You're listening to Bloomberg Business Week with Carol Messer and Tim Stenebeck on Bloomberg Radio. We're gonna stay in Miami and welcome in as well our Bloomberg TV audience and YouTube and Bloomberg originals are streaming service because we've got a special guest. Kathy Wood is back with us. She's the founder, chief investment officer and CEO of our Investment Management, joining us from St. Petersburg, Florida. Kathy, great to have you back with us. Happy New Year, Happy new Year.
I'm I'm really happy to be with you, and it is so far a happy new year. It's definitely a different tone. Well, you know, it's interesting we watched yesterday continuing today even though we're off our highs. When it comes to stocks, Kathy, it seemed the more j. Powell talked, the more you know excitement you saw, and it moves to the upside when it came to both stocks and bonds.
Does this market reaction make sense to you or do you see some irrational exuberance if you will know, if anything, I saw an exaggerated UH reaction last year to fears that inflation and interest rates were embedded in the system, uh, like they were in the seventies, and we just didn't believe that at all. In fact, we were seeing a lot of early signs of UH inflation coming down, actual
deflation surfacing. So this does not surprise us. I think what has happened here there there are three people who have weighed in in in in the last week who really have changed their points of view. One is Larry Summers. Larry Summers was almost apoplectic last year. So this is the former Treasury sector almost eplectic about inflation. And I think he truly influenced the FED because he was so
sure that we were in a seventies style inflation. If you'll notice in the last week he said, okay, now, don't don't signal what you're going to do in the future. We're seeing some economic weakness here. And I think the other thing he was saying, not explicitly, was hey, some prices are coming down that I didn't expect to come down. You know, the oil prices roughly half of where it was last March. So that's uh. That's the first person.
The second person was Treasury Secretary Janet Yellen. And remember, I think the market last year got really upset when she changed her mind on transitory and uh and and and I think that fed Chairman Powell as well, and uh and and turned him into an even more hawkish mode. Along with the rest of the Ford board members. She this week said that now that inflation is coming down, we're probably going to be looking at the bigger risk
being kind of mired in low inflation, low growth. That was a big and it effectively says, wow, maybe it was transitory after all. It was just a little longer than we expected. Who knew supply chain problems would last two to three years? Who knew Russia would invade? And then the third the third thing that happened. This was really important. I think in the Q and a UM Chairman Powell himself said, I agree with Lyle Brainerd. We do not believe we're in the middle of a weight
price spiral. And that's another code phrase for the seventies style inflation. So I think that is what the markets responding to. Cathy, you've talked about the threat of deflation, So what's your view of that versus inflation right here? Well, a couple of things. We see the deflation in the pipeline because commodity prices, which are at the top of the funnel, have been coming down on balance. Now we're we're seeing right now some interruptions in that as China
moves away from its zero COVID policy. But I think the fake out here is China has been building inventories, particularly of energy. It's been getting Russia's energy for discount to what the rest of us are paying, So why wouldn't it build inventories. So I think I think UM, that fear is probably going to be or has been a little overblown in terms of ramifications for inflation. UH. And I also don't China's China's taking off. But anyway, we have the funnel. We had at a holiday time
massive discounting UH. And even though we had massive discounting, in the fourth quarter, inventory accumulation accelerated. That was the biggest surprise to me. Wait a minute, final sales were that punk uh. That inventories built even though retailers and others were trying to clear the shelves with these massive discounts.
That was very interesting to me. So I think unflying demand here is um basically the consumer railing against price increases because real average wages have gone down and the consumer is going to win this battle. Kathy, I want to go back to the way that you characterize what we heard from the FED and J Powell yesterday, because he also said some other things like further rate hikes
will be appropriate. It's premature to declare victory. We have a lot of work left to do, and if our outlook turns true, then I don't see us cutting rates this year. What convinces you that his views have changed, Well, I think he is looking at the bond market and he's saying what he should say as as a FED chairman who has been very concerned about inflation. He can't turn on a dime. But just look at what the
bond market saying. The long term bond yield peaked in October at four point three and today we got down to I believe three point three five. You know, if if you look at the tenure bond yield as a proxy for what effectively nominal g d P give or take a little uh nominal GDP growth will be over the next ten years, that doesn't need leave a lot of room for for much inflation. If we're going to have real growth over the next ten years, so I
think the markets are speaking loudly. I think the inverted yield curve, we're still around seventy basis points haven't been that. We haven't seen it this low since the early eighties when Vulcar was trying to strangle inflation out of the system, and he did so. Cathy, forgive me, I want to jump in for a second, because, so are you expecting the Fed to cut rates this year? I would not
be surprised to see the Fed cut rates this year. Uh. And one of the other reasons that we're very focused on this message that the bigger risk is deflation, it's also a very big opportunity. Um when when we look at deflation, there are there's good deflation and there's bad deflation. The bad deflation is caused by demand destruction. The good
deflation creates demand. And that is what our research is centered on, which is illogically enabled innovation that rides down learning curves, which are expressed by cost cost declines, which turn into price declines. You'll notice that Tesla is cutting cutting prices and many many people jump to the conclusion that, oh, they're having so much trouble now, there's so much more competition.
