In the Know with Cathie Wood IV | ARK Invest

Hello again everyone. Mrs. Cathie Wood, CEO CIO of ARK Invest. And as you know, we have since the crisis began we've been doing some of these videos to share our thoughts when we felt that uncertainty was rising or at a crisis level. And we haven't done it the last few weeks because it seemed as though our V-shaped recovery was really becoming conventional wisdom. Now with the virus outbreak again, there are questions, and so we figured we'd come and reinforce some of the points that we've been making before with some of the newest data. So as always, we'll start with monetary and fiscal policy, and then we'll go into what the markets, equity and fixed income markets, have been doing generally. We'll talk a little bit about the economy statistics, and then we'll talk about some news in the end on the innovation front. So as far as monetary policy goes, well, M2 is now up on a year-over-year basis by 23%. So what that tells us, since GDP most certainly is not up 23%, it tells us that the velocity of money is continuing to fall. And part of that is a function of caution, and part of it is because there haven't, until recently, been many places to go out and spend that money. As a result, many people will say, well, the excess, some of it is finding its way into the financial markets, and that is absolutely what has happened. Now it's interesting that the Fed yesterday told the banks that they were not to increase dividends or increase share repurchases until the end of September. That was not expected, and especially because by its own measure, the Fed GDP measure at the beginning of June, their GDP forecaster was showing -12% for real GDP growth at an annual rate in the third quarter. Now it has moved all the way up to 1.5%, while private forecasters' estimates have moved from anywhere from down a bit to up 20%. And as the numbers are coming through, it's very interesting to see the scramble that businesses are being forced to make to keep up with consumption, and we'll get into that in a minute. On the fiscal policy side, well, the first thing I'd say about the virus is we do not believe that this administration will shut the economy down again. Part of the reason, or the biggest reason, is because we have now got a healthcare system that is much better prepared. And we also experienced, certainly in the tri-state area, significant excess capacity when it came to putting into place emergency measures to take care of what many thought would be an overwhelming of the healthcare system. That did not happen, and so we've gotten confidence that there's no need to shut the economy down. I think President Trump has said no shutdown of the economy. The other thing that's going on is these outbreaks are occurring in states that did open up a little earlier: Texas, Florida, Arkansas, no, Arizona, I'm sorry, Arizona. At the same time, however, the tri-state area is opening up, and that was a big part of the economy that was shut down. And so while the V-shaped recovery that we've been expecting may not be as smooth because of these outbreaks, we still would describe what is about to happen as a V-shaped recovery which will extend into next year. The markets, so equity, the equity markets, very interesting. We've hit new highs on the Nasdaq, not on other measures, so that would suggest that innovation, more innovation-oriented, more technologically oriented companies and stocks are pulling away from more cyclical stocks. That certainly is the case. When we left you the last time, it looked as though value was starting to appreciate more, value stocks more than growth stocks, and we said at the time that that was good, even though that would mean for us a period perhaps of underperformance. We liked the idea that the bull market was broadening out. That means that the bull market was gaining strength and was becoming more healthy. Well, since we left you, the value stocks have relapsed relative to growth and in fact have gone to a new low. I think that's the most surprising thing of the last few weeks. Now there could be two reasons for this. One, either the bull market is narrowing to a smaller group of stocks, certainly as I mentioned innovation being one of them, or some of this disruptive innovation that you hear us talking about all the time is really beginning to hurt the sectors that we've been saying are in harm's way. So financials, energy, traditional retail, anything, any industry or sector associated with the internal combustion engine, that includes rails, regional airlines. So you know, we did not believe that the disruption and disintermediation that innovation is starting to cause in these spaces would derail value taking off relative to growth, because we thought the idea of a V-shaped recovery would help them in the short run. Well, maybe digital wallets are starting to disintermediate banks, and electric vehicles at the margin, commodity prices are a function of incremental demand. And we do believe, of course, that with the economy shut down, energy has had a problem to begin with, but we also believe that electric vehicles are at the margin starting to destroy oil demand and will continue to do so. The internal combustion engine, we think electric vehicles because of battery costs are going to take off as the sticker price of electric vehicles falls below that of gas-powered vehicles on a like-for-like basis during the next year and increasingly during the next five years. So perhaps the market is looking at disintermediation, disruption of these traditional value sectors and pricing them accordingly. Time will tell. We're sure there are some great bargains out there in the value space, and that the hunting should be good, and we do hope that the bull market does broaden out to incorporate value stocks that do have a good future. So that's the only point I'd make on the equity market. On fixed income, it's as though nothing has changed. We're still in the mid-sixties basis points on the long-term Treasury yield. It fluctuates around there but seems to be sort of stuck. And