For today. We're going to go over interview with Cathie wood. It's exclusive only because she attended a salt conference.
And this was yesterday on September 13th. So sit back, relax. It's a very, very interesting sit down at this conference and I think you're going to enjoy it. And now we're going to listen to Cathie wood. we were just talking backstage.
I haven't seen it. Since pre pandemic, at least in person and so much has happened to you and to Ark during this period, it has been a remarkable ride. And just to put it in perspective, um, you started arkk in 2014. Dare I say you were 57 years old at the time. You don't look any older now, but, uh, she had no assets under management today at age 65. Uh, she's at the peak, I would argue of your career, but I hope there's more to come and you're managing something on the order of $85 billion, which is a pretty remarkable, uh, pretty remarkable things.
Um, she has been called on social media and I hope this isn't considered a sexist or something else. Mama Kathy, they call you aunt Cathy. And then in South Korea, they call you money tree, which I love. And this is what art Laffer who used to work with said about you. The thing that's amazing about Cathy, even back then, when you were working, when he was working with you, her horizon is forever.
She wasn't in it for next week or next month or next year she was in it for the long haul. And so I want to start with this before we even get into what's going on in the markets today. And this is just an investment sort of horizon thesis question. When you think about the quote unquote horizon. For your fund and the way that investors who invest in your fund should also think about that horizon. What is it? Well inter in terms of our investment time horizon five years.
So we have to believe that one of the technologies, uh, the 14 technologies around which we have based all of our research is going to win. Within five years or at least be discounted in the market, start to be discounted in the market as though it is about to inflect. So five-year investment time horizon. Our minimum hurdle rate of return, uh, is 15% at a compound annual rate over five years. And so I think that, uh, that combination of five years plus exponential growth trajectories is. Finally, starting to get into the market.
I've been waiting for. I know you've been waiting for years, so to put this in perspective, the fund, um, over the last two years is up about 164% give or take year-to-date it's down a little over 3% at a time. We all know the S and P 500 so far is up a little over 18% this year, thus far. So put it in perspective. Where are we in this market? Given your five-year horizon? Uh, I believe we are seeing w is going to be incredibly confusing.
I think to people just look at what's happened to the bond market this year, you know, against all expectations yields have dropped from, uh, I think it was 1.75 at the peak in March down to one, three as inflation expectations are exploding. Right. Uh, we believe the reason for that.
Is that we're probably when all is said and done, and the dust clears from the supply chain problems and everything. We're probably in a highly deflationary world and we see three sources of deflation. Uh, one is very good. It's it's called technologically enabled innovation.
Artificial intelligence training costs are dropping 68% per year. When something, when a cost drops that much, uh, the demand for it picks up and artificial intelligence is probably the biggest reason we're seeing the convergences between and among technologies. So we've got one S curve feeding, another feeding, another explosive energy, incredible deflation. That's the first deflation, all the rest of the world thinks if you were here for part of the day everybody's. Oh, and th that's what I love, you know, if. If, if, if the whole world thinks that's going to happen and, and, and a portfolio manager and analyst team things, that's going to happen, well, if we're wrong, it's not going to matter that much.
Right. Because nobody's expecting it. It's not in the market, but if we're right, the returns are enormous.
And I think that's, that's, what's going on with the technologically enabled innovation that we see, especially in healthcare, by the way. But there are two other sources of deflation. Uh, disruptive innovation. There's another side to it.
It's called creative destruction. And I think we're going to see a more creative destruction than we have. In all history during the next five to 10 years.
Now, you can say, oh, you're just talking your book. We have rights law, uh, teaching us about learning curves and cost declines that suggests we are going to see incredible booms out there in parts of the world, but it's going to mean tremendous destruction and others. So when I say confusing, I mean not. And then the third source of deflation.
I think we'll be cyclical, deflation. Most people are fighting us on this one. It's hard to fight us, given our research on those other two, but this, this cyclical deflation, it started with lumbered $1,711 in may.
Now we're at $500. Four 90. I think now we're at 4 25, a used car prices are surprisingly good.
