ARK’s Cathie Wood on Crypto, ETF Markets (Full Interview)
Hi everyone I'm Carol Massar Bloomberg Businessweek Radio and TV and I'm delighted to bring in Kathy Roy. She's the founder CEO and chief investment officer of ARC Investment LLC. She is someone who is well-known to our audience. Her consistent performance since she started ARC about seven years ago has certainly given her a lot of notoriety. Kathy first of all thank
you for joining us. I know it's a crazy day. We're all watching the markets. We're all watching Bitcoin in a big way. The crypto market is coming undone. Last trade was about thirty five thousand on Bitcoin. What's happening right now and how low do you think it can go. Well I think we're in a risk off period and for all assets if you if you look at the stock market the more risky or volatile parts of the market have come in dramatically since mid February. And I think a lot of the concerns have been around inflation. Initially that was helping Bitcoin because obviously
Bitcoin's and very important inflation hedge. You know it's a it's a rules based monetary policy the first global rules based monetary policy we have ever had hugely important reserve currency of the crypto acid ecosystem. But I think what's happening right now is because the stock market the highly volatile part of the stock market the innovation oriented part of the stock market has gone through such a correction which has been flamed by inflation fears. I think I think the correlations among volatile assets are going to one right now and that's including Bitcoin. Well I want to unpack a couple of things. So Bitcoin I mean you at one point I think back in April told Dow Jones that it could go to about five hundred thousand dollars. Do you still hold that target. Do you still think that's where we're headed.
I. We do. I do. Yes you know Mandela is our crypto analyst and we we go through soul searching times like this and scrape the models. And yes our conviction is as high. The one thing that has changed here however is the environmental concerns around Bitcoin in particular have caused people like Elon Musk to pull away and say whoa whoa whoa whoa. Let let me let me make sure I understand this. And we believe that even this is going to change because first of all right now the percentage of bitcoin mined with renewables and hydro electric power is quite substantial. I think in China it's over 50 percent in renewables. And we also believe and we wrote a paper in conjunction with Square on this and we're going to have a
conference about it in July. We believe that bitcoin mining integrated into the distributed grid. And by that I mean solar roofs power walls in homes utilities merchant power producers starting to include bitcoin mining in the eco system. Why would they do that. They would do it because renewables are intermittent power sources. Right. Whether is it sunny or not wind. Is it windy or not. And bitcoin mining could take off. If it's if there's excess energy from solar being loaded into power walls it can be offloaded into bitcoin mining and the whole ecosystem therefore becomes much more economic. If this happens we believe that the adoption of solar is going to accelerate dramatically because there's another profit center associated with it. Bitcoin mining. Well what happens though in the meantime. So here we are at thirty five thousand Kathy. Do you think we got much lower from here. You never know how low is low when a market gets very emotional.
