Cathie Wood on ARKK's Performance and Inflation

Cathie Wood on ARKK's Performance and Inflation

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Why don't people believe that. I mean with respect to everyone in the room we see a lot of pilots we see as in pilot use cases studies prototypes things that are heavily regulated either by the FAA in the air or different regulators on the ground. Why do investors market commentators look at your research and say we don't believe you. Would. Well it's interesting. This all started with Tesla 2 and Bitcoin because this has a pretty quick. Yes it does. No but bitcoin in

2015. Tesla 2014. 15. And and we have what seems like a crazy estimate out there. But it was all it was all modeled very data driven. And I think what the market is missing is there. They are not focusing on something called rights law. Rights law is a relative of Moore's Law. Moore's Law is a function of time rights law is a function of units. And it says for every cumulative doubling in the number of units produced costs decline at a consistent rate. Theodore Wright was a civil aeronautics engineer and he observed during the early days of airplane manufacturing. This this law. And so if you if you add back that I think the cost Sam correct me if I was 10 percent roughly for every cumulative doubling in the number of airplanes manufactured you fast forward to today and in robotics industrial robotics.

That number is 50 percent. If you look at the battery technology that number is 20 percent. DNA sequencing which is I know not in this room but 40 percent 28 percent for shortly. So these are menacing deflationary trends evolving all at the same time. So we're going to see s curve speeding s curves and I think we'll see it in space especially for a lot of potential investors. Stuart Milton Ruscha is here. We had a conversation on Monday where he made the same point. I

asked him kind of what's changed from the last up summit. And now we've had to kind of Arab. He basically explained it as being this big wave and ramp up in innovation technological innovation. But what he followed on to say is that there is now a tremendous influx of capital willing to invest in this area. The public markets might actually dispute that. But do you agree with Stuart that the capital is that to meet the innovation and the scale that you think is going to happen. The capital will be there once and now I'm saying both in the public and private market. I think in the private market with what we're seeing and this is a throwback to that 2018 conference which was we remember one D.C. venture capital leader after another getting

up on stage and saying oh we would never invest in this. This is too high fixed costs. This is too long term. Whether there are many excuses. And so it's been very interesting. There is a lot of capital moving into the asset right part of the business and and still maybe an aversion to the more hardware centric. But we do think that will change over time. Let's talk about public markets. There has been volatility in public markets. There has been underperformance in higher

multiple sometimes pre revenue often pre profit companies. But domestically they are in mobility Eevee and battery related startups like our related startups the ability startups that when public virus back. Why is that. Why did they go public. So why if they perform so poorly in the first year. OK. So innovation generally starting in February of 21. That was our peak. Innovation has been for want of a better word trashed. And the reason is what I mean by that. But I mean is I'd give you that backdrop here. So if you look at our our performance our flagships performance from the low in Covid to the peak in

February of 21 that was 360 percent increase. Innovation solves problems. We had a lot of problems through the Corona virus. Innovation solves problems. We were rewarded accordingly. Since then peak to trough when we hit our trough. Thank goodness we passed it down 75 percent. Why. Inflation and interest rates. So there is this and it's really interesting to be here. Wal-Mart territory because I think we're learning a lot from the retailers now and we're talking about what we learned about inventory Taylor Riggs.

Yes. So the fear of rising interest rates and inflation out of control hasn't been to the market. And of course that's the equity market. If you look at the fixed income market it does not agree with this. The three year I mean the 10 year Treasury bond yield. 3 percent that that instrument should be one of the most responsive to inflation fears. Right. So 3 percent which suggests GDP growth 3 to 4 percent during the next 10 years. So it's not been corroborated by the fixed income markets. And I

don't think I don't think that we are in a period where we can't extricate ourselves from this. In fact the inventory stories are a very good example of a lot of why inflation has become a problem. You know the scrambling to bring more and more inventory to satisfy demand stay at home. Dad went into overdrive. And I believe the narrative in the last year

inflation gave purchasing managers this idea that OK what's the worst that could happen if I build inventories. The worst that could happen is that I am able to deliver inventory profits sell at a higher price. Well that's not going to happen. That's not going to happen when we see. I've never seen inventory surges like this in my career and I've been around for a long time.

So 33 percent at Walmart 42 percent at at Target 74 percent at no 50 percent call. So very broad based. And so I think we're going to see a lot of discounting. And this was beginning to happen down just at the margin. And we're seeing it because our is now starting to outperform the rest of the market. I've never been in a market where the market has gone to new highs and we are hitting lows. I've never been in a market. So there's been and it hasn't been supported by the fixed income market. So we'll see what happens. I would offers a number of products but all innovation take out a cake

is everyone's season. That when you said I want to clarify maybe you said it's been trashed. You mean its reputation but it's performed poorly today. You have seen net inflows of money. Yes. Broadly speaking not perhaps not as much as you'd like. But what does that tell you despite performance and drawdown related to weak performance

