're inflating gdp is supposed to

go up over time uh we're supposed to be

more productive with our resources right

uh

and and be able to have a larger

expanding economy and be able to make

more money and spend more money that's

the point

over time

uh if you believe in the growth of

america right

but we also learned that there are three

inflationary camps that one is we're

gonna have an uh an inflationary

nightmare and unless the fed raises

rates we're gonna have hyperinflation

we're gonna have problems or maybe we

won't go to the extent of hyperinflation

but we'll have inflation for a while the

other camp is a deflationary boom don't

worry about inflation prices are gonna

come down and we're just gonna keep

booming

or we're gonna have a crash because

we're gonna have deflation

i wanna know from you which camp are you

in and what do you think thanks so much

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so much for watching and until next time

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