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Cathie Wood on Deflation Risk, Tech Stocks and Bitcoin

Mar 15, 2024
Well, you know, it's interesting, we saw yesterday continue today even though we are off our highs as far as

stocks

are concerned. Kathy, it seemed like the more Jay Powell talked, the more excitement you saw moving higher when it came to both

stocks

. and bonds, does this market reaction make sense to you or do you see some irrational exuberance if you will? Not in any case. I saw an overreaction last year to fears that inflation and interest rates were built into the system, like they were in the '70s. and we just didn't believe it at all, in fact we were seeing a lot of early signs that inflation was going down, real

deflation

was setting in, so this doesn't surprise us.
cathie wood on deflation risk tech stocks and bitcoin
I think that what has happened here there are three people who have intervened. In the last week, the ones who really changed their views, one is Larry Summers. Larry Summers was almost apoplectic last year, so this is the former Treasury Secretary, almost eclectic on inflation and I think he really influenced the Federal Reserve because he was very sure that we were. in a 70s style inflation, if you notice, in the last week he said uh uh, okay, now don't indicate what you're going to do in the future, we're seeing some economic weakness here and I think the other thing What I was saying not explicitly was that some prices are going down that I didn't expect to go down, you know, oil prices are about half of what they were last March, so that's the first person, the second person was the secretary. of the Treasury, Janet.
cathie wood on deflation risk tech stocks and bitcoin

More Interesting Facts About,

cathie wood on deflation risk tech stocks and bitcoin...

Yellen and remember, I think last year the market got very upset when she changed her mind on the transitory and uh and and and I think that fueled Chairman Powell as well and uh and turned him into an even more aggressive mode along with the rest of the Los Ford board members said this week that now that inflation is coming down, we're probably going to see the greatest

risk

of getting stuck in low inflation, low growth, that was a big change and effectively saying, "Wow, maybe it was transient". after all, it was a little longer than we expected, who knew that the supply chain problems would last two or three years, who knew that Russia would invade Ukraine and then the third, the third thing that happened, this was really important, I think in the president Q to um uh.
cathie wood on deflation risk tech stocks and bitcoin
Powell himself said: I agree with Lyle Brainerd: we don't think we're in the middle of a wage price spiral and that's another code phrase for 1970s-style inflation, so I think that's what it is. the market responding to the Kathy you talked about. about the threat of

deflation

, so what's your take on that versus inflation? Well, a couple of things that we see in the deflation process because the commodity prices that are at the top of the funnel have been coming down in equilibrium now that We're seeing right now some disruptions in that as China moves away. of its zero covid policy, but I think what is false here is that China has been accumulating inventories, particularly of energy, it has been obtaining energy from Russia at a 40% discount compared to the rest. of us are paying, so why wouldn't you create inventories?
cathie wood on deflation risk tech stocks and bitcoin
So I think that fear probably will be or has been a little overblown in terms of ramifications for inflation, and I also don't think China is taking it off, but anyway we have the funnel that we had at Christmas time, massive discounts, and although we had a massive discount in the fourth quarter, the inventory buildup accelerated, that was the biggest surprise to me, wait a minute, the final sales where that punk, that inventory is built. Even though retailers and others were trying to empty the shelves with these massive discounts, that was very interesting to me, so I think the underlying demand here is basically the consumer protesting against price increases because real average wages have gone down and the consumer is going to Win this battle Kathy I want to go back to the way you characterized what we heard yesterday from the Fed and from Jay Powell because he also said some other things like more rate increases would be appropriate.
It is premature to declare victory. We have a lot of work. It remains to be done and if our outlook turns out to be true then I don't see us cutting rates this year, which convinces you that your views have changed well. I think he's looking at the bond market and he's saying what he should say like The chairman of the Federal Reserve, who has been very worried about inflation, can't change a dime, but look at what the bond market says: the Long-term bond yields peaked in October at 4.3 percent and today we're down, I think, to 3.35 percent.
Knowing that if you consider the 10-year bond yield as an indicator of what nominal GDP will actually be more or less, a little bit of nominal GDP growth over the next 10 years need not leave much room for that much inflation. If we are going to have real growth in the next 10 years, then I think the markets are speaking loudly. I think the inverted yield curve, we're still around 70 basis points, it hasn't been, we haven't seen it this low since the early '80s when Volcker was trying to strangle inflation out of the system. Kathy, forgive me.
I want to chime in for a second because do you expect the FED to cut rates this year? I wouldn't be surprised to see the FED cut rates this year. uh and one of the other reasons we're very focused on this message that the bigger the

risk

is deflation, it's also a big opportunity. When we look at deflation, there is good deflation and bad deflation, it is bad deflation. It's caused by demand destruction, well, deflation creates demand and that's what our

