Fed's Ignoring Variable Impacts on Inflation and Bankruptcies

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The Fed seems to be ignoring variable impacts on inflation and bankruptcies. Despite the increasing evidence of a deflationary environment and reports of businesses cutting prices, the Fed continues to focus on lagging indicators. This narrow focus is problematic as bankruptcies are rising, primarily due to businesses taking out floating rate loans that they can no longer afford. The rapid increase in interest rates is leading to strategic defaults in commercial real estate and causing even prime properties to become half-empty. This trend is not limited to New York City, but is likely to affect other big cities as well as regional banks. The private equity world, in particular, is exposed to $3 trillion in adjustable rate unhedged loans, highlighting the potential risks of the Fed's interest rate increases.

On today’s episode of FYI we will be featuring last week’s episode of In The Know, a monthly video series in which ARK CEO and CIO Cathie Wood discusses Fiscal Policy, Monetary Policy, Economic and Market Indicators and Innovation.

On this specific episode, Cathie Wood, weighs in on artificial intelligence (AI), Bitcoin, Fed Policy, electric vehicles, the discrepancy between GDP and GDI, bankruptcies, and the German and Chinese economies.

Watch the video version here.

Key Points From This Episode:

Lagging and leading market indicators
Rising bankruptcies
The Fed’s policy, as indicated by the latest Fed meeting minutes
The discrepancy between Gross Domestic Product (GDP) and Gross Domestic Income (GDI)
The potential for a hard economic landing
Bitcoin, and a potential spot Bitcoin ETF
An apparent increase in demand for Electric Vehicles
The current state of the German and Chinese economies
The Artificial Intelligence Revolution

Glossary of Terms

“Fed” refers to the U.S. Federal Reserve, the central banking system of the United States.
Fed Funds Rate is the interest rate at which depository institutions (banks and credit unions) lend reserve balances to other depository institutions overnight on an uncollateralized basis.

M2 is the U.S. Federal Reserve’s estimate of the total money supply including all of the cash people have on hand plus all of the money deposited in checking accounts, savings accounts, and other short-term saving vehicles such as certificates of deposit (CDs).

Yield Curve is a graphical representation of the interest rates on debt for a range of maturities. It shows the yield an investor is expecting to earn if they lend their money for a given period of time. An inverted curve appears when long-term yields fall below short-term yields. An inverted yield curve occurs due to the perception of long-term investors that interest rates will decline in the future.

A Basis Point is equal to 1/100th of a percentage point (100 basis points = 1%).

Gross Domestic Product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period. Nominal GDP is a measure of economic output that uses current prices and does not adjust for inflation.

“CPI” refers to the Consumer Price Index, which is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Core CPI excludes food and energy.

“Magnificent 7” is a term adopted by the financial industry to describe the top seven technology companies currently investing heavily in artificial intelligence (AI). The seven companies are Meta Platforms, Alphabet, Apple, Amazon, Microsoft, Nvidia and Tesla. The previously used “FAANGs” acronym, coined in 2017, described the top technology companies at the time and included Meta Platforms (f/k/a Facebook), Apple, Amazon, Netflix and Google (now trading under its parent company, Alphabet).

“Mega-caps” refers to companies with market capitalizations in excess of $200 billion. Market capitalization refers to the total dollar market value of a company’s outstanding shares of stock.

The S&P 500 is a stock market index tracking the stock performance of 500 of the largest companies listed on stock exchanges in the United States.

The Nasdaq-100 is a stock market index made up of 101 equity securities issued by 100 of the largest non-financial companies listed on the Nasdaq stock exchange.

“QQQs” refers to the Invesco QQQ Trust ETF which is a passive ETF that tracks the Nasdaq 100 Index and therefore is sometimes used as a proxy for the index in conversation.