part of that, of course, is a function of monetary policy. We also think that yield curve control is becoming a part of the conversation. I don't think that the Fed is going to control the yield curve explicitly, but I don't have such a strong opinion on that. It seems as though the Fed is operating using the tools that it has now, and monetary policy is about where they want it. I'll just make one comment on the dollar, which is somewhat related to monetary policy, and that is that it has come down. Now it shot up during the crisis, so it was a flight to safety currency. The dollar coming down is reassuring in the sense that the flight to safety is unraveling. Perhaps monetary policy being more per here than a lot of investors expected is one reason that the dollar has come down, but it does give the emerging markets, especially those that hold a lot of dollar-denominated debt, some breathing room here. And that again would be consistent with the bull market broadening out to the rest of the world, including emerging markets. On to the economy, just a few striking figures in the last three weeks. I think the most surprising combination of statistics were retail sales, industrial production, and inventories. Now as you know, we had been saying before this crisis that the consumer was very strong, but business was not keeping up with consumption. Inventory growth was not keeping up with consumption growth, and capital spending was falling. Businesses were fearful because of the China-US trade conflict and the rhetoric, saber-rattling and so forth, and supply chain fears. And they were also fearful that the inverted yield curve that occurred last summer/fall was indeed going to turn into a recession, as so many economic forecasters were saying. We disagreed with that, but nonetheless, businesses were very cautiously positioned before the crisis. During the crisis, as you know, the last time I did a video, I was remarking and marveling over the 33% saving rate for the US consumer, and that that was record-breaking. We got new numbers today, and the combination of a declining income and rising spending, actually a burst in spending, income month to month, this is just one month and it was for the month of May, income dropped about 4%. Now if you include unemployment insurance claims, the extra $600 that individuals received, the drop was much, much less, and on a three-month basis there was an increase, a fairly good increase. Spending, however, increased 8%. That tells us that consumer confidence is building. Now there were a lot of savings, so a lot of pent-up demand, I'm sure, but that kind of spending increase, just 8% month-to-month, that's almost a hundred percent at an annual rate, would not have taken place if consumers weren't feeling better. And so we had the saving rate falling to about 23% again. Except for last month, that is a record. It's still extremely high and represents a lot of pent-up demand. Now industrial production, now spending, consumer spending was up 8%. Retail sales, which excludes services, so just non-durables and durables goods, those in May were up 17.7%. Industrial production, however, was only up 1.4%. There's a huge gap there. Now business inventories, and that includes retail, wholesale, and manufacturing, fell in April by 1.3%. There's a big lag in that statistic, but we have gotten pieces of what will be the next business inventory. Wholesale inventories dropped 1.2% in May, so inventories continuing to drop. And astonishingly, I've never seen this before, retail inventories dropped 6.1%. That's a 72% annual rate. So this is another way of saying that that spending burst is depleting inventories, and businesses are going to have to catch up or they will lose sales in the future. And we got our first June reading, very early reading, the survey called the Philadelphia Fed survey, Philly Fed. Expectations were for a drop of 21.4, those are points, not percentages. And the previous month had been a negative 43, so expectations were that the drop would improve from minus 43 to minus 21. What happened instead is the actual came out at plus 27.5. So that's a 50-point swing, and we have never seen that big of a swing before. So I think there are some big surprises that consumer, I mean businesses are facing relative to their expectations, and I do believe that's why we're going to continue to see this scramble to catch up, even though we're seeing hot spots around the country slowing things down again. And then one other thing happened this week is that for the first time in five months, S&P earnings estimates, this is a broad-based sample of estimates, they stopped going down for this year and they moved up for the first time for next year. Let's see if I can find that. So next year, the expectation is now that earnings will be about $160. Now that will represent roughly a 25-26% increase. So expectations are starting to heat up here. Now throughout this burst in the equity markets, we've seen innovation take off, and as I said from the very beginning, it's not surprising. Innovation helps solve problems. We have a lot of problems now. We got a few more interesting tidbits on how well innovation is doing this week. And there was a research service that estimates the number of users for Venmo, Cash App, and other digital wallets. And yes, I believe it's a newsletter called Sensor Tower, and their estimate is that the monthly average user count for Square's Cash App is now 40 million. Now at the end of last year, that was 24 million. The rate of gain is accelerating here dramatically. And we believe now that Cash App on a MAU basis, not an annual user basis but a MAU basis, monthly average user basis, has surpassed Venmo, and that both Venmo and Cash App have surpassed every single bank, including JPMorgan, in terms of the number of digital users. So these digital wallets are starting to disintermediate banks. And you know, given my own experience in the last week, I went to close on a house and went to a bank. I haven't been inside a bank for years, but had to be for this. And first, we had to wait for