A lot of traders see Bitcoin dropping below the 200 day moving average which is which was at 40 percent. So traders once that happened they just dumped some just dump and run. I think we're in a capitulation phase. Yassine has a dashboard. We were looking at all the indicators this morning. They are all suggesting that we are in the capitulation phase which is a really great time to buy. No matter what the asset is a capitulation phase is by. It's on sale now. Am I saying thirty five thousand is the low. You know if traders and there are a lot of speculators in bitcoin. If they are running for the hills
just because bitcoin has broken through a moving average that is important to them it could continue. But all of our indicators are saying this is capitulation right now. Do you have a low point on your model for Bitcoin. No these metrics are are more a measure are we in a truly capitulation phase and it's very detailed. Yassine uses on chain
analysis which this is the only asset where you can see exactly who's doing what when why and how. And all of those metrics are saying this is a capitulation. This is as as bad as it got during the Corona virus crisis. So what about systemic concerns and I'm not talking about bringing down the financial system but you know more and more of kind of the establishment are getting involved in Bitcoin a lot more companies have Bitcoin on their balance sheet. Should we be
concerned about their exposure. Tesla for one but others. Yes. Yes. Well they're usually in the case of Square and Tesla. They're between 5 and 8 percent of their cash is in bitcoin. So I don't think so. That's no cause for concern. I mean think about it. We were worried that Tesla would run out of cash. Of course Arc was not worried but the world was worried two years ago that it would run out of cash. It has so much cash now that it has the luxury to put 5 to 8 percent in in bitcoins. So MicroStrategy is another company. It has almost all its cash in bitcoin. That's that's perhaps something French you know. But as
I said if we are in the capitulation phase we shouldn't be worried about MicroStrategy either. We do believe this is a new asset class and that institutions they are looking at it right now because the correlations of relative returns and total returns to compare to other asset classes tends to be very low over time. And so they have to look at it now. ESG might prevent a move in wholesale but we do believe that once they understand how renewables are becoming incorporated into the bitcoin mining ecosystem and that bitcoin mining might accelerate the adoption of solar that I think Elan will come back and be a part of that ecosystem as well. So why do you think he came out and said wait a minute. Maybe I'm going to back off of Bitcoin. What do you think his concern was. What was his nervousness. Well I think he moved in because he's been thinking watching like we all have basically unhinged monetary policies. They're not tied to anything anymore whereas bitcoin is mathematically
needed to top out at 21 million units and we're approaching 19 million now. So the scarcity factor should increase and support the price. We do believe that is what is going to be supporting the price in here. I believe what happened after he took the position in bitcoin is he got pushback from institutional shareholders like BlackRock. If you've got Larry think you know beating the drum on climate change as one of the most important topics and problems of our time then he was going to have to face those sorts of concerns. I don't think he expected that. And now that he's sorting it out learning more about the environmental impact I think he'll come back into the mix. We certainly hope he will. I don't know if he's going to be part of the conference in July or not and would be he would be a very good addition because I think he would provide both sides of the equation. How quickly could the adoption of solar accelerate if we introduced mining
into that ecosystem. Do you expect a Bitcoin ETF to get approved anytime soon. And I'm curious if you plan to launch a crypto ETF anytime soon. You know I think well now that Gary Gensler is head of the S.E.C. he's Bitcoin friendly we know that. He taught a class of course it courses at M.I.T. before coming back to the S.E.C.. So and I think the research professionals at the S.E.C. they understand Bitcoin in particular. And and I think are much more comfortable with it now that we've had several years to digest what exactly it is. Go through a bear market. Go through a bull market. Now go through a bit of a bear market. I think watching the ecosystem
evolve and actually become even more anti fragile. You know we're getting some real tests here. And if the system doesn't break and I don't think it will. I think that their comfort will increase in a couple of ways. Number one the infrastructure is there is robust. Number two the liquidity is there. I don't think I don't think that's going to be disproven here. And number three the price is down from very lofty levels. So hey why not start an ETF after a correction in in the market than before. So I actually think the odds are going up now that we've had this correction. I don't know if it's going to be this year
or not. We hear perhaps fourth quarter but you know we heard third quarter before that. So as we get closer to the fourth quarter we'll know how much is being pushed out. Hey I want to ask you a bit more about Tesla. Obviously you know you've been out there front and center years ahead when everybody was turning their backs on Tesla. Taking another hit
the news out of China. They have certainly had some tough time. Their growth has slowed substantially. They've had a lot of headaches and protests in Shanghai after some accidents with its cars. Is the Chinese market at risk for Tesla. I I think the Chinese my China is going to favor its local producers like Neo and others expanding. And I think they're granting subsidies to Neo which is the battery swap company. Even on its very high end cars which they are not granting to Tesla. So it's obvious. And it has always been obvious that China would favor a local producer. But what
