Anyone who sold regretted it. Most of this volatility is algorithmically generated. Algorithms are not doing the research that we're doing because this is the biggest opportunity of our lifetime.
Greetings everyone. My name is Cathie Wood, CEO and CIO of ARK Invest. This is employment Friday, sort of. The employment report did not come out today. It came out on Wednesday. But nonetheless, Friday seems to be a good time to do this video. So as usual, we'll go through fiscal policy, monetary policy, economics, market indicators. I'll just start with a few comments about the environment which has been extremely volatile recently. I think we've been talking about AI since ARK was founded in 2014. We've been all over it. That's when we took our first NVIDIA position. And so we've been doing a lot of research and we've I think been doing very well in terms of understanding how this environment is going to evolve. In the last note, which was an interim one, I described how we did anticipate a shift in terms of incremental share away from SaaS as Platform as a Service basically usurped the role of SaaS and really helped customize for each company their own platform instead of using a one-size-fits-all. So, that wasn't surprising. But, as usual, the market throws the baby out with the bathwater. Or maybe it's the investors, or the speculators. And so, as usual, we consolidate our positions to our higher conviction names. But, you know, most of this volatility is algorithmically generated. Algorithms are not doing the research that we're doing. And so that is why we concentrate towards our highest conviction names. The market gives us that opportunity. So those are our comments around the volatility. And you'll remember last April during tariff turmoil I was on here saying look we think this is temporary what's going on in the market. Remember there was a sharp decline and a lot of people were freaked out. Even investors who typically are very calm and used to volatility they were shaken last year. Anyone who sold during that moment of drama regretted it for the rest of the year. The market has been up very strongly since. This market is climbing a wall of worry. Those are the strongest bull markets. The volatility does shake people up. But frankly, this is so much healthier an environment than what we experienced during the tech and telecom bubble. During that market, you know, Jeff Bezos could come out and say, you know, we're going to lose so much more money because we're investing aggressively. This internet opportunity is as vast and even vaster than we imagined and the market would go up and take Amazon up 10-15%. That would not happen today. Quite the opposite as the Mag 6 companies are basically saying you know we're going to spend more money. You're used to our free cash flow dynamics and they've only been moving one way for the last five years or so. That's going to change. And we're seeing some of the more traditional investors who do focus mostly on free cash flow and free cash flow margins a little unsettled and taking their position sizes down. We don't think that is necessarily a good idea. We think that Google and Meta, Microsoft, Amazon should be spending aggressively because this is the biggest opportunity of our lifetime. The question is as we evolve towards agentic AI and chat bots, is this going to take time away from traditional social media? Are we going to from a shopping point of view have our agents do all the work and do it around the internet? So maybe Amazon doesn't get cut in as much as it has been recently. We will see and we'll certainly be paying a lot of attention to share gains and incremental share gains which is what we got right around the SaaS call. All right so I think we'll start with the charts. I just would like to characterize this environment much like I did for macro reasons the trade turmoil environment. It is presenting great opportunities and we definitely lean into the volatility as I just mentioned and our longer term performance is really made with these decisions. So let's go into the charts. Here we go. Budget deficit as a share of GDP it dropped below 5% for a nanosecond until the GDP numbers and expectations for the first quarter were revised down but we're closing in on a 4 handle. Treasury Secretary Bessent has the goal of 3%. We actually think and our conviction is growing on this that we're going to end up in a surplus situation by the end of this president's term. So late 28, early 29. And that's because we can see productivity growth much surprising on the high side of expectations. You know you're getting crazy examples like Palantir its US commercial revenue growth was 142% up 142% and I think the number of sales people at Palantir actually shrunk a bit. So that productivity gain is astounding. It's at least from a sales point of view is more than 100% more than 140%. And you know I think this is a mindset we're all going to have to develop this is a muscle we'll have to develop in talking about the way the world works and the way companies are working. You know, Elon Musk puts out there some crazy numbers in terms of his goals. You know, I think that is the right mindset