the person to come back from lunch, and that was a good wait. But then when we were depositing money and so forth, we learned that we would not have access to this cash until July 1st, and that was last week. Now Cash App, if you've heard the stories about the Payment Protection Plan, they were able to take the frustration out of the experience. Businesses were applying to banks and either never hearing back from them or being given the runaround, and they did not see loans in the way that they expected. And so in the second tranche of the PPP, the Payment Protection Plan, the government invited Square into the ecosystem to facilitate it. And businesses, they applied and were approved for the PPP within a day, and they got the loan the next day, if not the same day. I think this is what's going to happen to banking, banking altogether. And I do believe that the disintermediation here is going to be quite severe, and we may be at a tipping point. That may be what has happened because of this pandemic. No one was able to go into a bank for a while, and casting around looking for other solutions, we believe that the digital wallet thesis, and we have a good white paper by Max Friedrich on our website, is going into overdrive, and the ramifications are going to be pretty provocative for the banks. Then the other couple of news items in the last week, and these are from today actually. Google has joined with Volvo. Now Google was casting around, and this is Waymo, their autonomous driving unit, for an auto manufacturer. And they had been working with Fiat Chrysler and Jaguar. I don't think they were extremely satisfied. But now Volvo, which is owned by Geely in China, is partnering with Waymo. So we think this could be Waymo's entree into China, which is a very good thing for Waymo and Google. They are saying that they will partner and deliver a Level 4 car. And really what that means is truly autonomous, not perfect. Someone will probably just have to sit and just make sure to respond to alerts when they happen, but Level 4 is very sophisticated. Now we were looking around for the date they will have a Level 4 autonomous vehicle, and they didn't provide that, which is also a little bit of a warning out there that this is really hard. This is really hard. And then Amazon, the rumors were confirmed, Amazon's buying Zoox for $1.2 billion. And that's not much more than they raised in funding. I think that the top valuation was at $3.2 billion, so here's another down round, going for roughly a third of its peak valuation. Again, another proof point that this is really hard. And we've been doing more and more work on Tesla's human-driven ride-hailing network, and we do think they will launch one late this year or early next year as a bridge to their autonomous taxi network. And it will be a very interesting bridge, because individuals will be able to put $5,000, I don't know what the number will be, down for a Model 3, and they'll work off the cost of the rest of the cost by driving around and earning money, part of which will go to Tesla. That's how they'll pay back the loan. They'll not only be helping Tesla that way, but they will, with the number of dry miles they're going to drive, they will be adding to the real miles driven data that Tesla is collecting. And that is all important to an autonomous taxi network. And they are already running circles. I think that they, I'm sure that they're up to 15 billion miles of real-world data now. And I think Google is up to 20 million miles. That's 15 billion versus 20 million. So maybe if the Volvo relationship can help them accelerate the number of miles collected, that will put Waymo in good stead in China. But we have a suspicion that China will not let Waymo own those miles or own that data. That's been the history in China. So I'll stop there. I just like to alert you that on our website now are two, well first, a webinar we did, we called it Big Ideas Summit 2020, a video conference, and it was quite a wonderful experience because we had two leaders, one in the FinTech space, one in the genomic space, who are blazing trails and really helped bring to life some of the excitement that we're going to see in those two spaces. So Jackie Reses, who heads up Square Capital, so you'll learn all about how fintechs are going to run circles around banks and others in terms of lending. And then Dr. Jennifer Doudna, who is the co-inventor of CRISPR gene editing, and she brought to life in a really provocative way what we can look forward to, the wholesale transformation of healthcare. And one of the most interesting things that she said, given that she's in the thick of it, she said, you know, this is happening a lot faster than anyone could have predicted, so get ready. And that it will be quite shocking to healthcare analysts, we believe, and healthcare investors generally, because the cadence in that for the year, so that analysts became expert in parsing out what every word coming out of the FDA meant, but now they're going to have to be expert in technology. And that just serves to reinforce a point that really research departments are going to have to restructure if they want to understand and capitalize on the exponential growth trends that are going to evolve out of the five major innovation platforms evolving today that involve 14 different technologies. And talking about one of the platforms, blockchain technology, but specifically Bitcoin, Yassin Elmandra published his white paper, well it was really more of a blog, addressing the myths still plaguing the Bitcoin space and exemplified by Goldman Sachs' recent report. So what we did in that report, what Yassin did, was lay out the myths and then lay out our response. These myths are old tales, they're you know, but we figured we'd try and put them to bed in one place since Goldman Sachs is such a distinguished financial institution, and we'd love to debate them about these points. So with that, I hope you enjoy all that we have to offer on our website, and I look forward to speaking here again when it seems necessary. Okay, thanks so much.