Investing in disruptive innovation | Catherine Wood | Ark Invest 2022

One of the reasons I've been drawn to innovation is actually a great leveler. We have never seen the amount of innovation that is taking place now. There's an absolute explosion of it. The seeds for all of it were planted in the 20 years that ended in the tech and telecom bubble, but the technologies weren't ready for what we're talking about now. AI breakthroughs really didn't start happening until 2012, well after 2000, and even cloud computing didn't happen until AWS, Amazon Web Services, in 2006. We're seeing five major innovation platforms: genomic sequencing, robotics, energy storage, artificial intelligence, and blockchain technology. They involve 14 different technologies, and we believe they're moving into exponential growth trajectory. So what we say to our companies and to our clients is get on the right side of change. There is so much happening now, it is the great leveler, but if you don't get on the right side of change, you're going to be left in a disrupted world order. Sure, there are risks in innovation, but there are risks in not being there, and we think those risks are growing by the day.

ARK is a very social company to begin with, and I think Titan will turbocharge us in the investment realm this way. We have 3.3 million Twitter followers, and they're global. As we do more with private companies and expose them to retail investors through the Titan platform, we're going to be educating them on what we believe are some of the most exciting companies in the world. We've started the fund already with one of the most interesting genomics companies that actually is making progress to identifying cancer in stage one, if you can believe that, including pancreatic cancer. That company is Freenome. In the AI space, it is helping companies become up to seven times more efficient and lower cost with their AI models. You know, when it comes to autonomous driving, which is going to be one of the most important AI projects in the world, when it comes to autonomous taxi platforms, Mosaic is going to be critical in making that happen. You've heard of Epic. Well, Epic, many people know for Fortnite, but we want to help educate that this is much more than just Fortnite. It's potentially a completely new social network as the gamers go into, I forget what the name of the island is, Party Royale or whatever, and socialize with one another. And it also has a game engine which Tesla just signed up for for simulation for autonomous driving. So what we hope to do is educate our investors about not only these incredible companies that are going to make the new world work, but show how the technologies that are evolving today are converging with one another. Who could have imagined that a gaming company would help Tesla with its autonomous taxi platform project? That's pretty mind-blowing. And so we want to, you know, I'm sure gamers are very interested in that, they love the company. It's hard to get access to Epic. We have it, and we can appreciate more what Epic is doing because we're working on the research behind those very, very difficult problems to solve. Innovation solves problems, I always say that. And so we want to showcase these companies as problem solvers and as companies who are going to change the world and really make it a better place.

Yeah, and I'll echo, and I say all the time, innovation solves problems. Innovation solves problems, and we have a lot of problems. And actually, innovation gains more traction during tough times because consumers and businesses, if they're afraid, they're willing to change the way they behave. There's a lot of inertia in human behavior, and they're willing to change. That's why I founded ARK. I saw the traditional asset management world focused on public equities going past it, and at the same time, we saw this explosion of innovation. You know, the seeds were planted a long time ago, the technologies are ready now, the costs are low enough. It's just so ironic because of what happened in the tech and telecom bust, people won't go near a lot of innovation these days. That's a good thing. That's a good thing from a portfolio manager's point of view. I know we're not in a hype phase, but I do feel the unmet need that we are filling is innovation as a special asset category. Because benchmarks and passive are all based on backward-looking indicators. The stocks in those portfolios are there because of their past success. If we're right, and these five major platforms, which involve 14 different technologyologies, are going to disturb if not destroy the traditional world order, if we are right, then it is imperative that investors have, I would say, a very good allocation to innovation, however one wants to define it, to innovation, so that they're looking at the future and riding the coattails of these new technologies and these exponential growth trajectories that we believe are going to be transformative for the world. Very important. We think the bigger risk in the next one to three years is deflation, not inflation, and it's both good and bad deflation. We're already seeing cyclical deflation in the pipeline. We've got commodity prices down 30, 40, even oil 30, 40, 50, 60, 80 percent, and it's because China's in recession, Europe's effectively in recession, and we think the US is in recession. So you've got deflation coming in the pipeline, and we have a massive inventory buildup that is actually shocking. Nike for its recent quarter reported that its sales were up three percent and its inventories were up 44 percent. In North America, its inventories were up 68 percent, and the inventory in transit is up 85 percent. This is going to overwhelm retailers, and the only way they'll clear their shelves is to discount aggressively. We're already hearing Walmart, Target, and others talking about discounting. We think cyclically we've got deflation, and then secularly, meaning longer term, we believe we have deflation because of innovation. Now, that's good deflation. You cut the price of something, units will increase. So we think we're going to see some booms in categories of innovation, but at the same time, if we're right on that, there are a lot of products in the old world that are going to be obsolete, and they'll have to cut prices. That's bad deflation. So we see deflation frankly all over the place. And the Fed right now is looking at two lagging indicators. It's looking at CPI inflation, and I just told you what's in the pipeline, and it's looking at employment. And employment, I think what's happened there recently, companies had so much trouble hiring during COVID that they have decided to hoard labor. And even though business is kind of praying at the edges, they're keeping their employees because they don't want to go through that again. If we're right on what this inventory glut is going to do to margins, we're probably going to see some deterioration in employment as well. So the Fed will pivot. We just saw a liquidity crisis in the UK pension funds because the increase in interest rates has been so rapid, led by the Fed. Pension funds were offsides in terms of their derivatives, and there was a run, margin calls. This has happened just recently, and that is a sign that there's a liquidity crisis brewing out there because interest rates have moved up too fast. We think the Fed is now making a mistake.