and companies who do not have that mindset are going to lose out opportunities to other more nimble competitors. So we've thrown out there a 7% 7 to 8% GDP growth, real GDP growth number globally by the end of this decade. Many people laugh at that. That's probably way too conservative given what we're seeing. And it probably means this deficit is going to shrink dramatically as a share of GDP. And unless there are just some stupid policies and move into surplus. I think COVID was a big scare and got the bond markets very worried, got investors very worried. Now we're riding the ship and hopefully lessons learned and we'll end up in a surplus like in the 90s. The last time there was a mini technology revolution called the internet. So now this is the other deficit when in the 70s and 80s. The bond market was vigilant and focused on the twin deficits. One was the federal budget deficit and the other was the trade deficit. And you can see what happened to the trade deficit during COVID and its aftermath. Imports boomed and we went into a very steep deficit as you can see here. That also is changing and many people in the foreign currency markets use the trade deficit as their gauge of where the dollar is going to go. And if we're importing a lot more than we are exporting, the fear is that the dollar will go down. There are excesses developing in the market. And so you can see we've corrected this. Of course, tariffs the steep decline there was front-running imports because of tariffs, impending tariffs. And now we've seen the other side of that. If we're right and I was surprised at how limited the deficit was just a few months ago, if we're right and the US is going to surprise on the high side of expectations in terms of real GDP growth and that the return on invested capital in the United States is going to go up. And because of tax cuts and deregulations and the tariffs. Well, then we're probably going to see more import growth. Not because of tariffs, of course, but for the first two reasons, more import growth and we will continue to have a deficit. Now we have never really worried about a trade deficit. Because when you take into account the entire picture the other side of a trade balance which is goods and services the other side of that is a capital surplus. Again, money attracted from the rest of the world because of the good environment we typically enjoy here in the United States from a business friendliness and capital friendliness point of view. So I just thought I'd talk about the twin deficits because I know people worry about them. And we can see on the trade deficit I've just explained why we don't worry about that. On the federal deficit. We are seeing a nice improvement in the deficit as a percent of GDP. I also wanted to depict where the dollar is. I know I've shown you this chart before, but this is the other worry out there. You hear lots of talk about the end of US exceptionalism. Whatever that means, it probably means something different to different people. But from an economic point of view, I would say we have not. In fact, we're probably going to see an explosion in activity here in the United States because of this technology revolution. The US and China are leading that charge. And so I do believe that the dollar is going to turn around and move in the other direction. Sure, it's gone down mostly for political reasons. I would suggest countries are diversifying away from the dollar into gold and other currencies. But we think this is going to change. It reached an extreme especially given where the gold price has been. But look what happened to the dollar. If you look at this chart, put this into perspective. This is not a collapse in the dollar. And if you're a technician, you'd say, hey, the dollar has held where you would have expected it to hold where it last peaked as shown with the black line. So, if the dollar goes up, one thing that I like to focus on is the dollar going up is a powerful anti-inflationary force and we do believe that the dollar will go up and will contribute to a surprise on the low side of inflation expectations. So here you see a graph of the CPI in green. This is the year-over-year percent change CPI versus M2. We're still recovering from the negative growth in M2, but I think we've stalled in this 5% range. And as I've mentioned before, we also think that velocity is starting to flatten out or go down. So the velocity going down or flattening out will diffuse some of the inflation expectations associated with money growth. Now what you see from the green line is kind of looks stuck in the 2 to 3% range and it has been for the last few years. We think that it is going to resolve to the downside importantly in I would say this year. Now I've been saying this for a long time. Had no idea supply shocks would cause this stickiness in inflation. I didn't think supply shocks would last for three years. We didn't expect the tariffs. But I think when you put it in that context to be in the 2 to 3% range during that period of turmoil is actually pretty good and probably suggests or corroborates this notion that we're going to see a drop in inflation. So here just to give you