Today we’re going to analyze ARK Invest latest video of the series “In the know with Cathie Wood”.
Cathie goes back in time to the end of 2016 – Early 2017.
Quantitative easing was on its way out and the FED was going to start raising the interest rates.
The market was very nervous…
Trump won the election and the odds of a cyclical burst increased because of his promise to cut taxes and that’s exactly what happened!
In the beginning the equity market was very nervous around the idea that interest rates would be going up.
When Trump was elected – value stock took off just like they’re getting off now – responding to this idea that economy is developing ahead of steam so the value stocks have taken off.
If you look at year to date: energy stocks are up 27%, financial stocks 11%, tech stock 1% and health stocks are actually down.
So basically traditional value stocks are having a nice run!
So right now we are in a 2016 like scenario, value stocks are up and growth strategy stocks are down (Take ARK ETFs as a perfect example)
Cathie actually likes the fear that ARK is experiencing and that there’s a reality check, in terms of the speculative moves that have taken place within the innovation space.
What happened post Q4 2016 after the market had broadened out?
Well… 2017 was a fantastic year for the equity market in general with cyclical value and growth.
And she believes we’re now moving towards a similar scenario.
Now let’s find out what Cathie’s said on Bitcoin being speculative, not sustainable, not environment friendly and heavily used for illicit activities.
With a lot of respect Cathie says that Janet Yellen doesn’t understand the crypto space, simply because it’s not her main focus.
Regarding the environmental issue: comparing the energy required for BTC mining to the energy required to mine gold you can clearly see that the first is a fraction of the latter. It’s an infamous comparison in favor of BTC. Further think about the energy consumption for a bitcoin transaction to the ones of the traditional financial banking system. It’s a fraction and the comparison is again ridiculous in favor of BTC.
She also reports what an FBI agent told her.
According to him BTC is the best thing that happened to the FBI, because they’ve tons of cryptographers who are able to break codes and figure out illicit activities and they’ve been able to track and arrest many criminals following the transactions to their wallets.
BTC blockchain is so transparent based on IP tracking and IP pattern recognition, that it becomes a useful tool against crime.
Talking about BTC she admits it is speculative, but we can see trillions of dollars in use cases.
So it’s very important to be supportive of those who are evolving this ecosystem and think about ways to help the community (such as developers) to secure the blockchain tech.
Regarding the time of 10 minutes for a transaction… it could seem a lot compared to smart contracts based blockchains
but you have to consider that it is a compromise because of the higher security of Bitcoin.
And the high fees for a single transaction are nothing if you compare them with the ones of the traditional banking system.
Cathie makes few considerations on inflation and that the monetary policy ease throughout the world, is going to ignite inflation.
ARK thinks there are 2 major deflationary forces evolving in the global economy and that these are going to be in a dueling match with each other.
Good vs bad deflation.
Good deflation has to do with technologically enabled innovation. It’s deflationary by nature, it rides down cost curves and production times.
So the industry gains efficiency and productivity at the same time.
• Take as an example the Electric Vehicle space. ARK analysts found out that deflation rate is 28% for every cumulative doubling in the number of units produced. We’re at 2.2M units EVS right now and it’s not going take long to double these numbers.
• In DNA sequencing space it’s a 40% for every cumulative doubling and we’re at a very low base there as well. But those low bases are going to move up pretty quickly.
And according to ARK forecasts… EVs sales will move from 2.2M to 40M (almost a 20x increase) in the next 5 years. And sales will only begin to impact economic statistics as they scale in the next few years.
We conclude this video with Cathie’s warning about what she defines as disruptive innovation.
She says that it is going to cause creative destruction in the traditional world order:
• DNA sequencing
And these are going to converge: autonomous vehicle are going to be robots, energy storage will be electric and AI will be everywhere.
It’s a combinatorial, multiplicative, compounding effect.
Think about these as if they were waves crashing in the ocean and think about companies as ships navigating. There will be some ships that get elevated but others that go dip. The energy liberated in the crashes/convergence will be revolutionary at the base of the entire world and this is what she defines the powerful good deflationary forces. So when combined they produce a movement forward.
On the other hand the bad deflationary forces are associated to what just mentioned.
The disintermediation and the disruption to the traditional world order is going to put lot of companies at risk. Companies that were thinking that nothing would ever change. Financial services, internal combustion engine automobile, rails and all the suppliers around.
Ray Dalio, Jeff Gundlach and Howard Marks have warned many times the investors on this bad deflation.
So we can conclude that these 2 forces will be very powerful and will have huge effects in the next few years.