No Tesla can cut prices now that supply chain issues are passing us because it is riding down a cost curve. The battery cost curve declines, and I think it's battery costs are lower than anyone else's. It's drive train costs is more more correctly, UH said, are are lower than anyone's out there. And so he wants he wants to proliferate electric vehicles to save us from environmental disaster. That is his mission, and he is going to drive down prices.
When you drive down prices, units explode. It's no surprise to us even without price cuts. Last year that electric vehicle demand was up more than sixty percent while gas powered demand was down I believe seven percent. The consumer pref shift has occurred. We are now in prime time for electric vehicles. I want to go back to test in a moment, but I want to go back to here our innovation E t F. We've done the story
on Bloomberg. You guys had the best month on record for the fund, up twenty percent at all r E t F s. All the eight ones E t F s are up, seven of them in double digits. Do you see that as vindication for your investment theses UM, and do you think it can continue. Yes, we believe that innovation was one of the biggest victims of the of the massive interest rate in increase we saw last year and less than a year, I think eighteenfold increase
in interest rates. It was like a massive earthquake. And the other victim, of course was the other very long duration asset out their long term bonds. Uh. They were hit at least through October, if if my numbers are correct, The long bond market had not seen that um, that bad a year since the seventeen hundreds. We're not We're not talking post worl War two. We're talking about the gives you a sense of the shock to the system, and the shock to our strategy was palpable. Boy, we
felt it every time Chairman pal spoke. We're speaking with Cathy Wood, CEO of ARC Investment Management. Kathy Carroll just asked you about the performance in January and she mentioned that it's the best month ever for the our innovation e t F. The thing is is that the jumping performance hasn't been met with in the way of flows, with investors putting money back into ARC. Perhaps This is because it's been a tough couple of years for the E t F and for many of your E t
F s. How do you win them back? Well, actually, I don't think we lost many investors. I think the shock to most people is how well we held our assets in Our underperformance started in February of twenty one, when people were starting to get vaccinated, going back to work, and these fears of inflation started to surface. So since February of twenty one, we have seen a massive down round in our innovation strategies. And in twenty one we had very significant inflows, most of which we kept. I
think the net was seventeen billion that year. Last year again a horrific year. I think for the year our flagship was so a r k K was inflows one more than one point five billion dollars, and I think that shocked a lot of people. What we saw was
averaging down. Uh. Many of our loyal shareholders did average down, and I think one of the reasons they did is we were out there every step of the way, giving away our research, reassuring our clients that actually innovation solves problems, and we have so many problems now created by supply chain problems, the war created by the FED, and the demand destruction which is hurting margins, which technology will solve
in terms of increasing productivity. And I think because we are so um prolific in in our research, our analysts are amazing in terms of the kind of original research they're doing, So our clients and others are reading research from us that they're not seeing from anyone else or
anyone at all. And I wouldn't get even out And I want to get into that in a moment, because I do love it, Cathy, like you've got over a hundred fifty pages and your big ideas for for this year, and it's a lot of things that we talk about. What I do want to ask you though, after a sixty scent drop in our innovation the e t F last year, and I know it was a tough year for form many assets, do you find any of your investors kind of treating ARC a little bit, you know,
more cautiously. I think one thing that happened last year is we were able with a number of papers we were uh we called it our ground war. We're trying to help investors and advisors understand that if you take a look at truly disruptive innovation, which is all we do UM and you look at other growth portfolios, large cap growth, uh, you know growth generally, as well as the major benchmarks like the NASDACK, you won't find much
truly disruptive innovation in them. And so as we were getting hit so badly, what we also saw is investors taking tax losses in some of NASTAC and other strategies and moving into our strategy, which was hit so hard because they did believe that we were going to rebound faster.