And I know I'm getting, we're getting pushed back on this one too. Uh, they shot up 60% as everybody decided to avoid mass transit. Last year. Right.
And, uh, and now we find ourselves supposedly in a chip shortage. I don't believe, I do believe in the chip shortage that because I do believe there's a chip shortage because the world's going digital, but I D I believe. Uh, well, I believe chips are the new commodities. That's the point I'm making here. So, uh, chips are going to be what, uh, Dr.
Copper has been in the industrial world. This is doctor. Uh, this is Dr. Digital, I don't know, uh, in the form of chips, but you hear the auto industry screaming, you know, auto sales have dropped from 18 and a half million units. In April to 13 million.
Now these are annualized rates in August. That's more than a chips shortage. What happened last year is people bought the cars. They're in their driveways.
Garages. Didn't want to take mass transit. And now there's a decision.
What do I want to buy a gas powered car or an electric? Well, that's where the short supply is. And I think the excess supply is going to be in the gas-powered side. So this is a really important test case of, of why I formed the firm when, when, when we did, uh, I think, I think the disruption is happening to the auto industry now.
Um, I want to get into Tesla obviously, and a number of your picks in just a moment, but I do want to just note Morgan Stanley, Citi group, Georgia bank, bank of America. All firms that have published notes within the past month, uh, effectively saying the opposite. Um, most of them believe that we are expecting to have inflation.
And I think across the board, either pull backs or much flatter returns. Right. You just think they're off. You think they're wrong? I think, uh, as I said, if you're looking at the traditional bench, They may very well be right. All I know is when we are looking at the transfer formative growth, that's going to take place in our space and we're completely. To nothing else, but disruptive innovation, we see explosive growth.
I think one of the reasons they will look right in terms of GDP is, uh, if the other side of, of disruptive innovation is creative destruction. Well, what's happening. It's the industrial world. Evolving into the digital world as more of the physical world goes digital transportation, importantly.
Right. And so the traditional benchmarks, GDP, the statistics that we look like are probably going to look pretty lousy at times, I would say certainly sector by sector as these transformations take place. What do you think the role of. Millennials and the next generation will be, I asked this because I've seen you make comments about demographics, both in terms of the role that millennials play in terms of the actual economy, but also the role that they may play in the markets themselves. Because a lot of people look at what's happened over the last 18 months in this new generation.
That's now in retail, often in your fund on Robin hood, Alan, read it and think something. Change. Some people think it's lips. Other people think it's forever. Um, well, I, we just learned from, uh, Jay Jolene Caruso that millennials are 70 million strong in our economy. And now bigger than the baby boomers, uh, as a, uh, a demo demographic.
And, um, I'm going to harken back to Stan salvage. Um, most of you won't remember who he was. Uh, uh, he made one very important call in the, uh, early eighties. He said, baby boomers are going to be the reason that the equity market goes up for the next 20 years. It was a brilliant call. He's no longer with us.
We're in the echo now. And I do believe that both crypto and the equity markets are going to be powered by millennials. In fact, um, Tom Lee at Fox try that.
Yeah, he, he has done the arithmetic the way that Stan did. And I think he says this bull market will not. At least until 20, 26 and maybe not until 2038 when the number of millennials peaks out there. Well, I went through it in the eighties and nineties and, you know, nobody believed him thought it was a ridiculously simple call, but when you look back in history, it was a pretty, okay.
I want to get into meme stocks and that whole phenomenon in just a minute, but I want to, I want to. We'll touch on a couple of your big investments and also touch on one other theme, which is China, because it's in the news. Uh, you have been, uh, thinking about that space or that, that region in a big way or that country, I should say in a big way. Um, and I know you've reduced some positions, but what, what's your overall thesis that this point on. And what we're seeing in terms of this regulatory crackdown, which seems to be worse every single day.
