A 30-Year Pattern Reversed: Inflation & AI Outlook | ITK With Cathie Wood

Key Concepts

• Rolling Recession: A period where specific sectors (manufacturing, housing) experience downturns while the broader economy remains resilient.
• Trueflation: A real-time inflation metric tracking thousands of items, often showing lower inflation rates than official CPI data.
• Non-farm Productivity: A measure of economic efficiency; the speaker argues it is currently around 3% and likely understated.
• Unit Labor Costs: The cost of labor per unit of output; currently low, suggesting room for wage growth without fueling inflation.
• Accelerated Depreciation: A tax policy allowing companies to write off capital investments (like manufacturing facilities) in one year rather than over decades.
• DXY (Trade-Weighted Dollar): A measure of the US dollar's value against six major currencies; expected to rise due to increased return on invested capital (ROIC).

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1. Macroeconomic Indicators and Employment

• Employment Data: Non-farm payrolls increased by 117,000 (beating the 75,000 expectation), though household employment (capturing small businesses) declined.
• Work Week Expansion: The average work week has expanded, suggesting companies are increasing hours for existing staff rather than hiring, which indicates underlying economic strength.
• Wage Growth: Wages grew at 0.2% (approx. 2.5% annualized), which is lower than the 3% productivity growth, keeping unit labor costs low and disinflationary.
• Manufacturing vs. Services: Manufacturing is beginning to "take off," while services remain disappointing. Historically, services follow manufacturing growth.

2. Fiscal and Monetary Policy

• Deficit and Taxes: Despite corporate tax refunds due to accelerated depreciation and individual tax breaks (no tax on tips/overtime), the federal deficit is improving (currently -5.2% to GDP). The goal is to reach -3% by 2028.
• Monetary Policy: M2 money supply growth (4.9%) is currently above CPI, a pattern historically seen in the early stages of economic recovery.
• Yield Curve: The 2-year vs. 3-month yield curve has moved into positive territory, signaling the end of the "rolling recession." However, the 10-year vs. 2-year curve is flattening, which the speaker interprets as the market pricing in long-term deflationary undercurrents.

3. Innovation and Deflationary Forces

• AI Impact: AI training costs are dropping 75% annually, and inference costs are down 85–95% annually. These are highly deflationary forces.
• Capital Spending: There is a significant boom in capital spending, breaking out of a 35-year base. This is driven by AI, power infrastructure, and a resurgence in domestic manufacturing (e.g., the CHIPS Act).
• Tech Resurgence: Legacy tech companies (Cisco, Flex, Corning) are seeing renewed demand as hyperscalers integrate them into AI infrastructure.

4. Housing and Consumer Sentiment

• Housing Market: There is a massive imbalance between buyers (1.4 million) and sellers. New home prices are stagnant or falling, and the spring selling season was poor. The speaker expects prices to continue falling to clear inventory.
• Consumer Sentiment: The Michigan Consumer Sentiment Index is near all-time lows, heavily impacted by high oil prices and the cost of living. The saving rate has dropped to 3.6% as consumers struggle with affordability.

5. Market Outlook and Strategy

• Partnership with Kalshi: The speaker is using prediction markets to track macro and innovation variables, aiming to provide a counter-narrative to algorithmic and high-frequency trading.
• Dollar Strength: Contrary to the popular narrative that the dollar will crash due to debt, the speaker argues that deregulation and tax policies will increase US ROIC, making the dollar "positive."
• Oil Prices: The speaker predicts a decline in oil prices due to increased US production (13 million barrels/day) and the potential for OPEC members (like the UAE) to increase supply.
• Investment Perspective: The speaker remains bullish on innovation, noting that while software and fintech have been "thrown out with the bathwater," they are actively buying these assets in anticipation of an economic turnaround.

Synthesis and Conclusion

The speaker posits that the US economy is exiting a "rolling recession" and entering a period of productivity-led growth. By leveraging AI-driven deflation and favorable tax policies, the US is expected to grow its way out of deficits. While consumer sentiment remains low due to energy costs and housing affordability, the underlying data—specifically in manufacturing and capital expenditure—points toward a robust expansion. The speaker concludes that inflation will likely surprise on the downside, and the US dollar will strengthen as the economy outperforms global peers.