WBD570 Audio Transcription
Cathie Wood on Bitcoin
Release date: Friday 21st October
Note: the following is a transcription of my interview with Cathie Wood. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.
Cathie Wood is the founder, CEO and CIO of Ark Invest. In this interview, we discuss investing in disruptive technologies, the importance of research for investment, deflationary signals, uncertainty in the Fed’s decision-making, and Ark’s continued bullish outlook for Bitcoin.
“My background is both economics and finance. So I feel very confident in what I’m saying: this is the first global private, meaning no government oversight, digital rules-based monetary system. When I’m explaining it like that I ask everyone to listen to each of those words, each one of them is very important. This is one of the most profound innovations of our time.”
— Cathie Wood
Interview Transcription
Peter McCormack: We're joined by Liz today.
Cathie Wood: Oh, Liz.
Peter McCormack: We always have somebody have up on there, so it's been Peter Schiff.
Cathie Wood: Okay.
Peter McCormack: Yeah.
Cathie Wood: Wow, kind of crazy what's going on there.
Peter McCormack: It is. The only way to call it in the UK at the moment is a shit show!
Cathie Wood: Yeah, I have different point of view though, I think, than most people. Are we on; are we going?
Danny Knowles: We're going.
Peter McCormack: This is it.
Cathie Wood: Oh, we're going? Okay.
Peter McCormack: We're on.
Cathie Wood: Yeah, so I am a disciple of Art Laffer, Laffer Curve supply-side economics, and I actually think cutting taxes is a very good idea because I think it will, especially with Brexit now, it will distinguish the UK that much more from Europe, which if you ask me, is the real you-know-what show.
Peter McCormack: Yeah.
Cathie Wood: Right?
Peter McCormack: Well yeah, and we also have this opportunity in the UK now, specifically with Bitcoin.
Cathie Wood: Yes.
Peter McCormack: We aren't restricted by the EU.
Cathie Wood: Right.
Peter McCormack: We have an opportunity to become the centre for it, and it's something I'm trying to work on. You've lived in the UK, right?
Cathie Wood: Yes, I was very young; I lived near Cambridge for five years.
Peter McCormack: That's not far from where I'm from.
Cathie Wood: Yeah.
Peter McCormack: So, I tell a lot of people where I'm from and they've never heard of it, but you've probably heard of Bedford.
Cathie Wood: Yes, I have, absolutely.
Peter McCormack: Since you've been there, they've built a bypass, so we can get there in 20, 30 minutes.
Cathie Wood: Oh wow, very good.
Peter McCormack: Did you also live in Ireland?
Cathie Wood: Lived in Ireland for a year as my father was moving from one set of contracts to another in the United States.
Peter McCormack: Dublin?
Cathie Wood: No, we lived in the southwest part of Ireland, so Kerry, the Dingle Peninsula, and I was fluent, at the time, in Gaelic; they'd call it Irish now.
Peter McCormack: So, my dad's Irish.
Cathie Wood: Oh, really?
Peter McCormack: Yeah, he lives in Donegal.
Cathie Wood: Oh, my father's from Donegal; I was just there.
Peter McCormack: No way!
Cathie Wood: Yes, near Letterkenny.
Peter McCormack: Of course, I know it. Well, my dad lives in Ballintra, which is just south of Donegal, and he grew up in Laois, moved to England and then retired back there about 12 years ago; that's funny.
Cathie Wood: Yes.
Peter McCormack: Well, welcome to What Bitcoin Did. You're one of three people I had left on my target list because I've managed to interview everyone; I've been lucky, I've had Bukele and Szabo and some people are very difficult to get, and I had you, Jack Dorsey and Elizabeth Stark left.
Cathie Wood: Oh, well I'm honoured, thank you.
Peter McCormack: Well, we're honoured. I messaged you on Twitter once because you followed me, which by the way, I'm sorry about my Twitter, but…
Cathie Wood: Oh no, I was just looking at your feed today; no, you're very interesting.
Peter McCormack: I'm a little bit provocative sometimes.
Cathie Wood: Yes, that's what I like.
Peter McCormack: Well, thank you for coming on the show; there's a lot we want to talk to you about, we're going to try and get through a lot today. Danny also was very excited about this; we actually came to Miami specifically to meet you.
Cathie Wood: Oh, thank you.
Peter McCormack: I've known Yassine for a while; Yassine's been on the show and he's helped --
Cathie Wood: Our fearless crypto leader, Yassine Elmandjra.
Peter McCormack: That word's banned around here!
Cathie Wood: Oh sorry.
Peter McCormack: It's Bitcoin.
Cathie Wood: Okay.
Peter McCormack: But yeah, so it's a rare opportunity to talk to you, so I might cover a few things that seem a little bit basic, but I think what I know from speaking to the people who are associated with the show, the first thing everyone wanted to know is your background. We, as a team, were talking about this beforehand, and we've seen you do all these interviews but we don't really hear you talk about your background, how you came to be running ARK; what was the journey?
Cathie Wood: Yes, okay. Well, Art Laffer was one of my professors at the University of Southern California, introduced me to Capital Group on the West Coast. Capital Group, at the time, and still I believe, was the best research organisation in the asset management industry, I believe, and so I got there and one of my first projects was to work -- now, this is going to date me, and that's fine, I'm proud of my age -- so I was in college when I started at Capital, it was 1977, and --
Peter McCormack: The year before I was born!
