FYI - For Your Innovation: Year End Q&A with Cathie Wood

ARK Invest ARK Invest 1/5/23 - Episode Page - 18m - PDF Transcript

Welcome to FYI, the four-year innovation podcast. This show offers an intellectual discussion on

technologically enabled disruption because investing in innovation starts with understanding it.

To learn more, visit arc-invest.com.

Arc Invest is a registered investment advisor focused on investing in disruptive innovation.

This podcast is for informational purposes only and should not be relied upon as a basis for

investment decisions. It does not constitute either explicitly or implicitly any provision of

services or products by Arc. All statements may regarding companies or securities are strictly

beliefs and points of view held by Arc or podcast guests and are not endorsements or recommendations

by Arc to buy, sell, or hold any security. Clients of Arc investment management may maintain

positions in the securities discussed in this podcast. Hey everyone and welcome back to FYI,

the four-year innovation podcast. I'm Michael Kroemer, product marketing manager here at Arc.

On today's episode, we'll be featuring our CEO, CIO, and founder,

Kathy Woods, special year-end edition of In the Know, which we published last week,

in which Kathy answered investor questions ranging in topics including general market

conditions, inflation, deflation, corporate earnings, interest rates, disruptive innovation,

Arc's investment process, supply chain, and the outlook for 2023. We hope you enjoy today's episode.

Greetings everyone. Well, I am here once again. Didn't expect to do an In the Know,

but we have been getting a lot of questions now that we're approaching the end of the year and

everyone's thinking about what will next year hold. I'd like to take a moment to answer those

questions. This will be pretty quick compared to the typical In the Know, but we were getting

enough questions that I felt, okay, let's just do this one more time. The first question,

our market outlook for 2023, inflation, interest rates, corporate earnings,

and how innovation should fare in that environment. Okay, well, we know that we're

getting a lot of deflationary signals, but the Fed isn't really buying into that yet.

But we think that the bond market, though, will start to convince the Fed. So the bond market

is telegraphing either much lower than expected inflation or recession or both. And we've seen

the 10-year Treasury bond yield drop from four and a quarter to three, it got down to 3.45,

it's around 3.6 right now. So that doesn't leave very much room. If you assume that the long bond

is kind of a proxy for how fast nominal GDP will grow, it doesn't leave enough room for

much growth and inflation. And we also know that the market always leads the Fed.

And I think the bond market is speaking very loudly. Jeff Gundlach, very interestingly,

double lines, famous bond investor, very, very successful. He has made the point, okay,

it does look like inflation is coming down. Why is it going to stop at 2%? And we would agree with

that. We're seeing a lot of deflation in the pipeline, commodity prices, discounts at retail

during the holiday season to clean the shelves of massive inventories. So we think that's going

to show through in terms of inflation. And very importantly, housing has taken it on the chin

this year. Usually the Fed is very sensitive to that. Autos as well. They really went nowhere

and now used car pricing is down 14% on a year-over-year basis. So inflation will come down.

And innovation actually is going to be part of that equation. The truly disruptive innovation

platforms around which we have centered our research. So gene sequencing, robotics, energy

storage, artificial intelligence, and especially artificial intelligence, as well as blockchain

technology, all of them are deflationary in nature. Good deflation, it should cause a boom

in the products and services associated with innovation. But deflation, another source of

deflation. So our confidence there is building. We've been right on the inventory bill. The

commodity price decline. And I think normally the market would have responded already. The

market is waiting for the Fed. And we think the Fed's rhetoric will change first and then its actions

will change. And we think that's all going to take place in 2023. Now, another question. Given that

our strategies from their peaks have dropped anywhere from 60% to 80% since February of 2021.

So this has been almost two years. Why do we not turn defensive like most managers are doing?

Well, there's a very important explanation for that. We do one thing. We do not pretend to be an

asset allocator. Our research and our investment investments are centered on disruptive innovation.

And so when advisors and individuals choose our strategy, they're not choosing it alone. They

have more diversified portfolios, of course, including real estate. The biggest asset most

consumers have is housing. So we are one part of an investment portfolio. And therefore we would

never be using cash. We would expect advisors and individuals to basically raise cash and

segregate it from their investment portfolios. In terms of our strategies, we during downturns

concentrate towards our highest conviction names. And so we have been doing that now for

nearly two years. And the history, history would suggest, and we have a paper, a white paper on

our site about this, that that concentrations strategy plays out very well in the subsequent

rebounds. And we do think this rebound will be quite powerful. This year has been the most

difficult year of my career, worse than 0809. And I would venture to say that it has been the most

difficult year of many investors' careers. The only thing that worked this year was energy. It's

up almost 50%. And many people are asking us, why don't we diversify into energy since it's working?

