Every "Employment Report Friday", the market always holds its breath for clues about the economic trend. Recently, the U.S. economy seems to be on an unusual track. Although the overall data has not yet shown a full-scale recession, many industries have already entered a cold winter. Cathie Wood, founder of Ark Investments, provides an in-depth analysis of the investment letter she released, revealing the "rolling recession" of the economy, corporate labor hoarding behavior, the double-edged sword role of AI and automation, and why the current depressed sentiment may be a prelude to a recovery in the innovative economy.
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ToggleLabor hoarding phenomenon: Companies are still holding on, but pressure is brewing
Despite the seemingly solid employment report, the analysis suggests that the reason companies have not yet laid off employees on a large scale is not because of a strong economy, but rather because of a "post-COVID labor panic" that has made companies reluctant to let go. Unless corporate profit margins begin to decline significantly, a wave of layoffs will not happen for the time being. However, if the expected deflationary trend materializes, marginal pressure will force companies to accelerate the replacement of labor with capital (such as automation).
Automation and AI: Creating jobs? Or replace jobs?
Despite widespread "job-loss panic" sparked by automation and AI technology, the letter emphasizes that history has proven that technology is ultimately a net job-creating force. The example of agricultural automation is the best proof that in the future AI and robots will improve overall productivity and benefit the economy and labor market in the long run.
The truth behind the rolling recession: industries falling behind one after another
This "invisible recession" has actually been going on for many years. From the housing market, automobile manufacturing, manufacturing to capital equipment spending, all have stagnated or even shrunk. High-end consumers and government spending, once the last two pillars supporting the economy, are beginning to falter.
Housing market: Affected by high interest rates, house sales have plummeted by about 39% from their peak, and mortgage users who are stuck in ultra-low interest rates are unable to change houses.
Automobiles: Under the pressure of the epidemic and tariff policies, sales rebounded briefly before falling again.
Manufacturing and capital expenditure: continued to be sluggish, recording the weakest performance since the expansion.
Small businesses and low-income earners: Confidence is lower than during the pandemic
The small business optimism index fell below COVID-era levels and is approaching lows last seen during the 2008 financial crisis. Consumer confidence has also generally declined, especially low-income groups who are deeply pessimistic and even expect a high risk of unemployment in the future.
Interest rates and monetary policy: The aftermath of the most aggressive rate hike cycle in history
The Federal Reserve raised interest rates 22 times in 16 months, which is the first time in history. Despite the extremely low starting rate (0.25%), such a jump still had a huge impact on businesses and consumers, and indirectly contributed to the so-called rolling recession. With interest rate pressure having peaked, markets are pricing in up to four rate cuts this year.
Yield inversion: A classic harbinger of recession
Historical data shows that whenever the yield curve inverts, it is almost always followed by an economic recession. This time the inversion lasted longer, and now the curve is starting to return to normal, which is one of the signals that a recession may have already occurred.
Is deflation coming? Market signals point to falling prices
Both the leading indicator of consumer prices, the True Inflation CPI, and the velocity of money circulation show that economic pressure is accumulating. In particular, China's weak economy and export deflation may drag the world into a deflationary environment. This will limit the Fed's room for further tightening and instead provide opportunities for growth assets.
Three major headwinds resolved? The value of innovative stocks emerges
The letter argues that the three major headwinds that have hindered innovative investment strategies: high interest rates, market concentration and high valuations, are gradually dissipating.
Interest rate: Entering a rate cut cycle, good for growth stocks.
Market concentration: The bull market that was dominated by the "six major technology stocks" in the past will expand to more "real innovators" in the future.
Valuation pressure has eased: The price-to-earnings ratio of innovative stocks has fallen sharply, approaching historical lows, indicating that "innovative stocks are on sale."
Bitcoin vs Gold: Which is the safe-haven asset?
Gold's recent surge in prices shows the market's search for safe assets. But Bitcoin's pullback in sync with technology stocks shows that it is still considered a risky asset. Despite this, the long-term trend of Bitcoin prices remains strong and is expected to lead the market again when risk appetite returns.
From productivity recovery to rolling recession?
This dozens-page economic and market observation summarizes the seemingly healthy but actually rolling recession situation of the past three years, and points out that artificial intelligence and new technologies may trigger a new round of productivity revolution and deflationary environment, paving a smooth road for truly innovative companies and investors. In the coming months, it will depend on how the economy and markets respond to this structural shift.
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