Cathie Wood: Before you were born. And my first project was to work on Hong Kong 1997; think about that; 20-year time horizon. And I thought to myself, "I love this, I mean the world is my oyster, we get paid to learn; that's unbelievable". So, I fell in love with the business back then, and I've seen the arc of our business, and what I mean is not ARK, I mean arc. So back then, there were no computers, no wireless phones, nothing, we barely had whiteout, that's how primitive we were, but we were doing real research and a lot of critical thinking about how the world was going to work, what companies would do well in this new world.
We've gone from that, and the heyday of that was the 1980s and 1990s, and then we had the tech and telecom crash, and the 2008/09 meltdown, and the world and our business has gone passive. If you go to some of these conferences, ETF conferences for example, investors don't even really know what's in these ETFs and they don't care; all they care is they're going to act a certain way in different kinds of market environments. So, the art associated with active management, I think, has been lost in great measure because of these crises and risk aversion, career risk, business risk.
Anyway, so I did make my way, Capital Group, Jennison Associates; I was there for 18 years, grew up there. Sig Segalas, incredible mentor; he's still the Chief Investment Officer there at the age of 88, I think.
Peter McCormack: Wow!
Cathie Wood: Isn't that amazing? And then I ended up at AllianceBernstein after starting a hedge fund when we worked for -- it was the largest woman-owned hedge fund in the world at that time, and we hit it at a perfect time; it was 1998, 1999, 2000. And my partners, whose family's fortune this was, decided okay, we had tripled their money and we weren't going to build out institutionally. So, I went off to AllianceBernstein, the first portfolio manager brought in from the outside, mostly because of the way I've always done things, starting from the top-down and being as bottom-up, stock research-driven as any other team out there, but they wanted someone who had more of a macro orientation and just came at the world from a bit of a different angle.
So, I was there for 12 years, Head of Global Thematic Strategies, but this movement towards passive was intensifying, especially after 2008/09; I was becoming more and more of a different duck, and I realised that I would probably need to leave, and did for that reason, and start my own firm and get back to bringing real research into the investment process and meeting and fulfilling an unmet need out there now. It's unbelievable what's happened in the last 20 years, how much research has disintegrated in our industry, and that is a real problem if we're talking about efficient allocation of capital.
These benchmarks and indexes are all backwards looking. The biggest stocks and companies in those indexes are there because of past success, but if we're right, and this is why I founded ARK, we're going to see more disruptive, I mean truly transformative innovation over the next 5 to 20 years than we have ever seen, I mean it dwarfs even telephone, electricity, automobile; those were 3 platforms at the same time, we have 5 brewing now and they involve 14 different technologies, all of which are growing exponentially. So if we're right, then the traditional world order will be disrupted and those indexes are not going to be a good place to invest.
Now, what I'm fighting here is history because as that 20-year phenomenon took place, it became a self-fulfilling prophecy; the more people investing in indexes, the better those indexes did. But we've had our first breakthrough though with the FANGs, they're breaking down, and those were the biggest companies in most large-cap benchmarks; they're breaking down because of disruption. TikTok is wreaking havoc, and so that's the first case in point, watch out.
Peter McCormack: So, the FANGs are breaking down, we've seen the disruption in social media a little bit more. What are the particular challenges that someone like Amazon or Google will have? Is there a limit to how much Amazon can actually build and create?
Cathie Wood: So, Amazon is not a social network, and it does seem like social commerce is growing in share, so it's not a social network; it's not going to disappear, of course, it'll become like the Walmart of online retail, is my guess, and Walmart's been a decent stock, it's not a barn-burner but they of course have AWS, that's facing a lot more competition from Google and Microsoft. So, it won't be as easy as it has for the last 15 years I would say; it's a mature company.
Now I say that with the full understanding that online retail, as a percent of total retail in the United States, is not much more than 15%, and so there's room to grow, it's just the social commerce. I'm hearing and I'm seeing the demographic be more men, I think, than women, although both are seeing something on Instagram and buying it with Shopify as the backend and really helping that process along. So, it'll become more competitive, but there is a lot of share to gain from traditional retail still.
Peter McCormack: Yeah, it seems like Facebook and Netflix have the biggest challenges there.
Cathie Wood: They do.
Peter McCormack: The problem with Facebook, it was kind of a novelty idea, but I know most of my friends just don't use it anymore, they find it boring; and Netflix just have that massive amount of competition with other streaming platforms but a very high production cost.
Cathie Wood: I think what we're seeing, and we talked a lot about this when we did own Facebook, we said the network effects at work, that venture capital these days was practically built on that, an app that goes viral, but how about the opposite, the negative network effect? Just as you say, many people are dropping off, that means less interesting for many more users. So, we're probably looking at the negative network effect for Facebook. Instagram it seems is still fine, and WhatsApp as well, but Facebook is a huge part of the franchise.
Then you asked about Netflix, they're getting into advertising but it's not going to move the needle as much as people think and, yes, the competition is not just other streaming platforms, it's TikTok, anything that takes a consumer's time, and TikTok is addictive.