tech

nologically enabled research is focused on. Innovation that descends through learning curves that are expressed in Costa cost drops that become price drops.
You'll notice that Tesla is cutting back. prices and a lot of people come to the conclusion that, oh, they are having a lot of problems now that there is a lot more competition, no Tesla can reduce prices now that the supply chain problems are happening to us because it is writing a cost curve, the battery cost curve goes down and I think your battery costs are lower than anyone else's, your powertrain costs are more, more correctly, you said, they're lower than anyone else's, so that wants electric vehicles to proliferate to save us from environmental disaster, that is his mission and he is going to lower prices when you lower prices the units explode, it is not a surprise to us, even without price cuts, last year the demand of electric vehicles increased more than 60 percent, while demand for gasoline vehicles decreased.
I think seven percent, uh, the consumer prefers. There's been a shift, we're now in prime time for electric vehicles. I want to get back to Tesla in a moment, but I want to get back to their Arc Innovation ETF. We've done the story on Bloomberg. You guys had the best month on record. for the fund up to 28 all Arc ETFs the eight eight ETFs up seven of them by double digits do you see that as a vindication for your investment theses and do you think you can continue? Yes, we believe that innovation was one of the biggest victims. of the massive increase in interest rates that we saw last year in less than a year, I think the 18-fold increase in interest rates was like a massive earthquake and the other victim, of course, was the other asset of very long duration that has been around for a long time.
Term bonds were hit at least until October, if my numbers are correct, the long term bond market hasn't seen something this bad in a year since the 18th century, you know, we're not talking post world war. Talking about it gives you an idea of ​​the impact on the system and the impact on our strategy was palpable. We felt it every time the president spoke with a pout. We're speaking with Kathy Woods, CEO of Arc Investment Management. Kathy Carroll just asked you about the performance in January and mentioned that it's the best month ever for the Arc Innovation ETF.
The thing is, the jump in performance has not been found in the form of flows with investors putting money back into Arc, perhaps this is because it has been a difficult couple of years for the ETF and many of its ETF, how can they be recovered? Actually, I don't think we've lost many investors. I think the surprise for most people is how well we held our assets in our underperformance that started on February 21st, when people were starting to get vaccinated to go back to work and these inflation fears started to emerge, from the February 21st we have seen a massive drop in our innovation strategies and on the 21st we had very significant inflows, most of which I think the network was 17 billion that year last year again, a horrible year.
I think for the year that our flagship was so ark, there were inflows of over $1.5 billion and I think that surprised a lot of people. What we saw was As they averaged down, many of our loyal shareholders averaged down and I think one of the reasons they did that is because we were there every step of the way giving away our research, assuring our clients that innovation actually solves problems and that we now have so many problems created by supply chain problems, the war created by the Federal Reserve and the destruction of demand, that it is affecting the margins that