we are seeing from China and particularly Tesla is exports into Europe where it does not yet have a plant. And what we're hearing is the especially in Germany but all over Europe where their their standards are extremely high for cars in terms of design and performance that they would prefer cars from Shanghai which is a much newer plant and much more productive much more efficient in terms of these design. Perfecting these designs then is Fremont. And so I think we're seeing a big export market develop from China into Europe. And I think China will like that. China wants to be known not for shipping or exporting you know cheap goods but also high end goods. So this could be the beginning of a trend. So so is China at risk then for Tesla. I mean I as I I don't think they're going to shut down the factory at all. I think that that factory becomes much more for exporting than we once imagined. I will say that Tesla's cars in in China have sold very well until very recently. I'm sure the publicity the publicity it has received has cooled cooled. Tesla's jets in
China. But it's it's been fortuitous that this export market has opened up at the same time. Kept there one thing I want to ask you. We talked about at the beginning inflation your mentor you and I talked about this. Just a few weeks ago Art Laffer you were in your 20s. You know you were focusing on the economy. It was a time where inflation was off the charts and everybody thought it would consistently stay that way. Laffer thought differently. And we know well
known in the supply side economics. Here we are at another time where the markets the volatility is often guided by our inflation expectations. Is inflation going to be a problem in your view. Well we've been saying for some time actually since the depths of the Corona virus we were doing YouTube videos saying regularly v shaped recovery. Businesses are way behind consumers. Consumers are buying all of these goods. In fact that's all they can do because they're stuck at home. Right. So they were buying non durable and durable goods that could be shipped to them. Right. Right. None. OK. That part of consumption is one third of
consumption and a disproportionate amount or percentage of the market basket of consumers was in goods for the past year. Businesses were. Didn't expect it. They were behind even before the corona virus. They had been lagging in terms of capital spending in terms of inventories. They were worried about inverted yield curves in China U.S. trade conflict. There were many many concerns. So they have been dragging their feet. They've got even further behind. And and still haven't caught
up. So what's a double triple ordering. Maybe quadruple ordering because they just can't get the goods. Exactly. We've got companies panic buying to keep buying. And so what I believe is we are setting up for a massive period of deflation. Now let me explain that. There are three sources of deflation. One is when the orders these double and triple orders are cancelled. Right
now we have seen lumber correct 30 percent in the last week. I think this is the beginning of that. Copper is now starting to correct. And I believe that commodity prices went too far too fast as businesses were scrambling and panicking. Right. They're losing business to competition. If they hadn't planned their inventories correctly. So that's one source of deflation but
that's only cyclical deflation. And we actually didn't expect it to start now. We expected it to start later in the year. But I guess it makes sense now that vaccines are here and consumers are shifting away from goods towards services or at the margin. The writing is on the wall. Those are double and triple orders are going to be canceled. Prices were too high. And we're probably going to see a drop in commodities. But there are two other sources of deflation out there. And this is what we've
been saying for quite some time. One has to do with it's a good deflation. It's caused by technologically enabled innovation. And we believe when you see DNA sequencing costs dropping 40 percent for every cumulative doubling in genome sequenced or when you see a training costs dropping 37 to 50 percent per year. These are massive deflationary forces that are going to hit every part of the economy. A.I. is going to be everywhere. So that's good deflation. Now what's bad deflation. Bad deflation is going to hit those companies that are going to be disinterred into mediated and disrupted by all of the innovation that we talk about all the time based on DNA sequencing robotics and storage artificial intelligence and blood gene technology.
So companies who have leveraged up to satisfy short term oriented shareholders who say I want my profits now I want my dividends now. So they buyback their shares. They haven't been investing enough in innovation. They are going to lose if they're not lucky if they're if they are unlucky they will lose their businesses. So Kathy what I like about you is your consistency and we have been talking about these themes right for a long time. Having said that you know your performance has been really consistent. It's been a tougher year this year and you've had flows out of your funds. I was tracking just I think
over the last week it's almost a billion dollars. So you know how do you keep your investors kind of energized in your philosophy and your thinking and your outlook and confident in your strategy. You know in a moment where there's a lot of doubt out there. Yes. Well a couple of things just in terms of flows in are our biggest outflows were in March. There are a lot of commentators out there shall I say screaming about how ETF would have to show our ETF would have to shut down which is impossible. And they just don't understand the ETF infrastructure surrounding us.