Peter McCormack: I have a 12-year-old daughter, and occasionally she sends me a video that she wants me to watch, a little 7-second clip, and then half an hour later I'm still there clicking through, clicking through.
Cathie Wood: That's right, and they'll learning more about you so they can really get you.
Peter McCormack: Yeah, it is interesting. Have you spent much time researching the work that Facebook has been doing with the metaverse, and do you believe that is a significant opportunity? It feels like this is kind of a little bit of a hail Mary for them to save what they were.
Cathie Wood: I was reading an article about their efforts in the metaverse yesterday; a reporter, I think it was the New York Times, I'm not quite sure, maybe it was Bloomberg, was saying, "Okay, I need to learn about this metaverse", and you could tell there's a little bit of a movement stirring, but the hardware is a real source of friction.
When we think about the metaverse, what's the first metaverse experience I've had? It was Zoom, except it's with our real faces and not avatars. Some people enjoy not seeing other people and living in that world; I don't think it's going to be as mass market as any of their current products. I think it'll be interesting to see how they weave NFTs into the ecosystem.
Yassine and I were speaking on the way over about artificial intelligence and how, with the creator community, AI is going to do some mind-blowing things, and NFTs and AI could be a beautiful match. Facebook's advanced in artificial intelligence, but when you say, "Hail Mary", I would say this is going to take years for them. I think, as the negative network effects associated with Facebook evolve, it will be very difficult for them to make that up with the metaverse; I think maybe in the next five years, maybe.
Peter McCormack: Yeah, I found myself increasingly moving to Twitter now; I barely use Facebook as the novelty's worn off and there were just too many adverts. I feel like, in the race between the two of them, it's kind of like the hare and tortoise really and I feel like Twitter's been the tortoise, building the experience first and always focusing on that first, where I always felt like Facebook sacrificed the experience to monetise.
Cathie Wood: Monetisation, yes, and Twitter of course did not, and that's why one stock did very well and other stock did not, but we'll see what happens with Elon. I'm excited, I like his idea around no censorship, so we'll see what happens. I'm sure it'll go to another extreme and there will be some kind of iteration.
Peter McCormack: What is it like though running a firm that invests in such disruptive technologies, because it's a bit more of a gamble in some ways because you're gambling on innovations working? I've only invested in two things, which is myself and Bitcoin, so I'm not an investor, I don't know anything about investing, and the reason I invest in Bitcoin because it is a disruptive technology and I believe in it and I think it will change the world, but in doing so I'm living the rollercoaster of that investment.
Cathie Wood: Absolutely.
Peter McCormack: Is it similar across all speculative kinds of disruptive technologies?
Cathie Wood: So, the way we go about our investing is we identify the technology at the core, right, and then we try and understand the learning curve and those are expressed through cost declines and ultimately, price declines. We're looking for technologies that are going to span sectors, so they'll start maybe niche but will ultimately go mass market, so these cost declines open up new markets over time. And then finally, these platforms serve as launching pads for more innovation, so they'll be perpetuated.
We use something called Wright's Law as we're trying to figure out learning curves, and Wright's Law says, "For every cumulative doubling in the number of units produced", so this is more in the physical realm, "costs will decline at a consistent percentage rate for each technology", and these rates are pretty phenomenal. If you're looking at DNA sequencing, it's around 40% for every cumulative doubling, one to two, two to four, and we're at a very low base in many of these.
Our electric vehicle forecast was much closer because we saw how rapidly battery costs were coming down and how the total cost of ownership of an electric vehicle would be lower than that of a gas-powered vehicle, and that was about two years ago; no wonder electric vehicles have taken off. We're known for our Tesla investment and that's because we're following this cost decline and saying, "Wait a minute, this is going to cross over electric vehicles, the sticker price", this is before COVID and all the supply shocks, "this year or next year", and these better cars and they're more environmentally friendly; they have a lot of going for them.
So, we are always surprised at how long it takes others to see that this world is happening, and the reason is the way that our financial markets are set up. Auto analysts were supposed to be the analysts on Tesla, well they are analysts of internal combustion engine machines, they're not the right analysts. We need battery analysts, we need robotics analysts when we go to autonomous, we need artificial intelligence analysts, and you need them all to collaborate. That's anathema in the traditional world, there's a lot of turf warfare around stocks, "No, it's mine". Well, there's going to be a lot of that in the innovation space because of all of the convergences between and among the different technologies.
So, I think the surprise to me is how long it takes traditional Wall Street to catch up, and we need the whites of the eyes of surprises, earnings surprises, revenue surprise, unit surprises, share gains, and even then it takes a while. But I always say to our team, and I think what inspires me every day is our analyst team, they're coming up with new ways of looking at the world, they have one foot in the new world, so always bringing new ideas; what I always say to them is, "Truth wins out, truth will win out".
Now sometimes, if you look at what happened during the bubble in the late 1990s, sometimes the market's willing to look out 10 years, 20 years, and value stocks on the number of potential eyeballs they might have at some point around the world; that was the crazy 1990s and many companies were funded then that never should have been funded. Today, we're in the opposite environment, the time horizon is one quarter, they want their profits now and are very short-sighted. So, it's a very difficult environment for our strategy but innovation solves problems, we have many more problems.
