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Cathie Wood speaks on the Fed, energy, ARK ETF, crypto, Elon Musk

ARK ETF Founder Cathie Wood joins Yahoo Finance Live for a wide-ranging interview on the state of the crypto market, Elon Musk, Fed policy, Teladoc, and more.

Video transcript

- Here's the closing bell today.

[BELL RINGING]

- Hammer there. Get after it, would you? There's the closing bell on Wall Street today for this Thursday. Let's check out the numbers, how we finished. Back in the green, stopping that five day losing streak on the S&P. Nice to see a 0.5% gain in the Dow. The NASDAQ also up more than 1% on this day. We've got a couple of friends here hanging out with us, don't we? We got Pras Subramanian here for the next hour. Julie Hyman as well with a very special guest today, Julie.

JULIE HYMAN: Yes. Thanks so much, Dave. Appreciate it. We're talking about Cathie Wood. Her flagship ARK Innovation Fund, it's attracted more than $1 billion in net inflows this year. But that's even as the price of the fund has gone down quite a bit. Over 60%. Recently, Cathie has been sounding the alarm and blaming the Federal Reserve for sending the economy into a-- the US economy into a recession.

Let's bring in Cathie right now, ARK Invest CEO and CIO. Great to see you, Cathie. Thank you so much for being here. And we've talked about the inflation picture and the Federal Reserve before. There was a piece in Bloomberg today where Robert Burgess said you might well be right that Powell and company are being too aggressive on rates and will send the US into a recession. We've heard other strategists raise that alarm as well. Talk to us a little bit about that and what that means for your portfolio if, indeed, that's the scenario.

CATHIE WOOD: Well, I do believe that the market, the stock market, has been discounting this for a good part of this year. The market is in a bear market. So the equity market is not going to be surprised. And even the fixed income market's not going to be surprised. The yield curve-- so the difference between the two year and the 10-year Treasury yield-- is over 80 basis points. 0.8%. This has not happened since the '80s, the early '80s, when Volcker, Chairman Volcker, was taking a sledgehammer to inflation, an inflation problem that had built up over 15 years.

This inflation problem built up over 15 months. And instead of increasing interest rates twofold, 10% to 20%, which is what Volcker did, Chairman Powell has taken interest rates up 16-fold. Again, never seen that before. And I do believe that the surprises now are going to be on the low side of inflation expectations dramatically so. We believe that inflation will drop below the Fed's 2% inflation rate sometime next year.

And the pipeline is telling us that. Commodity prices, inventories, which are overwhelming and causing all kinds of discounts, and the bond market itself. Whenever there is a yield curve inverted, it is saying, OK, growth is going to disappoint or inflation is going to be lower than expected or both.

JULIE HYMAN: And so does that mean then, Cathie, that we're not going to see, say, a terminal rate of 5% or above from the Fed?

CATHIE WOOD: I would be very surprised if we see anything like that. I think one of the most visible commodity prices out there, oil, despite a lot of potential support, can't get going. It peaked at $130 per barrel after Russia invaded Ukraine. It's now down to $74. And even with China opening up, we think, supposedly as support for oil prices, it can't rally. So I see you're putting up here 71.60. But that would be yet another proof point.

JULIE HYMAN: Yeah. And so are all the sales, I guess, that we're seeing when we go Christmas shopping, a lot of folks on a lot of items, Cathie, as we see that start to feed through. So, again, if this scenario is correct, if we are going to see inflation start to come down more sharply than anticipated, if we do see the Fed then slow down interest rates or even stop raising interest rates earlier than anticipated, bring it back to your portfolio and what that means for where you're investing.

CATHIE WOOD: Well, if you look at what has outperformed in the last year or so, we've seen the beneficiaries of inflation outperform. Now, I just told you that oil prices have come down from $130 to the low $70 range, almost cut in half. And yet the XLE, the S&P energy sector index, is not that far from all time highs. So there's a bit of a disconnect there. There we go. There we go.

So what you will see as inflation unravels, interest rates come down, raising the present value of future cast flows, that kind of environment benefits our portfolio. We have stocks in our portfolio, companies that are going to be extremely profitable in the next five years. Right now, they may not be that profitable because they're investing aggressively to capitalize on some amazing opportunities in the genomic space, robotics, energy storage, artificial intelligence, blockchain technology.