a sense of monetary policy this is the yield curve at the short end of the curve. So, the 2-year Treasury yield versus the 3-month Treasury yield. And you can see it's still in negative territory, which suggests that at the margin, the Fed is not accommodative. It's a little too tight. According to this measure, according to the 10-year Treasury yield versus the 2-year Treasury yield, it is in positive territory. But you can see that downward sloping line that we've drawn there. And thanks to Dan White for doing these charts this month. What you would expect if the Fed eases aggressively, this will continue to move up and the Fed could ease aggressively if we start to see negative inflation numbers. We probably won't see them on a year-over-year basis until Kevin Warsh takes over. Now, what we know about Kevin Warsh is he's actually quite a disciplined economist from a monetary point of view. And so it's been very comforting for me to hear him say this AI revolution is probably going to accelerate growth in many sectors of the economy. And as a monetary authority we should accommodate that real growth as long as it's not causing inflation. So if we have negative inflation and I think we will and real GDP growth is growing rapidly in this Fed that would cause a tightening and that would be a bad mistake. This Fed thinks that growth causes inflation. Kevin Warsh has it right. It does not cause inflation. In fact, it causes an acceleration in productivity growth which dampens inflation. And that was the story of the magical markets, the magical equity market of the 80s and 90s. Real growth accelerated, inflation came down and productivity was a large part of the reason. Productivity is output per man hour and unit labor costs are compensation adjusted for productivity. Now if you look at this chart, you'll see we're at I think it's 1.2% roughly. This is the chart many I would say Keynesian economists have been focusing on and they thought unit labor cost growth would continue to accelerate or stay in sort of that 5 to 7% range. They didn't get productivity right. Productivity has been stronger than expected and they didn't get compensation right either. It has been that growth rate has been lower than expected. But they took lessons and they have scarred tissue many of them from the 60s and 70s when unit labor cost growth, you can see on this chart, trended up into the double digits. And it was because workers were demanding more compensation increases because food prices were going up so rapidly and energy prices were going up so rapidly. Well, and so they were poised for that this time as well given the supply shocks we went through with COVID. Well, you can see that did not happen. And so really any Keynesian economist has to look at this and say this time is different. Even though real GDP growth has been from a headline point of view fine and the unemployment rate has been low. We did not get a pickup in unit labor costs. One of the reasons in terms of workers not making as strong demands as they did in the 70s one of the reasons is oil prices have come down. So that's at the margin a help to the budget. The other reason is I think that unions as a percent of employment or union workers as a percent of total employment I think they've dropped below 10% whereas they got up to nearly a quarter of the workforce in the 70s early 80s and of course their leaders were the champions and really a driving force behind the massive increase in compensation per man hour. So we think just to avoid or to be a little clearer we think we don't need unions if we're right on what's about to happen to this economy. If the economy booms the way we think it's going to boom and if the opportunities burgeon the way we think they will burgeon and real growth accelerates, we think compensation growth will accelerate for a good reason. It will be in response to the productivity gains of all workers if companies harness these new technologies AI, robotics and so forth. Onto the next reason we think inflation is not going to surprise on the high side of expectations. Here you see real estate prices and you can see existing in the green existing home price inflation has dropped below 1%. And new home price inflation meaning the price inflation associated with new home sales that continues to be negative and rents are starting to fall. It takes so long for these numbers to get into the government's CPI index. And we think therefore that these price pressures are going to place downward pressure on the CPI for the next couple of years. So we feel pretty confident about that. And then here you can see oil prices down on a year-over-year basis, you know, down double digits on a year-over-year basis. Now, that typically happens during a recession. But we're seeing it happen globally now because especially in China, the shift towards electric vehicles has been phenomenal. I think more than half of the new cars sold and in fact it might be more than 80% of the cars sold in China now are electric. So that's taking away some demand from oil. And of course the Middle East, Saudi Arabia, the swing factor has been increasing supply. And I think that might have