Yeah. Um, I think there's something going on there socially, uh, that the government is very worried about many of the same things that the rest of the world is worried about, where there's the divide between the rich and the poor, um, Uh, I saw today ever grand. There are, there are protests around the evergreen land offices because the wealth management products that weren't highly regulated are not paying interest or not paying back and so forth. So I think there's social unrest taking place. And that's why common prosperity has become the rallying cry and hostage to capital has also become, uh, a rallying cry.
Uh, so I don't think it's a very friendly place for capital now. However, uh, focused only on innovation. China has in its various five-year plans made innovation to eight and it's incredibly important, uh, plank.
And, uh, so we don't want to avoid it, but what we do want to avoid. Um, very high margin companies. So you look@jdlogisticsorjd.com. Some, some of the companies that are pushing, um, innovation and access into tier two and tier three cities we'll play with that. So what we did in the series of moves recently around China, we have taken our position down significantly, but stayed with a few of the low margin.
Uh, they, they need to see what would I need to see? Uh, I think it would be, she, she ping, uh, saying, you know, whoops, we made a mistake. We're open for business. I don't think he'll do that. Uh, so I don't think we'll be hugely involved with China. The other thing that I think is, and we've seen this in the crypto space, uh, by shutting open source movements down, which is what they're doing. Open source all open source movements.
No. Um, I think this is going to give the us a competitive advantage. So we have allocated more of our innovation assets here in the U S because of WhatsApp. China was going to be one of our biggest competitors. We saw them in the AI space, making the league tables and chips.
I'm not so sure. I think they have to do some, um, uh, housecleaning, uh, right now. Uh, we probably do not understand all the causes, but I think there's social. That would be my guess. And you think, let me ask this, do you think that the regulatory environment there is you're going to open up opportunity in the U S or will it give an emboldened regulators in the us to shut it out, to shut down what's happening here? Because it used to be that the big tech companies in the United States would say, well, no, no, no, you can't, you can't shut us down because look over there in China, those companies are so big.
We need to compete with them, but if they're. Yeah. Being shut down or crack down upon, will it just emboldened Washington here? It's a good point, but I, uh, I think this is much more than China. Um, as RuPaul on the last, uh, panel said, uh, you know, France is becoming very innovative, you know, and Southeast Asia has stolen the March from China.
So companies like, see it's a social media, social commerce gaming. It's it's exploding throughout the world and, and, and capital is shifting towards that kind of name, uh, because there are big populations in Southeast Asia and Latin America as well. Okay. Can we talk about our favorite topic? Yeah, let's talk about it. Um, and we have sparred over the years.
I love Tesla. I've never loved the valuation of Tesla and you have loved Tesla and the valuation of Tesla, and you've liked the valuation, even at much higher levels. And I have always thought, as you know, that that's crazy and you have been right. So here we are.
Um, you still believe that this is a company still believe that the valuation. Long-term is $3,000. That's your price? That's our base case. Now your base case, that's not even our bull case, but let's just stick with the base case from $700, 3000 by when five years, always five.
You recently sold some last week, right. But $180 million. I read that it was 130 million. That's how much? Oh, I'm sorry.
180,000 shares at $130 million. Right? Why'd you do that? So Tesla is still the largest physician in our portfolios on that particular day. And I can tell you. Because we disclose our holdings every day and we publish our trades every day on that. I'm always looking for cash in, especially the flagship fund, which is very concentrated and involves all of our technologies.
So a company in the automation space space UI path was down 11% that day on its earnings release. And Tesla had just gone up 30%. So it was really a tactical move. So just to give you a sense, Tesla is a 10 point. I believe it's 10.5% position in the flagship fund.
The next highest position is I think 5.9%. So the conviction, this was, I will take a trade up 30% down 10%. That's like a 40% different. That's all. But this is not a stock.
I mean, at least recently that has been on the move higher. In fact, it's been flat to down. No, it's actually, if you look at it, it has been, it has been levitating.
It has, we've got into the five hundreds. It got, it gotten well below 500, I believe in, but I assume therefore CR, but it must have crossed 10% a while ago, meaning you must've been much higher output. So when a stock moves from.
10% we can no longer buy. And thank you. I want to address this because we keep getting questions about it. We cannot buy a stock if it is 10% or higher in the. We can sell.