Well, the reason for that is we think it will stop working. If our forecasts for electric vehicles

and autonomous taxi platforms are correct, then oil demand could drop by roughly 30%. 30 million

barrels a day during the next five to 10 years. And we believe that demand destruction has already

started. It looks like oil demand peaked in 2019. And we're still in the process of peaking out,

I would say, in the 100 million barrels per day range. But we think the resolution of that

basing period here is going to be down. So we wouldn't be investing in energy. And we think

the indexes that have rebalanced and now are including more energy are mistaken. And those

investments, that rebalancing will not work out. Now, another question. You have been buying more

Tesla and other stocks during the downturn. And yet the prices have fallen further. And our

performance decline has worsened with interest rates and prices fluctuating so widely. And in

this case, they probably mean increasing. Will an investment focus on innovation work? Well,

we believe that the leading indicator correctly is inflation and it has peaked. The inflation rate

has peaked. Almost every measure of inflation has peaked. Most of those metrics peaking out in

March or June of this year in the first or the second quarter. So typically, that's a good thing

for innovation. But as I just mentioned, I think the market is so skittish and has been so terrorized

by the most rapid increase in interest rates ever. We have never seen an 18-fold increase in

interest rates within one year. It has truly terrorized the markets. And I think that the fear

is palpable. In fact, I think according to the Bank of America surveys, recent surveys of fund

managers and advisors, it's probably the advisors, we haven't seen this amount of cash on the sidelines

since I think it was 2006, maybe even 2001. I do know also the same survey shows that the put-to-call

ratio in the U.S. market, meaning those short relative to those long put calls, is at 1.5 now

and it has not been that high since 2001. So we have an incredible amount of fear in the market

and that actually is the best time to average into these markets. I remember in late 2020, early 2021,

we could do no wrong. Anything we said was gospel at the time and I knew that that wasn't right.

And at the time, I remember saying, keep some powder dry. It is for these moments or averaging down

throughout a period like this that one keeps the powder dry. This period seems to be the flip side

of the late 90s. The late 90s was an irrational increase in tech stocks, appreciation in tech

stocks. And it was incorrect. The technologies were not ready. And even if they were close to

being ready, the costs were way too high. So technology is not ready. We didn't get the

cloud till 2006. We didn't get the big breakthrough in AI, deep learning, until 2012. The cost for

DNA sequencing, $2.7 billion for one genome back in 2003. That number is down to $500 now.

We are ready for prime time and yet investors are doing the opposite of what they did during the

late 90s. They're running away, running for the hills, running for their benchmarks. And we think

that innovation is going to pose a problem for the benchmarks. So you bet we think innovation

is going to work. We think it's going to work in a big way. We are ready for prime time for these

five innovation platforms. Another question, investors seem hesitant to invest now for long

term growth given supply chain disruptions and the economic downturn caused by rising interest

rates. Why do we believe that now is a once in a century investment opportunity? Well,

a couple of reasons. Innovation solves problems and we have a lot more problems now. Even more

than during COVID, we have corporations now experiencing margin pressure and we have individuals,

consumers perhaps worrying about their jobs. And when we get into a period like this,

businesses and consumers are willing to change the way they do things

and they embrace innovative solutions to their problems. Now, this once in a century is not an

understatement. We have not seen more innovation platforms evolve at the same time ever. The closest

is about 100 years ago, telephone, electricity and automobile. Interestingly, back then, we were

just getting over a pandemic, the Spanish flu, and over a war, World War I. And at the same time,

we were experiencing incredible innovation. And so very similar dynamics and what happened?

Inflation peaked in June of 1920 at 24%. And within one year, it was minus 15%.

We think we're going to experience a mini version of that during the next year. And then what happened?

We launched into the Roaring 20s when the stock market had, I believe it was compound annual rate

of returns of 25% for the next eight years. The Roaring 20s, we think we have a setup here for

the Roaring 20s. And it is all around innovation. So again, we do think about you every day.

We are heavily invested, not only in our own funds, all of us at ARC, but in our own company.

We truly believe that our research is the best on innovation in the market. We give it away.

Most of our naysayers, I would venture to believe, do not read our research because it is compelling

and it is centered on Wright's law, which has served us very well over the years. So it is darkest

before the dawn. And the best time to invest, according to Warren Buffett and the great investors

of our time and of all time, is when there is so-called blood in the street. It's a crude saying,

but it means when markets are deeply into bear territory, you should have, there's a cycle of

fear and greed, and both are healthy. The fear should occur at the top of cycles, taking profits,

and the so-called greed part of that dynamic should occur at the bottom of cycles. And surely,

after maybe an 80% reduction on average in our various strategies, we are closer to the bottom,

certainly, than to the top, as we were in February 2021. Then we said spare some powder.

Now we would say continue to average in with that powder. So with that, I wish you a blessed

holiday season and we'll look forward to sharing more thoughts and ideas with you in the new year.

ARC believes that the information presented is accurate and was obtained from sources that

ARC believes to be reliable. However, ARC does not guarantee the accuracy or completeness of any

information and such information may be subject to change without notice from ARC. Historical

results are not indications of future results. Certain of the statements contained in this

podcast may be statements of future expectations and other forward-looking statements that are

based on ARC's current views and assumptions and involve known and unknown risks and uncertainties

that could cause actual results, performance, or events to differ materially from those expressed

or implied in such statements.

Machine-generated transcript that may contain inaccuracies.