We were the hit hit the hardest. Our research would suggest that that the two hundred trillion dollars that we expect by twenty thirty to be the market valuation pleased on disruptive innovation, that that had changed, that that hadn't changed. And so if you have a five year investment time horizon, yes you move into our strategy and oh, by the way, we are the new NASTAC, which is one of the
ways we were trying to convey. Look, if you want to look at the future and truly disruptive innovation the way the Nasdaq the NASDAC performed in the eighties and nineties, that's where we went vation. Okay, look through that now you will not find the kind of disruptive innovation. It certainly doesn't dominate those indexes. Maybe them. Well that's perfect. That's the perfect segue, Kathy, to get you to weigh in on what we look for from the companies that
are reporting this afternoon. Companies like Apple, Alphabet, Amazon, These are not companies that you necessarily are betting on. These are companies that you think can be disrupted. What do you watch for with them? What can they tell us about how the economy is? And you know what what arcs should be looking at. Yes, well you know when I say we don't own those in our flagship strategy, we do own them in some of our more specialized strategies.
But these two are the companies that have enjoyed incredible success. They have created big, big markets, and to move up tenfold hundredfold from here is going to be difficult. We're not saying they're not going to be successful, but we are saying a few things. Take Amazon. Amazon is not a social network. We have moved into a world of social commerce, so we own Shopify. Shopify is supporting Instagram and TikTok and others that have that that are taking
really social commerce and scaling it. UM and Amazon will not become a social network. It is not one. It's a good online UH retailer um and I would put it in a more mature category of online retail. That's not what we do. If you look at Google or alphabet UM, everyone is talking about chat GPT, and we do believe that it is going to put search at risk. Search is of Google's revenues. Now. We also believe, however, that the Google is going to harness AI as well.
I mean, it has it owns deep mind. It is one of the best AI companies in the world. But I think it has been so caught up in fears about legal liability associated with the dangers created by about Microsoft and Microsoft's big investment chat GPT. Do they have the potential to overtake Google when it comes to search because of the way they are harnessing AIM. I I think that's the big threat. I think that's why uh Sundar went to code read at at at Google. I
think they're going to become very aggressive. Uh So, yes, yes, we absolutely are are focused on what open ai and Microsoft are going to do together. Kathy, you know one thing is and you know for our TV and our streaming service and YouTube, we've got you know, the share prices of Apple, Amazon, Meta and Alphabet up there. I mean you're looking at Meta up more than and it
was higher at its best levels of the session. I do like how you think about innovation and things that are going to be impacting us in years to come. Is the metaverse something that you guys think about that this is an important trend or TB d well. Yeah, In Japan we subadvise a fund for Nico Asset Management UM called the Metaverse. So yes, we are in the very early days of what will become very immersive digital experiences.
In fact, we believe that more than half of our spending will end up online as opposed to UH through physical stores. UH and and that's part of our big ideas this year. Our our team UH led by Frank Downing and Nick Bruce, have done a terrific job Andrew as well, pulling together how this new world is going to work. So absolutely we do. I think what happened with Meta last night I listened to the call was fascinating. I think what's happening is UH, Meta has an answer
to TikTok It's reels and Reels is taking off. They're also extremely focused on using artificial intelligence as they are activating this platform. And What's App is also uh a very important platform that they have not monetized and now they're activating it. Uh so really really fascinating. And you know, just to give you a sense, Delta is working through What'sapp right now to inform passengers when something goes wrong, uh and improving customer service dramatically. So you know this
this could become a very big business use case. So yes, lots of big markets that Facebook. The other thing that Mark did was used the word efficiency. Uh. He must have used times and and and in that in that vein, he was using artificial intelligence as well. Because as we in big Ideas uh and you can find big ideas on our dash invest dot com um. In Big Ideas, we show the pro of activity increases that are possible
because of artificial intelligence. It's these companies who could be some of the biggest beneficiaries if they harness AI correctly. I think a lot of people are looking for the killer app like they look like these viral apps that the Internet delivered the killer app for artificial intelligence is productivity games, and any company does not harness it is probably not going to be one of the big winners out there. And just one other thing on AI. I think a lot of a lot of the hype is
in companies that have AI in in their names. But I think, you know, the real winners here are going to be those companies that have proprietary data and have lots of it, have the best domain expertise, best AI expertise, the best pools of high quality data. Two basically create new businesses in you're a big ideas paper you again speaking of of big ideas. And I love when we talk about this because everybody on Twitter has a comment.
