Cathie Wood’s Episode XIII Update

Cathie Wood is breaking from the regular updates to provide an update mid-way through.

Here are my notes.

Monetary Policy

  • Based on testimony, the Fed is nothing but supportive.
  • M2 growth is still up in the mid-20’s
  • Chairman emphasized they are focused on full employment (we are far away from that) and inflation consistently above 2% YoY (we’re in the 1 1/2 to 2% range).
  • Nothing right now suggest the fed is going to tighten the monetary policy.
  • Commodity prices are moving up very rapidly, especially copper, relative to gold is increasing in price.
  • Dollar is going down.
  • Housing prices are moving up at a double-digit rate.
  • Strong asset market prices when it comes to stocks generally, we’re still up for the year. And we’ve seen dramatic action in the crypto currency space.

Fiscal Policy

  • $1.7 to $1.9 trillion package. Sigh.
  • It does not include the $15/hour minimum wage, but it may be added to an infrastructure bill.
  • $3-4 trillion infrastructure bill brewing.
  • We will have to pay for this in some way, shape or form. We would like to think the economy will grow its way out of the debt, but there are investors who are worried about the leverage in the system.

Market Indicators

  • $600 billion in stimulus money making its way into the system based on the income report.
  • Spending is up 2.4% month to month.
  • Savings rate is back at 20.5%. The consumer has a lot of fire power here.
  • Capital spending is really strong right now. The move to the digital everything, which has accelerated innovation beyond the rate most observers would have expected. Capital spending and housing has the highest multipliers in the economy.
  • We think the economy is very strong.

Bond Market

  • Long rates shocked the equity market. Currently at 1.6% rate. The volatility is a monumental move.
  • Many bond investors thought we would have trouble getting to 1% but it seems like we can go to 2% pretty easily.
  • Based on short term traders, there are record rates in shorting on the bond markets.
  • There’s too much bearishness out there.
  • Bonds have been in a bubble.
  • The market is signaling we don’t need quantitative market, so let’s dissipate pate that move.

Stock Market

  • Traditional value stocks are having a nice run. We feel very good about that.
  • Value is up and growth strategies (like ours) are down. This is great because the bull market is broadening out to other sectors. What would be very negative is if the market continues to narrow because this is what happened during the tech bubble.
  • I like the fear. I like it mostly because I don’t think it will last. 😈

Crypto Market

  • Janet Yellen has gone out of her way to say how speculative it is, how it’s not environmentally friendly, and how it helps illicit illegal activities. I’m not sure why she’s saying this, but all I know she doesn’t understand the crypto space (with all due respect).
  • She’s responding to a movement in price, which has been very rapid.
  • On environmental issue: if you compare energy use of Bitcoin and energy to mine gold, it’s a fraction of it. Broadly, blockchains are going to enable rapid settlement of transactions.
  • On criminal activity: FBI said it’s the best thing that happened to us. The reason is because the crypto is so transparent.
  • On speculative: We can see trillions of dollars in use cases for Bitcoin. As investors, we need to be very supportive to support this ecosystem. At Ark, we are thinking of ways to help the community in terms of Bitcoin development and security.

Market Worries

  • P/E ratios seems to top out at the 20 to 25 range, earnings yield at 4% to 5%. This tells us the equity market has never incorporated 1-3% into their valuation structure of the market. What if the normalized growth rate is 2-3%? The 10-year treasury rate could move to 5% and fail because of notion that nominal growth rate is in the 2-3%.
  • We believe the monetary policy ease is going to ignite inflation. We believe that point of view will be in a dueling match with deflation.
  • Disruptive innovation is going to cause creative destruction in traditional world order.
  • There is so much innovation taking place right now and I don’t think investors appreciate how these S-curves are feeding one another as innovation converge. The best example is autonomous taxi network, the convergence of robots, energy storage, and artificial intelligence.
  • It’s going to take a while to see innovation reflected in economic statistics because it is so grounded in the industrial world and doesn’t capture what’s going on in the digital world.
  • Innovation will put a lot of companies are risk. The steady eddies in financial services, auto, rail, any company in the internal combustion engine… many of these companies, perhaps because of short sighted shareholders, have adopted short-term time horizons. They have consistently leveraged up to buy back shares and pay dividends. We believe these companies will have to cut prices to service their debt.
  • We believe the velocity of money will continue to fall as people will hold back on spending.
  • Liquidity in the ETF space: I was surprised to learn that one of the expert journalist at Morningstar was feeding into the fears of the market. The ETF infrastructure handles liquidity flows beautifully. A portfolio manager in the ETF space doesn’t have to worry about flows. 🙏🏼 I just have to make investment decisions unlike mutual fund managers who have to deal with the flows and investment decisions.