that investors continue to put money there. I think investors trust us. We know we're doing the work. We're giving our research away. We're beginning to give our models away. We have Tesla up on GitHub today or tomorrow. We're going to publish another one which I can't say until after the close. We are going to play them around. We're here to help people understand

what during the next five years is going to happen to these to these companies. So your original question with why they stay with us. They trust us. They trust our research. We're doing research that others are not doing. We're sharing it with everyone but the top down you know modeling as well as now from bottom up modeling. And we

want people investors skeptics to poke holes into our models. We welcome oh yeah we believe the variables open. If you think we're crazy on this assumption you change it then and see what the price target is. Let's see with the sensitivity to each assumption. But I think our clients really like it. And I also will say we see this. I'm going to say it's across the board but especially young people they know that we are researching the future and many young investors who own capital that we are we are researching the future. If you look at what has happened to our industry it really lost

the plot after the tech and telecom bust and then the 0 8 0 9 meltdown. You have this tremendous risk aversion business risk career risk and a movement towards passive and benchmark style investing. And I have been quoted as saying I don't know Eric Balchunas set at Eric Balchunas is less listening to what you have to say and please go right ahead. Yes he he he would disagree with this because he thinks it's actually a good thing that all of this passive and benchmark has happened for us. And

I agree with that to some extent. But in terms of allocating capital to its highest and best use I don't think looking backwards is going to work. So I'm really thinking about the competitive business of the United States. When I say that not about yes I think we were shy because we are looking at the future and the future is very bright for all kinds of people. Let me just point out to the audience here in the run up summit in Bentonville Arkansas and ISE next thing around the world on Green Day television radio. I keep looking at my phone and the reason I do is I'm on the Bloomberg terminal. It's a down day in equity markets but the ARK Innovation ETF is up two point seven percent. Why is that.

I think it is seeping into the investor's mind is. Wait a minute. Are we right on this inflation goal this fall. It's because supply chain issues extended for such a long time. Then Russia invades Ukraine. No. Of course. And of course monetary and fiscal policy had been so stimulative. But as I've said many times we think the greatest is greater risk. By far is deflation. Deflation cyclically. But you're talking over a longer time horizon talking about now too because I think this inventory issue highlights the cyclical reason we've been seeing. We think inflation will rattle. The secular deflation story is very powerful. And and as Evie's and autonomous mobility of all

stripes starts becoming a bigger base in the economy that deflationary hole is going to be aggregated because again these are convergences between and among different technologies that are all on their own. Deflationary customers. I should point out as well today's listening. Those in the room Eric Balchunas is all Bloomberg intelligence. They're a Greece research league. And if you are a Bloomberg subscriber I highly recommend reading his research. Last night we all gathered in a room and John Thain the CEO of Wal-Mart's U.S. division talked about the new normal and how we don't know what the new normal is yet. One of the things that you have talked about is the misallocation of capital into index products. Bear with me on this one. But in many cases you think about why people deploy

money for a one K diversifying their assets and add some index give you diversification. Are you essentially saying that CAC didn't all confessed the why to fund want the responsibility of holding onto people's assets with a very clear thematic focus. Yes. And I'm not saying I'm not saying investors should put 100 percent of their equity exposure in Iraq now. Is my own personal

portfolio like that. Yes but I wouldn't suggest it for most because this is a truly volatile strategy. So we have a study up on our site which says if you allocate 5 to 10 percent of your equity allocation to this kind of strategy and innovation solely innovation you will increase your returns per unit of risk over a five year period. Very important is five year period. We are the closest you'll find to a venture capital fund in the public equity markets. And of course we're acting like it. In fact we we led this V.C. down around you know the V.C. down rounds that we're seeing now. We're led by the public markets. Now I don't think the public markets have this right at all. I think that we are in bargain basement terror territory. And if you give us a five year investment time horizon we are a deep value portfolio. I think the private markets are closer to right. But there was a

wall of money pushing in and there was some bad behavior. So we are in a reset here. I don't think we'll go down to public market valuations. I think I think that we'll see kind of an adjustment both ways over the last three days here upside Bentonville Arkansas. I've enjoyed the broad spectrum of technology on display. A lot of it's physical as you can see it and say you understand it. For those in the room who aren't familiar with Cathy Wade she is known for bold predictions. I kind of keep this one up earlier. Perhaps one of your boldest predictions is the idea that artificial intelligence will drive massive global GDP growth. I think your forecast is 50 percent over a 10 year time horizon

a decade. Could you could you explain that to us. We pay attention to a site called Attacking US which basically anyone can put their forecasts in there but they are basically graded over time. And if you look at since since openly I released Valley to Farm Foundation model and I think Google's version of its version is Flamingo. But that service has gone from flat. When do you think artificial artificial general intelligence will occur. It's been flat for the last two years but since those two models have come out there the time that these forecasters expect to see art of artificial general intelligence has shrunk from 30 to 50 years to 60 to 12 years. So now you know it sounds impossible to think that GDP growth sort of that 3 3 percent in real terms and so forth is going to accelerate to 30 percent. But if you look at the history over thousands of

years you will see that at one point in time GDP in the economy. Now this is thousands maybe hundreds. If that wasn't around DAX point 0 0 3 percent then for another thousand years point 0 0 3 then point 0 3 then 3 percent. Who's to say we are close. I just mentioned these s curves hitting one another and the markets are not being set up for it. You know really looking to the past for

an indication of where we're going in the future. It's going to be a real blindside. First of all I'd like to talk about some specific examples which you and I discussed previously. But I want to ask you this because we're going to lie. I don't think anyone in the reminds us going to go along. Is that okay. We're all good. So do you ever just sit at your desk in St. Petersburg Florida and think maybe I should take this this bold prediction down.

