- Cathie believed the stock market would not be favorable to democrats controlling the Senate, which she was wrong about.
- She was right about the V-shaped recovery. Cathie believes we will go through a wobble due to the resurgence of infection and fatality rate, which is causing turmoil in people’s lives. Therefore, a stimulus is needed to address this part of the population.
- Equity markets will continue to recover in 2021
- Earnings explosion: we’re already seeing surprises relative to expectations, some of the largest she’s seen in her career.
- S&P 500 could hit $200 in earnings, double of last year’s $100 (2019 was $140), which is a continuation of 2020’s run
- Equity bull market is broadening out with cyclicals joining the party 🥳
- The 10-year treasury bond yield is breaking above 1%, which is surprising many.
Why talk about economics? Cathie’s background is in economics. She needs to understand the “big picture” in order to invest. This point of view has played out well to ARK Invest’s benefit.
- Monetary policy. M2 is up 26% on a YoY basis. Economists have not seen M2 growth like this before, which is why there’s more questions than answers. ARK Invest believes that given the magnitude of the cycle ahead, coupled with fears associated with rising commodity prices and a falling dollar, the Fed will need to reassess its plan. For example, copper prices are up 75% from the March 2020 lows, and continue to rise, while the dollar is moving down. A Fed reassessment will be seen as good news as it will signal a belief that the market will work itself out.
- Fiscal policy. ARK Invest expects another trillion dollars in stimulus, which they hope will be targeted to those that were devastated by the corona virus. They don’t believe the economy need any more stimulus based on what’s going on with asset prices, particularly stock and real estate prices. There are a lot of powerful activity with positive signals, so any more stimulus would lead to higher taxes and wasteful spending.
- Democrat Sweep (New administration and Congress). There are 3 conciliatory policies that ARK Investment believes will be in focus in the short-term:
- Infrastructure which has bi-partisan support.
- Healthcare: low prices (generic drugs will continue to get a big push to keep pricing down), accelerated approval of breakthrough cancer therapies. No changes anticipated in other areas of healthcare. There may be some attempts to bring forward universal healthcare again, but that will be heavily debated.
- Clean energy. Republicans are beginning to understand the cost of technology like EV and battery are coming down, and clean energy technology is ready to scale. This wasn’t true in the past, which is why the government needed to subsidize. ARK Invest doesn’t think another subsidy is necessary, but if the administration did, it will accelerate clean energy.
- Damaging policies. Increasing tax rates focused on certain income levels like marginal tax rates is not seen as a good strategy. In the past, when marginal tax rates were increased, the tax base disappeared. For example, individuals are migrating to low tax states which are visible on both coasts. If there is a rise in capital gains tax, corporate taxes, and an increase in regulation, we’ll probably see a migration of innovative companies and creative people to other parts of the world like an individual’s home country. Cathie hopes this does not become a trend, but it remains a risk.
- Economic indicators
- Employment. Numbers were weak especially in the leisure and hospitality space. Manufacturers are scrambling to catch up with the housing market and auto market. China and Europe are seeing V-shaped recoveries. Commercial real estate is hurting, which they don’t think is a systemic problem.
- Average hourly earnings increased by 0.8%, which is a high number not seen except in the late 70s, early 80s when inflation was in the double digits. In a YoY basis, average hourly earnings are growing at a 5.1% pace. If you couple that with a massive stimulus, we could see GDP growth in the teens.
- Equity market is a leading indicator. The rise in cyclicals (the broadening of the bull market) is providing confidence that we’re on the right track.
- Inflation is being watched carefully since it hasn’t responded to all of the 2008-2009 stimulus. It continues to be in the 1 to 1.5% range, which is causing people to think inflation is dead. People thought inflation was dead in the late 1960s. In the early 1970s (especially in 1973), inflation kicked up royally as OPEC cut production and oil prices quadrupled. This caused the unhinging of the US dollar and the gold standard. The inflation risks remain in the 26% growth of M2. The question is: Will the money be saved/invested so velocity keeps going down as it continues to move to the asset market (stock and housing) where we’re seeing the real inflation? Or will we see a gradual shift in psychology where consumers and businesses start to get rid of dollars as quickly as possible in order to buy goods and services before prices go up? If dollars continue to move to the asset market, the velocity of money will continue to fall, which will lessen the risk of M2’s 26% growth rate.
- Interest rates. Long term interest rates, the risk free ones, are breaking out, above the downtrend lines. Buying the dip (when bond prices goes down and interest rates go up) may not be the right thing to do anymore. The yield curve, which has been historically good for financial stocks, is misbehaving which she’s not sure what’s causing this.
- Credit spreads, the spread between high (junk bond) yields and investment grade yields, have narrowed.
- The dollar dropped 7% in 2020, which means we lost 7% in purchasing power relative to other currencies. If this continues, it will force the Fed and the treasury to reassess its strategy.
- Bitcoin. In the innovation front, Bitcoin has doubled in the last month or so. It crossed the 20,000 peak and has gone to 40,000. When an asset goes parabolic, it usually takes a generation (10 to 20 years) to recover, but Bitcoin recovered in 3-years. The question is: was this triggered by the bond yield, monetary and fiscal policies? Also, should you hedge yourself from inflation? Cathie thinks that there’s no better hedge against inflation than Bitcoin. Gold has also seen a rise, but it lags Bitcoin. Both will do well over time. Cathie is also confident about Bitcoin because individuals and companies are calling to ask if they should hedge into Bitcoin. Cathie believes that companies will start to hedge their cash positions by adding Bitcoin to their balance sheets － especially tech companies who are more comfortable with this technology. There is also validation in this space with regulators. Brian Brooks, Comptroller of the Currency, said public blockchains can be used for the settlement of transactions and banks can be used as nodes on the public blockchain. This was not expected, but is a big validation which will help banks cut its costs. Cathie thinks stable coins will be a bridge to the disintermediation of banks where we will see a direct to consumer/business from the central banking systems of the world. This will come in time, but in the short term, everyone will start to study about cryptocurrencies. From an innovation point of view, this is just the beginning. Bitcoin’s market value is only a little over 700 billion, which sounds like a big number. Tesla and Bitcoin is one of the biggest ideas that Cathie has come across in her investment career. She says wonderful days are ahead for the exponential growth trajectories that will deliver superior investment returns no matter the environment. It will be a doozy of a correction, so it never hurts to take some profits so that you can be ready to pick up on bargain basement prices.