They're investing now because many of these are going to be winner take most markets. So they're huge markets. And, therefore, there's latent profitability. The gross margins in our portfolios-- so just taking a cost of goods sold from revenues-- the gross margins are very high. And what they're spending on R&D, sales and marketing, stock-based compensation to attract talent in these early days is really important to their future success. So as interest rates come down, the present value of future cash flows going out five years, the present value of those increases.

JULIE HYMAN: Cathie-- if I might-- so you think interest rates are actually going to come down because the scenario that you were describing before, right, with the incredible increase that we've seen in rates already, even if the Fed doesn't get to 5%, even if it gets to 4 and 1/2% and stays there, isn't that going to continue to be a headwind for some of these growth companies, some of which rely on lending, for example, on debt to do some of the investing you're talking about?

CATHIE WOOD: I think a change in rhetoric toward, hey, maybe we're not going up after 4 and 1/2% or a change in rhetoric will get the market going. The market is trying to figure out how high is high. And you've got some observers, economists out there thinking it could be 6% or 7%. And so the market is holding back and saying, wait, we need some evidence.

Now, I think the evidence is becoming very strong because long bond yields are down at 3 and 1/2%. The long bond market does not think interest rates are going to 5% or 6%. It's been moving in the opposite direction. We got up to 4 and 1/4 on the 10-year Treasury. And now we're down to 3 and 1/2%. So the bond market I think is speaking pretty loudly. And the bond markets itself, which would be the most sensitive to rates going up, is moving in the other direction.

JULIE HYMAN: Cathie, we have to get to your performance because you could say the equity market is speaking as well when it comes to the performance that we've seen of your benchmark fund this year. ARKK down more than 60%. And I know we've talked about this before that you are a longer term investor. But if you look back three years, you've underperformed the S&P 500. If you look back five years, you've underperformed the S&P 500. In fact, if you go all the way back to 2014 when you started the ARKK fund, it's still underperformed the market. So what catalysts can investors look for to turn that around? Is it going to be the interest rate scenario that you're describing?

CATHIE WOOD: Yes. We have never seen a market like. This is worse than '08-'09. And I think many technicians basically took a chart of the tech and telecom bubble and the bust and they said, OK, that's what's going to happen. That has happened to us and more. This is worse than the tech and telecom bust. The difference between the two periods is we got into an irrational market in the late '90s. Investors were piling on technology stocks actually trying to outcompete indexes and each other. So they ended up with 40% technology.

But the technologies were not ready. We didn't get cloud until '06. We didn't get breakthroughs in deep learning until 2012. Not only were the technologies not ready, the costs were way too high. To sequence the first whole human genome, it took $2.7 billion for one person's genome in 2003. Today, that's $500. The technologies are ready. The costs are low enough. The seeds for what we're investing now were planted during the years that ended in the tech and telecom bubble. That was irrational.

And I think we're on the flip side of the bubble right now. I think what's going on right now is irrational. Many of our stocks are below where they were at the low point in 2020 when COVID hit. Some of them are back to 2017 levels. And a company like Teladoc, its revenues are up 14-fold since. Its gross margins are in the high 60s. We think moving into the 70s. And that compares to the NASDAQ's 43% gross margins. See what I mean about latent profitability? They have a lot more to spend to make this backbone of the health care--

JULIE HYMAN: Well, Teledoc also still loses money, right?

CATHIE WOOD: This is what I'm getting back to. High gross margins, high 60s, low 70s. This company, its ultimate profitability is going to be superior because we believe it will become the health care information backbone of the United States, if not elsewhere. So just think about that. High 60s, low 70s gross margins compared to the NASDAQ 43%. And yet the stock is selling for I believe it's around two times revenues, whereas the NASDAQ is selling at 3.25.

This is as irrational on the downside as the upside was in the late '90s. And the reason this has happened is because of the tech and telecom bust and even more so the '08-'09 meltdown. Investors are scared to veer much away from their benchmarks. When we get into a risk-off period, they are selling any stock that's not in their benchmarks.