But you stick to your million dollar bitcoin forecast despite what we saw I think about a six drop in it last year. Um, people are saying to me, really did she really stick to this? Why the confidence in
that despite everything? Well, the confidence actually was strengthened last year. Now, last year was was a terrible year for everything crypto, But if you think about what happened, it was the centralized opaque players who went bankrupt f tx Celsius three hours to capital Um and and what did we see from bitcoin. Bitcoin is completely decentralized and transparent. It started because of oh eight oh nine, the lack of transparency
in the traditional financial services ecosystem. And I remember when we did our research and Art Laugher I mentioned him. I mentioned him the first it was on your show. Um, he took us through what bitcoin meant to him and it was wow, Art, the this is a rules based moetary It's a rules based digital monetary system, and it's global and and there's no human intervention. Uh, it's very disciplined. It's mathematically metered to top out at twenty one million units.
Well in the last year, the response to the last three years, the responses to COVID, the the fiscal and monetary responses that you know in many countries are causing hyper inflation and you know fiscal crises. We're seeing protests and riots all over the place. Um, well, where do these people go for an insurance policy against an implosion in their purchasing power and wealth. It is in something
like bitcoin. Bitcoin is an insurance policy, and it is an insurance policy for the for for everyone, against confiscation of wealth. Uh. So you're not tempering any of your thoughts even with what happened last year, and if anything, you're kind of doubling down in your conviction because of what happened last year. Is that fair? Yeah? We did. We tempered a few assumptions we thought, led by Tesla and block formally Square and micro Strategy, that more corporations
would put coin on their balance sheets. That is that we've dialed that one down considerably. And the same thing with Nation States El Salvador, as they're sticking to their guns on this one. Uh and uh and actually are doubling down. I believe in terms of bondish ones back by a bitcoin um but other countries will probably not move as quickly as they might have if L. Salvador had had, you know, a grand swish right off the bat. We do think it will happen, it's just we've pushed
it out a bit. So I think our base case going now is in five years, I think roughly six and seventy thousand, something like that, and then in by thirty as as we see more use cases and more of these insurance policies taken out against they still and policy regimes are not healthy, we think it could pass a million dollars. Kathy, we don't have a ton of time, and I want to make sure to get to a
few more of your big ideas in your research. For three we've talked about AI, We've talked about cryptom we talked a little bit about batteries in Tesla. UH. In the last thirty seconds or just the last couple of minutes that we have with you, let's talk about a few you more specifically robotics. What what's appealing to and what's exciting to you. What do you see as investment
opportunities for robotics. Well, I think everyone thinks robots have been around forever, and they kind of have, but they've been locked in cages inside auto companies and so forth. What we have now is really the dawn of the age of robotics. It's really going to happen because of battery technology and artificial intelligence, and we're talking about industrial robots. Amazon is adding one thousand robots per day UH and by the year we think they will have that Amazon
will have more robots than people. Even though they will continue to increase their employment UH, roles, robots will increase faster. Why is this happening? Well, as always with technology. The technology is ready and even more important, the costs are low enough now and the technology really AI battery technology
g critically important. Uh. And the costs if we use rights law for every cumulative doubling in the number of industrial robots produced, costs will decline by I think it's even more than that, given the massive labor shortages that have been exposed, and we still have around the world, some of its demographics, some of its COVID related um, the aftershocks. We think the time is right for robotics now. So uh. And you know, Tesla is a robotics company
autonomous vehicles, which is where we're going. Uh, those are butts, those are robots. So we think we're going to see a lot of robots rolling around, flying in the air, drones and so forth, so, you know, and collapsing. The cost of that, I don't know. If that's so, I'll take it. I'll take Kathy. We really only have about twenty five seconds left, so quickly, if you've got some new money to commit, what's the name you buy at
Tesla right now? Well, Tesla is the number one position in two of our fund Eric KK and r k Q, and we even have it in r k W because it is probably the best case of a convergence between and among the most uh massive innovation opportunities of our lifetimes. Robotics, autonomous vehicles or robots, energy storage, they will be electric, and artificial intelligence. They'll be powered by AI. So that's one S curve feeding ANOTHERS curve feeding another escort. Gonna
leave it there. I feel like we go around the world with you, Kathy, and so appreciated. Kathy would. She's the CEO, she's the founder, she's the ce IO of ARC Investment. Check out her Big Ideas fifty three pages. You can find it outline at ARC invest Kathy, thank you so much joining us from Florida.