tech

nology will solve in terms of increase of productivity and I think a lot because we are so prolific in our research that our analysts are amazing in terms of the type of original research that they are doing, so our clients and others are reading research from us that they don't see from anyone else or from anyone at all and I want to get even and I want to get into that in a moment because I love Kathy, like you have over 150 pages of your big ideas for this year and it's a lot of things that we talked about that I want to ask you, after a fall of 67 in Arc Innovation, the ETF last year and me.
I know it was a difficult year for many assets. Do you find that any of your investors treat Arc a little more cautiously? I think one thing that happened last year is that we were able to handle a number of documents that we called. In our ground war, we were trying to help investors and advisors understand that if you take a look at truly disruptive innovation, which is all we do, and you look at other growth portfolios, large-cap growth, you know growth. in general, as well as the main reference points. like the NASDAQ, you won't find much truly disruptive innovation in them, so because we were taking such a bad hit, we also saw investors take tax losses on some NASDAQ and other strategies and move to our strategy, which looked so affected because they believed we were going to recover faster, we were the most affected, our research would suggest that the $200 trillion we expect by 2030 would be the market valuation given to disruptive innovation, that had changed, that had not It has not changed and so if you have a five year investment timeline, Horizon yeah, moving towards our strategy and by the way, we are the new NASDAQ, which is one of the ways we were trying to convey, look if you want to look . the future and truly disruptive innovation in the same way that the NASDAQ, uh, the NASDAQ performed in the '80s and '90s, that's where we went.
Nation, okay, look at that now, you're not going to find the kind of disruptive innovation that certainly doesn't dominate those indices, maybe 25 of them, that's the perfect transition, Kathy, for you to evaluate what we look for from the companies that report this Later, companies like Apple, Alphabet, Amazon, these are not companies that you are necessarily betting on, these are companies that you think can be disrupted. Are you keeping an eye on them, what can they tell us about what the economy is like, and do you know what Arc should be looking at? Yeah, well, you know when I say we don't own those in our flagship strategy, we do own them in some of our more specialized strategies, uh, but these are the companies that have enjoyed incredible success, created great markets and Growing ten times 100 times from here is going to be difficult, we are not saying that they are not going to be successful, but We are saying a few things: take Amazon Amazon is not a social network, we have moved into a world of social commerce, so We own Shopify.
Shopify supports Instagram and Tick Tock and others that have that that are really taking social commerce and expanding it, um uh. So Amazon is not going to become a social network, it's not, it's a good online retailer, uh, uh, and I would put it in a more mature category of online retail, that's not what we do if you look at Google. or the alphabet, everyone speaks. about the GPT chat and we believe it will put the search at risk. Search represents 95% of revenueGoogle. We now also believe, however, that Google will also leverage AI. I mean, it has its own deep mind, it's one of the best AI companies in the world, but I think it's been so caught up in fears about the legal liability associated with the dangers created by what's going on with Microsoft Kathy in the big picture?
Microsoft investment in GPT chat? Do they have the potential to overtake Google when it comes to search because of the way they are leveraging AI. I think that is the big threat. I think that's why Sundar went to code red on Google. I think they are going to become very aggressive. So yeah, we are absolutely focused on what open Ai and Microsoft are going to do together Kathy, you know one thing and you know for our television and our streaming service and YouTube we have Apple Amazon stock prices meta and alphabetical up there I mean, you're looking at the meta up to 20+ today it was highest at its best levels of the session.
I like how they think about innovation and things that will impact us in the coming years. It's the metaverse, something you guys think about. a major trend or to be determined, well, yes, in Japan we sub-advise a fund for Nico Asset Management, um, let's call it metaverse, so yes, we are in the early days of what will become very immersive digital experiences, in fact , we believe that more than half of our spending will end up online rather than uh uh through physical stores uh and that's part of our Big Ideas uh this year our team uh uh led by Frank Downing and Nick Roos have done an excellent job Andrew also uh putting together how this The new world is going to work, so we absolutely do.
I think what happened with the meta last night. I heard the call it was fascinating. I think what's happening is that the meta has a response to the tick tock. Its reels and the reels are taking off. They are also extremely. they focused on the use of artificial intelligence as they are activating this platform and WhatsApp is also becoming a very important platform that they have not monetized and now they are activating it, it is really fascinating and you know, just to give you an idea, Delta. is working via WhatsApp right now to inform passengers when something goes wrong and dramatically improve customer service so you know this could become a very big commercial use case so yeah a lot of big markets faced The other thing Mark did was use the word efficiency, he must have used it 15 times the investors liked it and in that sense he was also using artificial intelligence because like us at Big Ideas, and you can find Big Ideas on our Dash invest.com um and Big Ideas we show the productivity increases that are possible.
Thanks to artificial intelligence, it is these companies that could be some of the biggest beneficiaries if they leverage AI correctly. I think a lot of people are looking for the killer app as they look. These viral applications that the Internet delivered right, the best application for artificial intelligence is productivity games and any company that doesn't take advantage of them is probably not going to be one of the big winners and I think just another thing about AI. Much of the hype is around companies that have AI in their names. I know the real winners here are going to be those companies that have proprietary data and have a lot of it, have the best domain expertise, the best AI expertise, the best clusters of high-quality data to basically create new businesses in your big document. from Ideas, you're talking about big ideas again and I love when we talk about this because everyone on Twitter has a comment, but you're sticking to your million dollar Bitcoin forecast despite what we saw.
Think about a drop from 65 last year, people say to me, is she really really sticking to this? Why the confidence in that, despite everything? Well, confidence actually got stronger last year. Last year was a terrible year for everything related to cryptocurrencies, but. If you think about what happened, it was the opaque centralized players that went bankrupt with FTX Celsius uh three hours of capital and what did we see from Bitcoin. Bitcoin is completely decentralized and transparent. It started due to 0809 lack of transparency in the traditional financial system. Service ecosystem and I remember when we did our research and art, Laffer.
I mentioned it. I mentioned it the first time it was on his show. He explained to us what Bitcoin meant to him and it was incredible art, so this is a rules-based market. a digital monetary system based on rules and it is global and there is no human intervention uh it is very disciplined it is mathematically measured to reach a maximum of 21 million units in the last year the response to in the last three years the responses to covid the fiscal and the monetary responses you know in many countries are causing hyperinflation and you know the fiscal crises we are seeing protests and riots everywhere.
Well, where do these people go to get an insurance policy against an implosion in their purchasing power and wealth? in something like Bitcoin, Bitcoin is an insurance policy and it is an insurance policy for everyone against the confiscation of wealth.

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