something to do with a political dynamic with negotiations between the Trump administration and Saudi Arabia on all kinds of things including defense. Here you can see we've broken out core CPI from core PPI. CPI you can see in the purple there and PPI you can see in the green. And what you can also see if you look carefully is that the PPI inflation rate has moved above the CPI inflation rate. So, those of you who are exposed in the market to consumer goods companies might be hearing more about margin pressure. And so watch out for that. And here's the most important slide, Truflation. This is saying after wrestling in this 2 to 3% range for several years, inflation is breaking down. It is as of this reading I think about 0.7% on a year-over-year basis and remember this is a real time indicator monitoring 10,000 goods and services and you can see it probably captured the peak in inflation better than the CPI it went up almost to 12% whereas the CPI was up 9%. One thing that we are seeing in real time is food price inflation coming down. We're seeing deflation in eggs and some of the food items that were very painful for people in terms of affordability during COVID. So that's good. But if you look at food prices today relative to where they were right before COVID, they're still about 32% higher. And so I think we're going to see more unwinding of food price inflation. Another reason inflation will go negative. Now here in terms of real activity this is the ISM for manufacturing it's the purchasing managers index and you can see a nice bump here. So we've characterized the last three years as a rolling recession. If you look at housing and all of manufacturing in the United States below that 50 percent that basically indicating that manufacturing has been in a world of hurt even though we weren't technically in a recession like you've seen when it has been negative. We were in a rolling recession and it looks like this is the first sign that that's changing and the biggest change in this PMI was orders. So the new order index popped from roughly I think it was 47 meaning it had been declining to 54 and employment went up also. Now we don't have it in this package but another index came out not for manufacturing but for services and that showed both orders and employment less positive. I think both of them were still above 50 but barely above 50. So there are some puts and takes here. Here is I don't know if you'd call this a put or a take, but this is consumer sentiment. University of Michigan, we focused on this a lot. The consumer is not a happy camper. And you can talk about GDP growth all you want. And highlight it as evidence and even the last employment report as evidence that all is well. But the consumer does not agree with that and most of the indexes this one is the worst I think in terms of depicting consumer sentiment but both most of them have been down and a lot of the fear has been because of employment and affordability. So you can't take that away from sentiment. Even if it's changing at the margin, the consumer is still unhappy. This is one of the reasons. Look at what happened with the payroll revisions for all of last year. We got them this week. Payroll was revised down by 861,000 jobs. Now think about that you know 75,000 per month roughly 75-80,000 per month when a number of the prints were less than that when they were originally reported. So they would have been negative and many of the reports were maybe a little above 100 take 75-80 last year was a very weak employment year. Now we know and again legitimately the consumer is fearful for the sustainability of their own jobs and you can understand why. But this is a piece of good news that came out of the last report. We've been featuring this 16 to 24 year old category in the note for quite some time because you can see that's where the most severe unemployment rate increase has taken place and it was above 10%. In fact, it was above 12% but they revised that down and you can see that now we're below 10%. What's going on here? Well, we think well it could be the employment improving. It could be that employment is a lagging indicator but it also could be something that we've mentioned a number of times and that is AI is becoming so powerful that individuals are able to just go out and build businesses now. And so we think a lot of entrepreneurial activity is happening and you can see if you look at new business activity meaning new businesses starting up and we'll get that chart for the next note those are starting up nicely now I mean they've been going up for a while so I think you know when people are laid off or when they can't get entry level jobs. They might become consultants as they're building their businesses. And I do think we're going to see an entrepreneurial explosion. And we're very excited about that. You know, we just saw a chart today and I'll put this one in the note next time too. If you ask CEOs what percent of you are saving eight or more hours per week because of AI? The answer is roughly 43%. If you ask workers what percentage of you or if you do a survey, you'll figure out that workers are saying that only 5% of them are