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Cathie Wood vs. Larry Fink: Inflation Debate Rages as Fed Chair Holds Firm

Faster stimulus-lead inflation or tech-powered deflation? However prices pressures play out, stocks are likely to benefit.

While not exactly "Coke versus" Pepsi, or even "The Beatles versus the Rolling Stones", this week's inflation debate between two of the most high-profile figures on Wall Street has nonetheless entertained financial markets as prices rise at the fastest pace in more than a decade and the Federal Reserve continues to insist the surge won't last. 

Cathie Wood, the star fund manager at the head of next-generation investment group and the ARK Innovation EFT  (ARKK) - Get Report, thinks the current spike in inflation, which hit a 13-year high last month, with quickly give way to a longer run of deflation as the impact of accelerating technologies provides broader consumer choices and more efficient production and distribution. 

Larry Fink, CEO of BlackRock  (BLK) - Get Report, the world's biggest asset manager with more than $9 trillion under its umbrella, told CNBC's 'Squawk Box' program that he doesn't believe inflation with be "transitory", as the Federal Reserve has insisted, adding that policymakers' focus on jobs and infrastructure will imbed price pressures into the economy for at least the next few years.

President Joe Biden's push for $3.5 trillion in new spending, as well as efforts to boost infrastructure investments, would certainly support Fink's thesis. 

Fed Chairman Jerome Powell, however, told lawmakers Wednesday that "high inflation readings are for a small group of goods and services directly tied to the reopening" adding it would be "a mistake to act prematurely" by pulling support from the economy as it extends its post-pandemic recovery.

Markets are equally divided, although much of that division could be linked to the age-old wisdom of "don't fight the Fed", which is buying $120 billion in Treasury and mortgage bonds each month. 

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A 30 basis point tumble in benchmark 10-year Treasury note yields since the Fed's 'hawkish' policy statement on June 16 -- which was in some ways validated by faster inflation readings at the consumer and factory gate level -- suggests the world's most rate-sensitive investors are either not buying the idea of longer-term inflation or merely front-running the central bank's massive monthly bid.

Bank of America's closely-watched Fund Mangers' survey, which polled 270 panelists with $805 billion in assets under management, identified inflation as the market's key risk, but only 26% think it's likely to remain permanent. 

Curiously, what both Fink, Wood and the Fund Mangers' survey seem to agree on is the fact stocks will continue to benefit regardless of how inflation plays out.

Wood says inflation worries -- a "killer" for stock valuations -- are overblown, and that deflationary pressures will keep 10-year yields comfortably below 3% over the medium-term, making equity investments more attractive by comparison.

Fink says the Fed's inflation narrative, which sees headline declines heading into the end of this year and beyond, will keep rates low and prod more investors into higher yielding alternatives like stocks.

“Many of the savers are now more confused, and I think some of them are now, finally, entering into equities and other asset categories" as their savings are "slammed" by low-rate, pro-growth policies.

Fund managers, too, are riding the TINA (there is no alternative) wave, which has lifted the S&P 500 to 40 record highs so far this year, pegging the benchmark 95% ahead of its March pandemic low, with big overweights in commodity and tech stocks.

"I think there's a lot of confusion, but its growth is going to be scarce as inflation comes down, our kind of strategies, which generate revenue growth in the 25%-plus range, are going to shine longer term," Wood told CNBC Wednesday.