It's a beautiful thing. Let me tell you the flows are no problem. Our spreads have not moved. But anyway beyond that what has happened is our price targets for the next five years. That's our investment time horizon have not changed. Right. I looked at. Not at all. No. In fact some of them have gone up as quarterly results have come out. Now they're not going to change that much because that one quarter's result is not going to change a five year price
target by that much. But the forces that the Corona virus put in motion supporting all of the innovation that in which we invest they are not they they're not looking back. And so what we are seeing is you know a 30 to 40 percent discount to peak prices in in February for the same price targets. So we're looking at this saying all right on sale innovation is on sale. And oh by the
way the bull market has broadened out. It has. It is now embracing value and more cyclical stocks. So what has happened is the bull market has broad and has strengthened and that is using usually a launching pad for our next move up. This happened if I can just say 2016 same thing. Fourth quarter of 16 after Trump against all expectations was elected
value stocks took off because we're going to have a big cycle of tax cuts. Right. And our strategy went down. We were negative. But what happened was 2017 was one of our best years ever saved last year. And that's because the bull market broadened out included value. Cyclicals were taking off and the economy was on the mend. Our economy is very strong right now. And cyclical earnings growth and revenue growth is a competition to innovation. But if we're right on what's happening with commodity prices right now and that's going to be extended that is the ticket to the next move in our kinds of stocks. Well
that's interesting too. What about though the tech underperformance Kathy that we've seen. How much longer do you think. You know we see that. Well you can never say when we've hit bottom. I mean I can tell you that the valuations in our mall and in our portfolios would suggest that over the next five years again if our research is correct. No promises. We believe that our portfolios will more than triple over the next five years. So that's more than a twenty five percent compound annual rate of return over the next five years. Actually it's approaching 30 after today. So you
know I'm looking at that with great confidence because these innovation platforms have hit escape velocity and there is no turning back. There is no turning back because they are helping businesses and consumers. Back World War you little freak sorry that we got your back. Go ahead. No that's OK. I'm freezing up. Go ahead please. We were not going back to the old world. We're not going back to
the old world. So you know my confidence has only increased in our strategies. Can I ask you why did you guys get out of Apple. Your position in Apple. OK. What we do when a bull market is as extended as as the move into our type of stock was is as that move happens we start it. We were freezing up a little bit. Let's see if we can get Kathy back. That's OK. So innovation is happening but not always when it comes to the virtual conversation. Go ahead. You're telling me
not Apple. So Apple was one of our cash like instruments. It's an innovative company. It's in in in the innovation zone. But its characteristics are very defensive. So we will add names like Apple the things Apple Google Facebook. We will add those add to those positions or even reintroduce those stocks as a bull market. Our portfolios wrap one hundred and fifty percent.