COVID was the launching pad for our strategy, we could do no wrong in 2020; innovation solves problems. Then inflation and interest rates start moving up, and we can have a discussion about that, we might have a little bit of a different point of view, but our stocks were the biggest victim because of fears of inflation and interest rates. But again, inflation and interest rates are causing more problems, and innovation does solve problems.
I think the growth rates, the exponential growth rates of our companies should overcome any fears about inflation and interest rates. It is the more mature growth companies, like the FANGs, that really need to fear this kind of environment. Nonetheless, with one quarter time horizon and RPEs in the stratosphere, compared to others, even though we assume they're going to market multiples within five years, we're terribly disadvantaged in a one-quarter time horizon market, which is not what investing should be.
Peter McCormack: Yeah, it's an interesting point you make there with regard to your price being a victim of the markets and a lot has been made of the fall in the price, but is there more context of that in terms of price appreciation over previous years? The poor analogy I can give you is, whenever the Bitcoin price drops, my dad calls me and he's like, "Have you sold some; why haven't you sold some? It was at $70,000, now it's at $20,000"; he did the same 4 years ago when it was $20,000 to the $3,000.
I said, "Well firstly, Dad, I'm hugely significantly up, I've been investing since 2017, and also my time horizon on this is over a decade, so I just kind of tend to ignore that". What's the context of the performance of your ETF over the longer term?
Cathie Wood: Well, first of all, you're going to win.
Peter McCormack: I hope so.
Cathie Wood: You will, you will, and we do the same thing but we perhaps do something, maybe you do this, we average down and concentrate into our highest conviction stocks. Now, if you only have two assets, you and Bitcoin, I guess that's a little bit more difficult to do. But we started out last February, February 2021, we had been up 360% from the bottom of the coronavirus to the peak, our peak in February of 2021, and during that time, we expanded the number of stocks in our portfolio because we had been highly concentrated at the bottom in COVID towards our highest conviction names. So, we went from roughly 33 names to 58 names; there were IPOs, there were lots of exciting opportunities.
Then, starting February of 2021 to our low in May, and we think that's the low but we're getting close there again, you never know, the Fed, I do believe is a big menace here, we were down 75%; think about that, up 360%, down 75%.
Peter McCormack: I can't do the maths on that; where does that put you?
Cathie Wood: See, someone just asked me the question saying, since inception, our strategy is up maybe a percentage point less than the S&P 500 or the Nasdaq, which was single digits, but if you're telling me that after this bloodbath, I'm saying, "Oh my gosh, this is a great setup for the future if we're just behind by that much because we are so much more volatile than the benchmarks". There's going to be a change there too; when the shift away from benchmarks happens, we will be the self-fulfilling prophecy, or we will be the beneficiary of the self-fulfilling prophecy or self-fulfilling trend, which is away from the benchmarks towards innovation because it's going to become so obvious.
So, that 75% decline, why does that happen? It happens because most portfolio managers, even the active ones, so they really are trying to invest, they're still investing close to their benchmarks and they don't want to be so far away from their benchmarks. Our stocks are not in benchmarks except for Tesla, and so Tesla, believe it or not, has held up better than most of our other stocks because it's in the benchmarks. When risk-on happens, then they all start migrating and taking positions in some of our names, and so that gives us the lift.
Peter McCormack: Is it particularly difficult; does it bring a new challenge that the Fed's decisions will impact how your fund performs, and what would you wish from the Fed so that you could just focus on the fund and not what they're doing?
Cathie Wood: Well, we just published an open letter to the Fed today, and basically said, "Wait a minute, how can you be unanimous in your decision-making, you Fed Board members, unanimous at the last few votes, when there's so much conflicting evidence out there?" So, yes, we feel as though the Fed is making a mistake here and that, yes, high beta stocks, which would be our kinds of stocks, more volatile than the market, do get hit disproportionately, but something's happening now and it's happening with Bitcoin as well, which I find very interesting.
So, our strategy bottomed intraday, the flagship, on 12 May, and the S&P and Nasdaq have broken below their lows; in the last week, they broke below their last lows, we did not. Now, maybe I'm jinxing myself and we will now, but our strategy has held up better since May, and same with Bitcoin after the volatility in May. It's held in much better, it hasn't hit new lows, successive new lows; it's in a range, much like our strategy is.
During a bear market, and towards the end of a bear market, our strategy starts outperforming; why? There's a saying in our business that the new leadership shows itself towards the end of a bear market; it's starts outperforming. So, at the end of 2008/09, for example, I was at a different firm, but our flagship strategy bottomed in relative terms on 24 November, I remember it well, yet the market didn't bottom until March of 2009. And in the first quarter, the market, as measured by the S&P, was down 10%; we were flat, and then we came out flying. I'd like to think that's what's going to happen, the problem is the Fed here.
In the piece we wrote today we said, "Please consider the conflicting evidence and at least debate, talk about the risk of centralisation"; this is a massive risk, because it's not just the Fed, it's not the Fed Board members, it's probably one member, and that's Powell, who's insisting on unanimity in their fight against inflation. So, what they're doing, what they've just done, is raised interest rates 13-fold, from 0.25% on the Fed's fund rate to 3.25%, and they're going to go to 4% we believe on 2 November; that's a 16-fold increase in interest rates.