saving eight or more hours a week. Now what they could be doing is using AI and then enjoying free time as they have become so much more productive at their jobs. But if we're going to see an explosion in entrepreneurial activity, you're going to have a lot more CEOs looking for those efficiencies. And so another reason we expect the proliferation of AI to increase productivity significantly. Just a few more charts on why the consumer is unsettled at best. Saving rate. Some families are hand-to-mouth. They can't save anymore because of the affordability crisis, especially as it relates to housing. They're delinquent on their auto loans. So the subprime is in purple and all. And you can see where that is relative to 08-09. Again, they're suffering. And I've said this before, in the 08-09 they chose to default on their home loans before they defaulted on their auto loans because there really was no Uber or Lyft back then. It's different today. So, this may be why we're seeing auto delinquencies in a supposedly growth environment take off like this. Here just to repeat a chart that we've shown before. Refunds the big uptick starts this week and we think there's going to be a boom through the end of March and that it is going to put money in the pockets of those who are now hand-to-mouth. They will be able maybe to lift their saving rate or enjoy life a little bit more with some of this extra cash. And so that's fabulous. Now, existing home sales, this was a shocker. You know, sometimes I digest economic statistics every day. It's like I need my fix. And you know, rarely am I surprised, but to see this relapse and go back to lows after the mortgage rate has dropped 90 basis points, I was just surprised. And the prices as I mentioned before continued month-to-month sequentially come down taking the year-over-year price increase I think to only 0.9%. So, it's interesting. There's not enough confidence out there yet to go buy that house or interest rates aren't low enough or prices aren't low enough. So, we're going to see an adjustment and builders are incentivized to cut prices now and continue to subsidize mortgage rates to clear this inventory. It's not clearing. And so we think that's another reason prices are going to go down. Now we'll get into market indicators. And just one thing I'll say about the downward revision in employment before we leave the economic indicators is to give you a sense of how messed up the government statistics are, how incorrect they are, how flawed they are because they were born in the industrial age and now we are not only in the digital age but the AI age and it's just too much change. They can't keep up with it because of how they structured the indexes. So sorry if this gets a little esoteric, but if employment really was much lower than initially reported, what that means for the GDP accounts and the GDP accounts are more right than the employment indicators because there's another side to GDP. It's called national income and or gross national income and that is quite accurate in terms of money changing hands sales that are reported out there wages that are reported out there. They're all from the tax records. So GDP equals national income. It's not perfect. There are statistical discrepancies. So if you've lowered the employment number, what you're really saying is okay, there was much more productivity. Productivity was understated. That means real GDP growth was understated and it means inflation, this is the punchline, was way overstated. So inflation is much lower than is being reported. We believe it's probably much more in line with true inflation below 1%. Than what we're seeing in the government statistics today. So now S&P we'll get to market indicators relative to gold. We're watching this one. It was such an important warning in the 70s that you know the S&P was going to really have more than I think from 66 to 82 it went nowhere. It went down, but it really went nowhere over that time. And we certainly don't want to go into a period like that. And we don't think we're going to, but we can't dismiss the fact that gold has been stronger than the S&P here. Even though the Dow Jones hit a record high, and I've heard that register with some people who are not in the market. But to see this tick down is a little uncomfortable, I will say. But then we'll flip back to what's going on with the oil price. S&P price to oil back in the 70s behaved the same as S&P to gold. It's completely the opposite now. And in fact, this is more important because falling oil prices are the equivalent of a tax cut for consumers and businesses. So we're happy that this is diverging. We think it's an important divergence and we do think and I mentioned this in my last note that gold is over its skis. If you look at gold relative to M2 never been higher. It's higher now than it was even after the 70s where we ended up with double-digit inflation and in the great depression where the economy collapsed and gold was a source of safety until the government took it away. So we will go with this one for now. And here is another we have to acknowledge that gold has way outperformed Bitcoin. Bitcoin has gotten caught up