We knew there was going to be a correction and we just wanted to have very liquid stocks. Apple is a great company is going to do fine. It's a fang. It's in a lot of portfolios. We are all about the next things but we will use the existing things. If you see they are acting very defensively become a defensive group. So we will
fold them in. Increase them when we see a move like we saw last year when we see a decline like the one we're seeing now we're seeing much higher returns from the other stocks in our portfolio. You know you're talking about kind of value in cyclical. And I'm curious are there any value and cyclical strategies right now that you guys have identified as ones you want to pursue. Well in our space strategy Air X you'll find a lot of value
oriented stocks. Many people are surprised to see deer for example in there. And what they don't understand is thanks to satellite technology and and and the increase in the number of satellites out there and that and the precision that we're getting from them. We are now enabling precision agriculture with autonomous tractors and drones. So without without that constellation out there that would not be happening. We think the two biggest applications or are beneficiaries of the space race are satellites going to enable mobile connectivity or connectivity around the world broadband conductivity. It is really hard for us to imagine that 3 billion people in the world have no access to the Internet or broadband. This is going to
enable that satellite and also farming. And the other thing we think is is going to happen much sooner than space tourism or it will be a much bigger deal in terms of revenue generation is hypersonic flight. So any aerospace company focused on hypersonic flight we're interested in and they tend to be value stocks. You mentioned earlier there have been people who have been very vocal and public fans of you and then some now have become your critics or they criticize you know having a younger investment and a group of analysts your analysts team. What do you say to
them. I would say that's our secret weapon. Those analysts have their their education and their feet in the new world. The most seasoned analysts health care analysts on Wall Street and God bless them. They've been great at what they do anything. They know all the code words and how to decipher them from the FDA. But they probably haven't experimented with crisper gene editing like our genomic analysts have. And they don't have advanced
degrees in cognitive computing including bringing behavioral science into it. So many of our analysts are coming to us directly from college and they are fully equipped with domain expertise in a way that most analysts out there again very seasoned are not just because they didn't go to school and haven't been exposed to these new technologies. No no. Know there are a lot of pages out there and they of course know a lot. But I would put any of our analysts up against the most
seasoned analysts on the street when it comes to the topic of innovation and new technologies. Right. That's our focus. And so why wouldn't we. I think we have a competitive advantage for a few reasons. Number one our analysts their domain expertise. Number two are their willingness to engage with the communities out there through social media and give our research away not when it's finished but as it's evolving so that they can communicate and engage with the innovators themselves. So I think we have a competitive dynamic unmatched out there in the industry.
Hey just to wrap up Cathy I knew about you and I've been talking for a lot of years this has kind of been a year that's unusual. I would I would say in some regards for you. What have you learned in the past year and what is maybe change to you. Well as we were having such an incredible year last year and I do think the Corona virus crisis caused it innovation. So it solves problems. I kept saying to everyone this will not everyone in the company. We must stay humble. We must stay humble. And we must we we know this is going to come to an end. We're going to go through a severe correction. And we have to just keep our our heads down focused on our research to to keep our conviction and and drive our strategies forward. That's
what's happened keeping our heads down hopefully staying humble and really trying to educate people. The great opportunities available out there get on the right side of change. This is going to be the most amazing period of my investment career. And I've been through 40 plus years because we've never seen five innovation platforms evolve at the same time. All of them
leading to exponential growth trajectories that are going to transform people's lives. And so I say just you know read our research and talk to our analysts on Twitter if you really want to learn more and and and join the rally because we believe it's going to be magnificent. Just quickly from the audience. Do you ever get recognized in public like a celebrity. Some people like you to Warren Buffett and do you ever miss kind of your pre rock star days. Just quickly. The answer is yes to much to my surprise even in an island off of New Zealand which is what. But and no. We are honored and delighted because you know what. And I know it's been hard for our clients in recent months. Keep the faith. But many people's lives have been changed by what happened last year. They. They
put there. They allocated resources towards our strategies towards bitcoin. And. And they had a magnificent run. So it's gratitude that we feel now. Of course we're feeling very responsible of course this year. But that's why it's so important for us to say you know that what pains me more than anything as a portfolio manager is when I know our clients are selling at the bottom. And it usually is that people sell. The big capitulation that I described earlier with Bitcoin is selling at the bottom. So so you make a terrible mistake and you don't want to ever get in again. And it just pains me. So I'm just praying that we don't have a lot of that. We've had a lot of retention. Just to
correct one thing you said at the beginning actually as a firm we've not had one month of redemptions in the ETF platform had. If you go month end to month end which is how we measure this sort of thing. Our gins and March were 500 million. We had we we've had positive flows in April May. It remains to be seen. It's been nip and tuck. It may end up being a small depends on what happens in these last few weeks. But you know if there's real capitulation sure we could have a big outflow. But I think that's capitulation.