Of course, uh, we do not have to sell. And what we usually do, this is not science, very unpredictable. So, you know, this is you can't replicate this in terms of trying to figure out what we're going to do, but when a stock gets to 11 or 12% in the portfolio, it means that, or that means it has appreciated.
By 10 to 20% relative to the other positions in the portfolio. And usually what we're doing is being opportunistic and taking advantage of a drop in a stock. Again, need the cash largest position above 10%. Okay. Let me ask you that. No, no, it makes sense.
I know there will be, there'll be bulls and bears on this. Um, let me ask you a different question though, and it's really about how to assess and think. Some of the comments, projections, and other things that Elon Musk makes about the company and how, how you interpret them and how the public interprets them. And frankly, how bears interpret them, which is to say that there's a lot of times where Elon will come out and say something, whether it be about robo taxis or, uh, when there'll be a full autonomous driving or all sorts of things that I imagined at some point, cause we've had these conversations with. Do you get baked in or should be getting baked in to some kind of assessment of the stock and as optimistic as you can very well be about all of those things, they haven't come true.
And so how do you, how do you grapple with that? Uh, this is one of the hardest problems. Uh, that we're going to solve technologically. So actually in the last three months, we have increased our projection for autonomous taxi networks.
Now in the $3,000 base case, we assign a 50% probability to autonomous. So it's a really hard problem, but if anyone is going to. Our confidence that Tesla is that company has gone up dramatically, as we've learned about, can I ask it w when Iwan says that robo taxis by the end of 2020. When you project, what, what numbers would you therefore have put in in 2000? I think 19 when he said that or 18, when he was saying, yeah, again, five-year, uh, our probability last year when w and or whenever he said that was lower, I think we had a 25% probability.
So do you discount what he says? What by what number? Elon, Elon, if you really look at what he's doing at space X and at Tesla, he's changing our world, right? You're not going to get me to just read that. I think it's simply about the valuation and how investors should think about, he was the first person. When I, when we were talking about autonomous taxi network. He said that the last mile is going to be so hard.
I'm not sure it can be done. This was about five years ago, maybe, maybe longer, uh, the resources that he's putting into this program and the talent that he's attracting and the advancements that he's making, uh, and that are possible now that artificial. Uh, intelligence training costs are dropping by 68% per year. Uh, we think the probability of autonomous is going. I don't disagree, but does it frustrate, you know, he's a, he's a visionary and you know, he, he, he sees the future.
So clearly the fact that he changed from saying last mile, I don't think that's good at w w there'll have to be some combination system you've changed from that, with his partner, Andre Carpathy, who is one of the most brilliant artificial intelligence engineers. I think this is going to happen in the next few years. He is always a year or two or three too early. We adjust for that in our forecast. What do you think about the prospect? That one. Oh, and by the way, may I say one other thing, one of the reasons Isla.
Does that is he wants to get the supply chain in motion. And when the supply chain does not cooperate, he brings it in. He's becoming much more vertically integrated. So auto suppliers and technology companies know that if they don't March to his drum and at his cadence instead of these four to five year design cycles, they're not, they're going to lose the. A lot of short sellers have lost a lot of money betting against Dylan, as you know.
Um, and one of the things that a lot of short sellers will tell you that they missed was not actually the technology or anything else, per se. What was the scale and ability to go back to the market over and over again, to get more and more capital that. The scale of the capital unto itself, that could become almost a self fulfilling prophecy. If, if there were people out there willing to impart their capital to you over and over again, how much of that is in your thesis? Uh, well, what, the way we would frame that is we, we believe. That Tesla had four barriers to entry and all, but one have increased, uh, in, uh, in the last few years.
So they have. They have the artificial intelligence chip. They have the best battery technology costs lower and will be lower for the next three to five years.
They have the most data to do the training and find corner cases. And then the last one, which I would have thought they would've lost already, uh, is over the air software updates. I haven't had to take my model three in since 2018, they have the best cars on the road.