It's too much for potential investors in all products too to believe that the 50 percent GDP growth. Cool. I'm not an economist but what. It's kind of crazy since you admit it. Yeah it seems crazy. But I'll tell you when we first did our Tesla projections for us did our book quite early start early signs that we're on to something here. Right. And with I would look at those forecasts and add a salmon. Tasha were responsible for saying wow this is a tall order. And what did we see. It's playing out. So it's so much closer to what we were expecting than to what I H s which is the auto forecaster out there was

expecting. Just to give you an idea idea here in 2014 15 when we when we was starting our test intensive Tesla work IHS was predicting for 2022 that the number of electric vehicles sold globally in 2022 would be 250000. Last year it was four point eight million this year. What did they get wrong that you got right there. They're probably listening to the traditional auto manufacturers too much that they that they were listening to the forecasters within those organizations when we're moving away from the internal combustion engine. That was the wrong place to look back towards battery technology. And they weren't paying attention to the advances in battery technology. Thanks to Elan and others as well as the cost declines in batteries they also

weren't paying attention to how quickly China with China is moving aggressively towards policy support perspective. And yes I believe it is. Its sales now are up to 18 percent. Electric vehicles and that's out of twenty five million. And it's a dramatic above Emma Chandra the United States as well. Yes we're we're in the low single digit. We are running out of time. But I am going to push it. And we've got to talk about Elon and we got to talk about Twitter. Elon Musk is interesting. Understatement of the century. And we're very focused. Last few days I've had conversations here about

Twitter and what's going on. But as you know I call all types of sectors as well. And Tesla is part of my day to day. Coverage Is there an element of key man risk with Elon Musk behaving the way that he does. Well I think people have been saying that all along with Tesla because of Space X right. As a result and neural link. And I mean he is our renaissance man but he has ramped up quite a lot hasn't it. Has it has been he has you know as you scale a Tesla

they've got that manufacturing scaling under control. Now the next challenge there and what he is I think sticking around for he just needs to grow for you if you side of it. He needs to stick around for the autonomous side so he and Andre are putting together. So let's bring about talks between hydrogen. Yes. Why is that important. Why does he need stock records for Tesla and any and cruise automation and way Mo. This is the biggest transportation opportunity out there. It is.

As I mentioned before think about this. Ten trillion dollars in revenue versus zero now by 2030. Right. And that's ox bull case or store base case scenario. That's our base case scenario. So nine to 10 trillion dollars in revenues. So I don't think we've seen a figure of opportunity for one. And it's not just one sector. Again there's a convergence going on between among technologies and sectors autonomous taxi networks or robotics energy storage and artificial intelligence. Right. Right. So. I'm going to keep going for about five more minutes sorry. Bit

about three more questions that I just would regret not asking. First is a mechanic's issue really but Tesla what's fascinating is the retail investor interest and there's a potential another stock split on the horizon if you just give your opinion on that about you know the test the sort of monumental gain. The issue of stock split and then more people trying to have ownership of that stock. Well I think you know retail was there way before institutional. And see there's a perfect example of what's gone wrong. Many institutions couldn't even think about putting Tesla in their portfolios until it got into an index. It got into an index when it was 500 billion dollars. Think about all of the alpha generation that institutions made left on the table but

retail investors enjoyed. I think retail investors are feeling empowered. They know more about the future than institutions do and they know we're doing the right work. So I think that's why they were there early and they will be early into everything we're doing because they really love to learn and they're a part of the future. They have one foot in the new world. They're going to make it. So they're excited about it. So they are willing to put up. I've been shocked. How many how many people. And it's not just homes people but come come up to me and say they're down 75 percent. They say thank you. And I'm saying what. You know this would not happen. Of course they enjoyed the big gains before that because they are long term in their time

horizon. They are long term. They really believe we are on to something big. Are they more risk averse or less risk averse. I should say I think you know when. When. When I listen to their controversy about accredited investors and non accredited investors. You know when I think about what that really should mean who knows more. It's not fair that we are blocking these

young people most who don't have the income or asset thresholds because they're not accredited so they don't get access to innovation. So we're trying to change that again cause us to have a venture capital fund in the in the public equity markets. And we're going to start a crossover fund. I can't talk about it. It's not for me. No. See see. I'm not messing with you. Yes. Let me buy.

2022-06-11 21:22

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