Peter McCormack: How does that impact you directly; has it changed the incentives for investors?
Cathie Wood: Oh, sure, fixed income is more attractive than it was, it's also there's a flight to safety to fixed income, to cash or bonds. So, if you look at what he's doing, I think Chairman Powell thinks he's the reincarnation of Chairman Volcker. Now, I was early in my careering during Chairman Volcker's reign, and he was fighting an inflation that really started with the Vietnam War in April 1964 and then in May 1964 was the Great Society, all of these of social programmes that President Johnson launched. That was the beginning of the inflation that Volcker inherited in 1978 or 1979, I think it was 1979, 15 years, and it was embedded. There was cost, push, people had gotten used to working around inflation, demanding certain wages and so forth; so that was 15 years.
By the time the Fed recognised that it might have overstayed its welcome, it was maybe 15 months; that's a lot different. And this has been associated with supply shocks every step of the way; COVID, supply chain, Russian War, it's hard to separate out. I think the key here, and this is where I'm going to have the biggest argument with the people who really think inflation, the genie's out of the bottle, I believe the velocity of money now is going to start falling again. It actually peaked in 1997, has been falling, it falls at an accelerated rate during crises; and if the velocity of money starts falling now, that M2, it looks like M2's going to come in below 3% year over year for September; if velocity is falling on top of that, that means nominal GDP growth is flat to negative on a year-over-year basis; that's a killer for companies' profits.
Now, in this environment, the reason why we would start outperforming is because our fundamentals are better. We're the new world, our revenue growth is much stronger than GDP, and in times of turmoil and trouble, again, innovation solves problems, revenue growth accelerates; certainly, that was the case in COVID. I think the carnage of the last, certainly in 2021 for us, is our strategy being dismissed by many old-timers in the industry as, "Oh, just a stay-at-home COVID strategy. All those stay-at-home stocks are now going to go into negative growth", which has not happened.
So, it's interesting. I think the Fed is a problem, I think they're making a mistake, I think the world is paying for it. If we think there's pressure here, the emerging markets, we're going to ruin our status as world's reserve currency. I remember, there was a similar situation in the 1980s but we responded to it. When the dollar was causing so many problems for the rest of the world, treasury ministers from around the world got together in 1985, there was both the Plaza Accord and the Louvre Accord; they agreed to sell dollars and buy back the other currencies to support those other currencies, to prevent the deflationary bust that was being caused by currency implosions in the emerging markets and their debt service exploding because it was dollar-denominated debt.
The same thing's going on now, and I think we're going to see more rips in the fabric of the global financial system. I think what happened in the UK around pension funds was really more about banks. Those pension funds weren't going to meet those margin calls and the banks were the counterparty, right, so they had to come in. So, the BoE has already reversed its monetary policy; now they say it's just until 14 October --
Peter McCormack: Well, they just extended again, didn't they?
Cathie Wood: Oh, did they?
Peter McCormack: Yeah.
Cathie Wood: Another week? I think I might have read that; was it today?
Peter McCormack: It just announced today, yeah.
Cathie Wood: Yeah, so maybe another week or something. So, what's happening now, what are these pension funds selling so that they can be made a little more right instead of upside down? They're selling the easiest financial instruments to sell, treasury securities, government bonds, so that's one of the reasons we're seeing our government bonds back up.
So, we've got the BoE reversing, you've got the Bank of Japan and the Chinese Central Bank, PBOC, both of them are supporting their currencies; what does that mean? It means they're selling dollars and buying their currencies, so it's freeing up some dollar liquidity and there is a dearth of duller liquidity out there.
So, I think we're going to see many other central banks doing that, but I also think when the ministers meet, the G20 in November, that the odds of another Plaza or a Louvre Accord-type agreement are going to be pretty high because I think that we're seeing deflation in a lot of indicators now; commodity prices, we're seeing inventories overwhelming retailers. So, I think we're going to see a lot of deflation, for cyclical reasons, and then secular reasons as well; innovation is deflationary but good deflation, it causes bad deflation for companies that are going to be disintermediated or disrupted or destroyed.
Peter McCormack: Well, I have to track the dollar price because all my sponsorship contracts are priced in the dollar and, from the start of the year, it's dropped from $1.38 to a low of $1.05; I think we're about $1.11 now. But it's also become very expensive for us to come here to the US to base this operation; our transport costs, our flight costs have come up, booking an Airbnb; essentially, it's up 25% this year.
So, I've been tracking that in terms of what the impact is on us. I've never known the pound to be so low against the dollar; it was $2.05 the first time I came to the US in I think it was 2006. What I don't understand, and you'll understand better than me, is what are the benefits to the US of a strong dollar but what are the negatives?
Cathie Wood: So the benefit is, it's a powerful anti-inflationary force.
Peter McCormack: So, that's a domestic…
Cathie Wood: That's a domestic consideration, right, and most commodities are priced in dollars, and so forth. The negative is we're going to lose our competitiveness. We're already seeing trade drop off quite significantly; we believe we're in a recession and trade's part of the reason.
