Cathie Wood’s Episode XII Update

Cathie Wood started her career in economics at USC. She feels it’s important to have a sense of economic and policy backdrops when investing. Cathie noticed over the years that there’s a lot of short cuts in reporting. And diving into the reports has helped her point out the V-shaped recovery of the pandemic.

Fiscal Policy

  • $1.9 trillion could be the case.
  • Decisions to overturn the decisions that Trump made and to push the fiscal policy aggressively.
  • We will potentially see the $15 minimum wage. She thinks is good for sum, but will backfire. She believes that a lot of small businesses will not be able to afford it.

Monetary Policy

  • M2 is still north of 25%.
  • We are seeing the ramifications of asset prices such as stocks, bonds, and housing.
  • Chairman Powell says it’s way to premature to pull back.
  • The 10-year inflation expectation is 2.2%. Fed wants to see north of 2% or more.
  • Last year we saw declining prices in March and April. We could see the CPI at 4% by summer.
  • ARK doesn’t believe there will be an underlying inflation problem. Technologies are deflationary, and will hit exponential growth. A lot of companies in harms way because they are using leverage to buy back stocks and issue dividends.
  • We will see deflationary booms associated with innovation platforms. In addition, we will see deflationary bust associated with companies that will have to service their debt. One is good (technological) and bad (fixed income markets) deflation.

Equity Market

  • Great profit season in general.
  • The v-shaped recovery is benefiting most industries (travel, leisure, hospitality) will catch fire this year thanks to the vaccine.
  • Highly valued stocks can’t miss their earnings — they will get hit if there’s a miss.
  • Commodity prices are starting to gain traction, another sign the economy is doing well.
  • Counter trend rally in the dollar. The dollar has moved up against most expectation.
  • If Biden’s fiscal program is approved, then dollar could start to go down again as a result of the fiscal deficit. A counterbalance is the trade deficit, which will come down. This is because more spending will shift to services from goods.

Economy

  • The headline numbers were mixed.
  • The unemployment rate is 6.3% down from 6.7%. Un-farm payroll employment was 49,000, expectation was a north of 100,000.
  • Average work week went up by 0.3 hours, a huge increase. This means will be associated with a lot of economic activity. This rarely goes up yet 0.3 in any one month.
  • Average hourly earnings is up 0.20, expectation was 0.3.
  • Cathie believes the economy is doing much better than was Biden administration is suggesting.
  • She believes the fiscal policy size is overdoing it.
  • Housing is on fire.
  • Capital spending looks great. Non-defense capital goods orders still going strong.
  • Inventory is starting to increase, but also note commodity prices are also increasing. This means that inventory is trying to catch up to consumption.
  • Government spending is going to be a source of great strength.
  • Trade deficit will also be a source of strength as we import fewer goods relative to spending in the service sector.
  • The saving rate is starting to go up from 13.7% to north of 20% (estimate). That is a huge amount of fire power for the consumer.

Innovation

Big ideas 2021 released a week ago. In the first day, there was 100,000 hits compared to 58,000 of all 2020 for Big Ideas 2020.

Decreasing costs

  • The cost associated with scaling new technologies is coming down low enough to open new markets. For example, EV prices are soon dropping below gas cars on a like-for-like basis. Globally, EVs will scale at 82% annual compound rate.
  • AI training cost is dropping by 37% per year. AI models are growing by 10 folds per year. So there is a huge amount of progress happening due to dropping costs. One of the reasons for this is natural language processing costs are dropping.

Virtual worlds

  • AI will enable virtual worlds. Virtual reality is on the cusp. A creative explosion will happen in every sector.

Digital Wallets

  • Digital wallets is a $4.6 trillion opportunity in the US alone. 200 million digital wallet holders which will be our future bank branch. It could be the most valuable technology development per user. Cash App and Venmo are surpassing JP Morgan deposit holders (at 60 million).
  • Part of digital wallet is Bitcoin. Not astonished to see the price elevate because they expected institutions to be a bigger part of equation. What they didn’t expect is that Bitcoin will be part of the balance sheets of institutions.

Automation

  • In automation, it took the manufacturing industry 15 years to go from 20 to 200 robots per 10,000 employees. ARK believes it will take 5 years to 200 robots for the entire US economy. History dictates that this will create many more jobs than it destroys.
  • Autonomous ride hailing today is a $150 billion market. It will become a $6-7 trillion market by 2030. If ARK is right, by 2025, this category will reach $4 trillion in market cap. If Tesla is right, 20% of miles driven in North America will be autonomous by 2025. ARK believes it will 7-8% of miles driven.
  • Drones are going to change our lives. By 2030, 19% of food deliveries will be by drones. This will be a $116 billion market.

All other innovation

  • Orbital aerospace is where all technologies will converge. The global connectivity market (SpaceX satellites) is a $40 billion market. $10 billion is in the US and $30 billion is rest of the world. Hypersonic flight will be a $270 billion market.
  • 3D printing is starting to takeoff because it solved problems during the pandemic. ARK believes combined with AI, it will be a $120 billion market in 5-years.
  • And finally in genomics, long read sequencing will be transformational. ARK is excited about the multi-cancer screening opportunity.