So your base case is 3000. The best case scenario, the best case is about 4,000. Cause we will never go to, uh, we won't go to a hundred percent in that autonomous, but let me give you the dynamics there. Uh, if you had asked me last year, I would have told you that the autonomous taxi network opportunity, uh, in the year 2030 would be a six to $7 trillion revenue opportunity. Uh, we have in the last year raised.
Two 10 to 12 trillion. And it is because. And before we had been modeling as though the costs would drop to where, where they should given competition, which is 25 cents per mile. Right now it costs us 70 cents per mile to drive our own cars. Uh, we are learning and it's true. Uber and ride sharing services.
That convenience matters a lot. Not having to drive matters a lot. And so our price for the robo taxi service has gone up from 25. I think we're up to either 50 or a dollar per mile topic. Our other favorite topic, you know, it's going to be Bitcoin five years from now. What's it worth if, if we're right and, uh, company.
Continue diverse to diversify their cash into something like Bitcoin and, uh, institutions, institutional investors start allocating. 5% of their funds towards, uh, I'll just say Bitcoin for right now. Cause we did that. We framed it for Bitcoin. It could be for other cryptos as well. Um, we believe that the, the price will be 10 fold of where it is today.
So instead of 45,000, over 500,000, you could own Bitcoin Ethereum or some other crypto. Uh, currency, and you could only own one, which would be. That is becoming a harder and harder, uh, question to answer. I think I'd default still to, to, to Bitcoin because countries are now deeming it legal tender, and we haven't even put that into our, uh, thinking either.
However, Is seeing an explosion in developer activity, thanks to NFTs and defy. Um, I'm fascinated with what's going on in defy, which is collapsing the cost of the infrastructure for financial services in a way that I know that the traditional financial industry does not appreciate right now. So, uh, it does have to move from proof of work to proof of stake. That transition is underway and seems to be taking. Uh, so are here's how I'll answer that question? Our, our, uh, confidence in ether has gone up dramatically.
As we've seen the beginning of this trans, uh, transition from proof of work to proof of stake. We'd still probably do 60%, uh, Bitcoin, 40% either for all of that to happen. Do regulators, especially us regulators need to buy into the.
In a major way. I would also say that we just saw it in the last week. Uh, Brian Armstrong runs Coinbase. You have sticking, Coinbase has now gotten into a somewhat bitter feud with the sec over how, uh, the ability to offer effectively a yield product, uh, on some of these cryptocurrencies specifically Bitcoin will work.
Yes. Uh, I think regulators are working assumption from the beginning. Um, was that, and this was based on meeting with them, meeting regulators, both state and local and federal was that no regulator wanted to be blamed from preventing the next big technology breakthrough to happen in the U S and that has proven true. Now we've got.
Chairman Gary Gensler. I'm really happy. He understands crypto and understands the merits of Bitcoin in particular. Uh, he is a regulator though, and he's a hard core regulator.
What Coinbase did? I mean, I was shocked when I saw Wells notice. Are you kidding? They haven't even released the product. Like what is this? And I think what that Wells notice is doing, it's, it's a call-out by regulators. We got to discuss this stuff because this is happening very quickly. And I think we are going to bring, um, courts into the system.
This happened in Canada, a company called three IQ sued, uh, the regulator there, uh, and one in court. So they were able to issue Bitcoin ETFs and, and closed end funds and ether as well. So I am beginning to think. That Coinbase doesn't mind this at all.
And if you saw the stock reaction, it hardly budged, right? Um, we're going to have to wrap up in just a minute, but I do want to talk to you a little bit about the social media enabled phenomenon that is happening, uh, about it. And it's impacted your fund and it's impacted the interest in all of this diamond hands and the like, What do you make of that? And also, how do you think about your own responsibility in the context of one of the things you do, which is so interesting is you are transparent in terms of what you're doing every single day. People see what you're doing.
There's also people that are there, therefore trading off of what you're doing. And how you think about that. I'll start with the later one was the first one about meme stocks or, yeah, it was a little, it wasn't really a question, but it was in the context of just thinking about what's happening here and.