Now interestingly, in the third quarter, if we see a positive GDP, it will be because trade is collapsing, meaning imports falling much faster than exports, and so that helps our GDP in a strange way, and the reason it's happening is we have an inventory glut. If you look at Nike's report a couple of weeks ago, global sales up 3.5%, something like that; their inventories globally up 44%; their inventories in North America up 68%; and their inventories in transit, probably mostly from China, up 85%.
So, it's overwhelming what's going on, and so we're trying to cut back on imports, that's going to back up into these other countries as well. We think the globe is in a recession and the dollar is exacerbating the pain. Commodities are priced in dollars and these other currencies around the world are unwinding and just making it very difficult for populations. The Fed tipped its hat to this in some of its last speeches, different members, Powell included, but I think, if we want to remain the reserve currency, this is I don't think the way to do it long run.
Peter McCormack: What do you think the Fed should do then?
Cathie Wood: Well, I think if I were the Fed, the first thing I would do is, from a rhetoric point of view, I would start talking about both sides of the equation. Yes, we see that core CPI and PCE deflator higher than what we would like, 0.6%; but headline, CPI and PPI actually down, negative; did you know that? No, you didn't because all we hear about…
Then there's, in my open letter, I put a table with all these commodities in and how much they've fallen from their peak and how much they're down year over year; yes, here they are, so you can see. You can see when they peaked, gold peaked two years ago, more than two years ago; silver peaked more than two years ago; lumber more than a year; iron ore; DRAM; Baltic Dry.
Peter McCormack: So, is this basically a reflection of COVID, gold and silver was the investment people were making during COVID, and then everything else has the supply shock once markets open back up?
Cathie Wood: Yes, there are two I pay more attention than normal to: gold and copper. So gold, to me, is the inflation hedge that the traditional world has used, and I look at when it peaked, most people don't know that it peaked two years ago; did you know that?
Peter McCormack: I would have guessed.
Cathie Wood: Okay.
Peter McCormack: It was only because it's one of the few things I did track because I was fighting Peter Schiff online!
Cathie Wood: Oh, okay, yes. So, that's two years ago and its stayed in a trading range $1,700 to almost $2,100 for two years, more than two years, and it's broken down; same thing with copper. Now, copper's interesting because there's a shift towards electric vehicles; the copper content in an electric vehicle is two to five times that in a traditional vehicle, gas-powered vehicle. So, copper was levitating between $4 and $5 per pound for a bit over a year, and it's broken down and you can see it's down 20% year over year, gold is down 3%, silver down 11%, lumber down 34%. Food and energy are up but is monetary policy here to exacerbate the problems caused by Russia's invasion of Ukraine and increase the pain around the world of people who are being taxed incredibly by higher food and energy prices? I don't think so.
So, just looking at this, and that last one down there, we saw this last week, so it's hard to get that number, so the industry reported it in the month of August, containerboard. Now, this is what we ship goods around in. Containerboard prices dropped 29% in September and are now down 53% year over year. So, there's real deflation in the pipeline, and then you have this inventory. That's at the top of the funnel, upstream, and then you have inventories at the bottom of the funnel, downstream, that are overwhelming manufacturers and they're going to cut prices to clear that inventory.
Peter McCormack: I was going to say, what is the lag here; when you would start to expect to see an impact on prices?
Cathie Wood: Oh, we'll see this in the PPI, this is going to get into the PPI very quickly, very, very quickly; it's already, as I mentioned before, PPI was down. I think we're going to see sequential negatives in many inflation indicators that are more headline; these, of course, are more upstream.
Peter McCormack: So, do you think this has nothing really then to do with the raise in interest rates?
Cathie Wood: No, I think we're in a global recession and that the Fed thinks that we have a 1970-style inflationary problem, so come 2 November, it will have increased interest rates 16-fold, never happened in our history before; Volcker increased them 2-fold, from 10% to 20%, right. Many people dismiss this argument totally, they say, "Come on, it's such a low base", no, that's the point; we got used to these very low interest rates since 2008/09 and a lot of swaps, and swaps were the problem in the UK, were based on the notion that interest rates wouldn't go up very much, if they go up at all.
So, I think we're going to see a lot more swap-related turmoil and distress out there; it may happen in the US, we know our pension funds aren't as leveraged as the UK pension funds are, or have been, so we don't know where the next accident, by definition, we don't know where it's going to be but I think they raise again and we'll find another rip in the global financial fabric.
Peter McCormack: Well, we know it's causing a problem in the housing market in the UK now because we have 300,000 people a month who come off fixed-rate terms to go onto variable, and that's leading to an increase in the supply of properties; didn't you even say one of your friends has put his house up for sale?
Danny Knowles: Yeah, they've had to downsize.
Cathie Wood: Yes.
Peter McCormack: Because they cannot afford to pay these new variable rates. A number of the mortgage companies have reduced their products available; I think there's a 40% reduction in products. People don't really know what's going to happen, what the Bank of England's going to do; and so in some ways these rises in interest rates, whilst they're trying to combat inflation, they're causing other problems.
Cathie Wood: Havoc.