in this risk off in a certain sense dynamic where you know you're getting wholesale drops in sectors. Sell now ask questions later. It's certainly happened in the SaaS space. It's happened in the wealth management space. It's happened in the trucking broker space. So this algorithmic selling in the market definitely has hurt Bitcoin because many people are not looking at it as a store of value the way they are looking to gold as a store of value and safety in a time of trouble. Now we don't understand that because gold supply growth is we believe accelerating. Bitcoin supply growth cannot accelerate. Now quantum computing, we talked about that. We talked about all the worries that are going around in the Bitcoin community especially as the ETFs have gotten involved. So we had newer holders probably weaker holders and you know when they're confronted with those risks they'll again sell and ask questions later. You can see though that the uptrend higher lows in a major way. Sure we broke the one I guess from 24 but that general uptrend has not been broken. And I don't think it will be broken now could be famous last words but you know a lot of technicians are involved in the market right now. In fact, that's all they're doing. And it's astonishing to me that some of the people that are so steeped in the research of Bitcoin and other crypto assets have defaulted to technical analysis as this move has taken place. Well, if you're a technician, look where we are now and you can see that's where we topped in 2017. So that's kind of a marker. There's also some support. You can see there in the 2022-23 range when Bitcoin was actually a refuge for those who were very scared of the regional bank crisis turning into a much broader financial crisis with counterparty risk a la 08-09 that cannot happen to Bitcoin. And definitely I encourage people to self-custody if they want to hedge a bit against counterparty risk because we do have the ETFs now involved in ownership. So it's been grueling. But it's also been I don't love these periods because I worry about our clients. We use these periods. We've been buying in the crypto space in our various strategies. But this is the time where you know you learn about everybody's fears and I described them in the last note video and how we've addressed them. But you learn about other developments in the crypto asset ecosystem and I have just gotten involved in an advisory role with a company called LayerZero which is trying from a DeFi point of view trying to go back to the future and not compromise the way Ethereum has and other blockchains with layer 2s and so forth, but actually go back to the future and develop an ecosystem for this new age, the agentic AI age, where there's going to be a lot of activity, you know, machine to machine that can handle 2 to 4 million transactions per second. Ethereum can only handle 13. Solana maybe 2,000. So you know it's very interesting that during tough times the builders in this community are heads down. And so our research surfaces some of this new activity because these new approaches because they're starting to talk more about them in the context of the way the DeFi ecosystem is currently set up. So lots of learning and I guess I'll conclude by saying you know unlike the tech and telecom bubble this is the real deal unlike the tech and telecom bubble people are scared to death as a portfolio manager in the world of innovation I would prefer fear and climbing a wall of worry than the speculative excesses that we saw in the tech and telecom bubble. Now you might say AI is going through that. That's been part of the worry in the market. We don't think so. All the research we're doing would suggest that we are in the equivalent of 1996 in the technology or the internet revolution that was taking place back then very very early and sure it went into overdrive it went crazy but in 1996 that was the year that Fed Chairman Greenspan talked about irrational exuberance and you know that scared people because they thought he was going to tighten to curb speculation but effectively he said he wouldn't do that he'd let the market work and we all learned a lot of lessons because of what happened after that and the scarred tissue in the market today because of that is happening here because those who went through the tech and telecom bubble are gray hairs in our business now and they have that scar tissue muscle memory whatever you want to call it and they're saying as the most seasoned investors I am going to protect my firm against this risk. And I think that is what's keeping the fear and this wall of worry going. It's volatile. It can be uncomfortable. But just like last April, you know, these can be very important opportunities to invest in the next big thing. And we're ready for prime time. We can see the explosion in AI and we can all feel the ground shifting underneath us. And you know I can see and hear CEOs now saying oh my goodness we have to do something about this. So I think the momentum is going to continue building out there and the most important thing is to get on the right side of change. So with that I'll thank you and wish you a happy long weekend.