All of the whole sort of new generation that seems to be talking about these stocks. Um, some saying things that are factual, some saying things that are not factual, some saying that they, uh, want to have less regulations so that they can do more. Uh, it's it's a, it's a very different world than it was post financial crisis, where everybody said that the job of the financial industry was to protect. If you will, the little guy, the little investor.
And now I think the little guy is saying don't protect me. And in fact, by protecting me, you're not protecting me at all because what you're really doing is protecting the soup. I think it was on your show this morning. Wasn't it? That Robin Hood's legal counsel said something like that. That's really insulting to these people that you are going to protect them.
Right. Okay. That was, that was pretty interesting.
And, and, um, uh, so, uh, I'll, I'll first talk about the trading around what. Um, I have been managing money since 1990, so for 31 years, and I've always had, um, other, other investors or speculators shooting against us, because guess what? Even when I was managing separately managed accounts for wirehouses. I would be posting models. That word would get out there. What we were doing when we posted our models out there and it would get out and lo and behold, these stocks would take off.
So. I've been managing with that in mind for years and years. And so we don't have to buy a stock if someone wants to take it up 20% the day after we buy and we haven't finished our buy, I'll finish it another time because I know disruptive innovation is inherently controversial and we'll get another shot in terms of what's going on. I mean, I so admire the millennial generation. Yeah.
As you say, I'm sure there are people trading just because their friends are trading, but the hunger for knowledge that they have, and the gratitude to us for the kind of research that we put out, the depth of our research, uh, you know, our tweets, our analysts are all tweeting. Um, we have to be. We're on the right side of regulation.
We know what we're doing there. We have someone from the sec who became our CCO. Um, so their hunger for an M for information and their gratitude, it has been extremely humbling in a way. You know, we get a lot of people coming up to us and thanking us for that because we've opened their eyes to a new world. Let me give you a, give you a bit of a difference when my children were in high school or, uh, I was trying to teach them about the stock market.
I was trying to get there. Nada, you know, it's almost like crypto had to happen that got them interested. And to the extent they were looking at our research around crypto and others, that they're, they're educating themselves and they love education. And it's one of our mission and values. So, uh, you know, we meant to do this. Not because we knew this was going to happen, but because we want parents and grandparents to, and the children themselves to understand how rapidly the world is about to change and to get your children, grandchildren, yourselves on the right side of change, whether it's investing or, or your education or your career.
Okay. Couple quickies, Joni. I do not, but I gave one as a birthday present to, uh, six, a Gallus, uh, chief investment officer at, um, at Jenison associates. He turned 88. He thinks it's the best president who's ever gotten. Angie Dalton.
I don't know if you know her from Sigma and capital growth and I did. We split it and his grandchildren now get to do layers of art on top of his digital art. Do you think there's a bubbly. I well, you know, when I saw the original $69 million piece, I thought, okay, this has gone too far, too fast.
Um, you know, we're now talking about the creative world and when I heard about async art, I don't know if you've heard of that company. Async art, um, has developed a digital ecosystem where artists can. Put out there, digital art and then, and then anyone can buy pieces, pixels and change it. And so you can do layers.
And the original artist gets paid. I was walking when I heard the CEO tell his story and my smile went ear to ear. Oh, man, this is going to be so explosive. Uh, this is how I felt when the internet first came about like, oh man, this can be really big. Remember when everybody's in, what's the internet. You know, I had the same feeling here because you know, creators, you know, they don't get paid for, you know, every iteration.
So Robin hood you a stake, we do. It's a 1% position yet. Again, we're into the millennial generation pay, uh, pay payment for order for payment, for order flow. I'd be shocked if it goes away.
I agree with the general council, because it has been so good for zero commission trading and so forth and, and you can look at the spreads and you can analyze exactly who's taking water. What, how big the pie is. Right. And I, I honestly don't know. I'm glad it's a discussion.
Cause it keeps coming up. Let's get some, uh, regulators, uh, making the final decision we're at a time. Oh Kathy, would everybody thank you, Andrew.
2021-09-17