Peter McCormack: I'm not an economist, I'm just a guy who sits down and just talks crap to people, but it seems to me like, especially in the UK, every time they pull one thing, they're breaking something else.
Cathie Wood: Yeah.
Peter McCormack: To me, it seems like nobody knows what the hell they're doing.
Cathie Wood: That's one reason I'm such a Bitcoin fan, you know!
Peter McCormack: Okay, let's talk a bit about Bitcoin; it is a Bitcoin show. I would be very interested to hear your orange pilling story, how you discovered Bitcoin and what was it that convinced you, that made you realise this is a technology that you did want to invest in?
Cathie Wood: Yes, so when we started ARK, we had four technology platforms; genomic sequencing, robotics, energy storage and then next generation internet. Brett Winton, our Director of Research when we were at AllianceBernstein together, was occasionally bringing into our brainstorm on Fridays this thing called Bitcoin, so that really started in 2011. We started ARK in 2014, I guess we had gone through Mt. Gox and so we said, "Okay, let's start with the next generation internet".
As time went on and we did our research on Bitcoin, and the first paper we wrote was in 2015 and it was in collaboration with Art Laffer, and so I said, "Art, I want you to take this paper, Can Bitcoin Serve the Three Roles of Money, and I want you to tear it apart". Now, Art is known for his fiscal policy expertise, but his mentor was Robert Mundell who won a Nobel Prize for his monetary theory and he was very involved in bringing the euro together, so I don't know how people feel about that these days, but nonetheless --
Peter McCormack: I'm glad we're not part of it.
Cathie Wood: Yes, there you go. So, Art did rip it apart, which was fantastic, and he came back to us and he said, "I've been looking for this ever since we went off the gold exchange standard". He said, "It's a rules-based monetary policy, rules-based monetary system", and he said, "I may not agree with the rule", because he was thinking more in terms of inflation so you'd want a price rule as opposed to store of value quantity, but he says, "But it's okay, it's a rule, and we need to get back to this". I said to him, "Art, how big could this be?" and he said, "Well, how big is the US monetary base?"
Now, Bitcoin was $250 at that time, so it was roughly a $6 billion network value or market cap, and he said, "How's the monetaries?" I said, "It's $4.5 trillion", he said, "There's your answer". I said, "Really?" and I immediately put a lot of money, especially our analyst, Chris Burniske at the time --
Peter McCormack: I know Chris.
Cathie Wood: You know Chris?
Peter McCormack: Yeah.
Cathie Wood: So, our analyst, he was the one really doing the work on the paper and hand-selected Yassine, which has made us very happy. Your question again, I lost that.
Peter McCormack: What was your moment where you realised, which you've explained.
Cathie Wood: So, I don't think I've ever disclosed this before, but I put $100,000 in.
Peter McCormack: At $250 dollars.
Cathie Wood: Yeah.
Peter McCormack: I don't know how many Bitcoin that is; what's that, 400 Bitcoin?
Cathie Wood: I don't even know, and I wasn't counting at the time.
Danny Knowles: It sounds about right.
Cathie Wood: I've kept it all because as soon as he said that, the lightbulb went on.
Peter McCormack: You did that personally or with the fund?
Cathie Wood: Couldn't do it with the fund because we had to find a security, and so this thing called GBTC, which everybody knows now is Grayscale Bitcoin Investment Trust, that had the one-year holding period and they were just cycling through that.
Peter McCormack: Sorry, this is the rules of your fund means you can't buy directly?
Cathie Wood: Yes, ETFs can only own securities and so we had to find one, and we found Grayscale; actually, Grayscale was one block away from us in Chelsea. So, they opened their books and we had to go to the New York Stock Exchange; I mean, we had to do so much to get Bitcoin in.
So, we put it in ARKW, our next generation internet fund first, and then we put it into ARKK, which is the flagship fund, and Chris, when he saw me do that, all of a sudden he felt so much more responsible, he did anyway, but $100,000, it's like, "Okay, she just did that and she did it off my research", and so forth. He doubled down as well; it's a great story because well, it ended well, right?
Peter McCormack: Yeah. How was my maths then?
Danny Knowles: You were spot on.
Peter McCormack: Okay, so you can still only invest in securities?
Cathie Wood: In EFTs, yes.
Peter McCormack: So, therefore, you've invested in companies as well as the Grayscale Trust. How do you feel about the performance of the Grayscale Trust and do you basically see it as a fire sale?
Cathie Wood: I do see it as a fire sale, I do ultimately think maybe it's going to take a new administration, but we'll get an SEC commissioner in there who --
Peter McCormack: Hester Peirce.
Cathie Wood: Oh yes, so we know Hester and we're definitely aligned, and I don't know; she would be very controversial, I'd love it but --
Peter McCormack: Yeah, we would love that.
Cathie Wood: Yeah, I know, but just as you were saying, the UK, there is going to be regulatory arbitrage and the US's risks, and we're already seeing it happen in business moving offshore because of our regulatory system. A different administration and I would say an administration that really cares about making sure innovation is very welcome here from a regulatory point of view, I think will grant Grayscale conversion to a Bitcoin ETF, and then that gap closes and that's a nice day.
Peter McCormack: And we're off to the races.
Cathie Wood: Yeah.
Peter McCormack: What is it like as an investment because it is particularly weird, Bitcoin, it isn't a company and while some people refer to it as a commodity, it's a particularly weird commodity because it's so controversial? Some people have this kind of weird hate towards it even though they don't understand it.
Cathie Wood: Yes.
Peter McCormack: It gets constantly attacked by the media, it is politically divisive, though we are seeing that gap close, we are seeing some people more from let's say the Democrat side come along, Ro Khanna and Senator Gillibrand have all kind of expressed an interest in Bitcoin, which is great because we don't want it to be a partisan issue. But you, as an investor, it must be a particularly weird commodity to be invested in and to try and explain to people.
Cathie Wood: It isn't hard for me to explain.
Peter McCormack: Okay.
Cathie Wood: I mean, when you have conviction in something as a necessary innovation to help solve some of the world's problems -- my background is both economics and finance so I feel very confident in what I'm saying; this is the first global, private, meaning no government oversight, digital, rules-based monetary system. When I'm explaining it like that, I ask everyone to listen to each of those words, each one of them is very important, and this is one of the most profound innovations of our time.
So, my conviction, and it's borne out of our research, it's borne out of great research that Yassine, Frank and David are doing now as well as what Chris has done and the community largely, so there's no doubt in my mind. Many people think that I'm too confident, not just with Bitcoin but all of our strategies, we face the same kind of pushback with all of our innovation strategies, this is nothing new, this feels the same; it's a little different to explain but it's not a company so more finance, but it's a monetary system, which is economics, and I'm comfortable in both of those zones.
Peter McCormack: Do you see a growing interest again in Bitcoin right now; are people talking to you a bit more about it, just because of what's happening in the economic environment?
Cathie Wood: We get questions all the time. I think people love to hear our take on, excuse me, but crypto broadly.
Peter McCormack: No, it's okay.
Cathie Wood: But what we talk about is, in the way I just described Bitcoin, that's the money revolution, and then we have the financial services revolution, DeFi, a little more centralised, and then we have the next generation internet revolution around digital property rights. I realise all of these involve property rights but when you're talking about the creator economy and the blending of consumption and investment, it's probably even more centralised and in that third bucket.
I think when people hear us describe this new world, especially young people, it hits a responsive chord, and the young people are bringing their parents into it, so that's an interesting dynamic; that really hasn't happened in my career before, and they're bringing ARK to their parents as well.
Peter McCormack: Interesting. So, thank you for your time; we could have done this for hours. Hopefully we will do this again because it's just an absolute pleasure.
Cathie Wood: Yeah, it was really fun, thank you.
Peter McCormack: Just to close out with a few questions, what's coming now for ARK; what's the future for ARK; what should we be keeping an eye on?
Cathie Wood: Oh well, we're very excited. I think a lot of people look at ARK and think that we're on the defensive; we are on the offence in a couple of ways. We've just launched a crossover, public/private venture fund and it's our first social distribution strategy, so it'll be distributed on something called the Titan app, which is Andreessen Horowitz's funded company.
More germane to our conversation here is we're launching two new strategies; they're separately managed accounts, so strategies: one focused on cryptocurrencies, and of course Bitcoin's going to dominate that, there are going to be very few real currencies; and then the other one is more across crypto assets and the three revolutions I mentioned, and it will be actively managed. We think there's going to be a lot of opportunity to add Alpha, if you're using Bitcoin as your base, or whatever you want, as your benchmark, with a crypto asset strategy spanning across the three revolutions.
Peter McCormack: Wow. Have you looked at the convergence between Bitcoin and tenth-tier football in England because I think this is one of the best investment opportunities there are?! Well, if you ever get to England and you want to go out to Cambridge and you could take a little journey to Bedford, you can watch some of our football.
Cathie Wood: I would love to.
Peter McCormack: We're top of the league; we've won every game.
Cathie Wood: Oh, I love it.
Peter McCormack: We are the Bitcoin team. This was great, I absolutely love this.
Cathie Wood: I do too, Peter.
Peter McCormack: I hope to do it again, I hope with Yassine, we're overdue having you back on the show as well.
Cathie Wood: Thank you so much.
Peter McCormack: Thank you for coming in and, yeah, hopefully we'll do this again sometime soon and really appreciate you coming in. Do you want to send people to anywhere?
Cathie Wood: Oh well, we have our research, it's on ark-invest.com, and if you want to see how we get to our Bitcoin price target, which is more than $1 million per Bitcoin in 2030, you will see in Big Ideas 2022 how we populate that, and it's all very reasonable; if you look at how we get there, we're not making any extreme assumptions. The biggest assumption is that this is a really important insurance policy for everyone in the world, so it's a very big idea.
Peter McCormack: Well, it depends what $1 million buys you then as well, we'll have to see, but if it does, I think my team's going to be very successful because we hold Bitcoin and that's our strategy; that's how I'm going to get them up the leagues. Cathie, thank you so much for this.
Cathie Wood: Thank you, Peter.
Peter McCormack: This was an absolute pleasure.
Cathie Wood: It was fun.
Peter McCormack: Hopefully I'll see you soon.
Cathie Wood: Yes, thank you.