JULIE HYMAN: Well, I mean, in some cases, they're scared with good reason, right? I mean, because they've lost a lot of money.

CATHIE WOOD: Yeah. Julie, just one sec.

JULIE HYMAN: Sure.

CATHIE WOOD: So if I can just finish this thought so that you understand and so that your viewers understand. So they have been selling our stocks because they're not in the benchmarks. And it has reached an incredible level. But I also think if you ask where the risk is now in the market, I think it's in the benchmarks that everyone's crowded into because they're very backwards looking. And our portfolios are forward looking.

Most people will not construct portfolios the way we do. They need their benchmarks. We need the best companies who are going to execute on the future of these five new platforms. And we believe those are in our portfolio. So if no other reason, given the down round we've been through, if for no other reason we would be a great diversifier for those who are hewing to benchmarks where we think there's a lot of risk to the traditional world order because of innovation.

JULIE HYMAN: Cathie, I am curious. I was looking at your prospectus today. And it mandates that 65% of, again, ARKK be invested along the lines of what you're talking about, this innovative companies that you focus on. That leaves the other 35%. Was any thought-- I'm just curious-- over the course of the year to get into other types of companies to sort of cushion the downside to some extent?

CATHIE WOOD: No. We know what we do. And our focus is completely on disruptive innovation. That's what I mean. Others will diversify into benchmark stocks. What we do as they are selling our stocks, we are concentrating our portfolios on our highest conviction names. We've gone from 57, 58 names in the flagship portfolio to now 30 names. So that has-- what we have done is those which are the lowest on our scoring system have left. It's not like they won't come back into the portfolio. But we've concentrated towards our highest conviction names.

I think the kiss of death for a strategy like ours is to style drift into another strategy. You will not find us buying energy at all. And why is that? Because the secular outlook for oil demand is down. We think that oil demand may have peaked in 2019. It's stretching to get back there now. But with electric vehicles taking off, and now you've got Uber and Lyft riders buying Teslas and other electric vehicles, the vehicle miles traveled, the electric vehicle miles traveled is increasing dramatically.

And so we wouldn't touch energy. And I would say I'm proud of the call on energy after Russia invaded Ukraine. We looked at that price and we said, now surely there's going to be demand destruction and an accelerated shift towards electric vehicles.

JULIE HYMAN: Cathie, you said you don't style shift within your fund. You do have other products, of course. They're all along the same lines. And you did launch recently a new kind of fund, the ARK Venture Fund, which invests 70% in private companies, 30% in public companies. I'm just curious, what can we expect from you in 2023? Are you looking at any other sort of new products to bring to market?

CATHIE WOOD: Well, we do have two new crypto strategies. And, yes, we're very excited about helping to democratize the venture space. $500 minimum requirement on the Titan app. So social distribution added to our social media and social marketing strategy. So very excited about that. And then two new crypto strategies. I believe the best time to launch new products is when times are tough and they're out of favor because that gives the end investor an opportunity to ride the next wave.

And I really believe, if I can just back up and give you a sense, during COVID as we learned the disaster that COVID would be, the market dropped in one month roughly 30% depending on the measure. We were down 46%. Our mantra back then was innovation solves problems. COVID is a terrible problem. And then, of course, our genomic revolution was our best performing fund, up 180% in 2020.

But our flagship from the low in April of 2020 to the peak in February of 21 went up 360%. And so this idea of innovation solves problems. We have more problems now. We have all the supply chain problems that innovation has helped work out. We have food and energy prices having increased as dramatically as they did. Electric vehicles. Genetic engineering, CRISPR gene editing to allow crops to grow in less fertile areas than Ukraine.

So innovation solves problems. And I believe what happened during COVID and after as investors woke up to the idea that, wait a minute, innovation does solve problems, I believe that that was a dry run for what we are going to experience during the next 5 to 10 years as these five innovation platforms around which we have centered our research take off. They are ready for prime time.

JULIE HYMAN: So I know we don't have much time left, Cathie. And I do want to ask you about crypto. You mentioned the two new crypto products that you're coming out with. I know you've been adding to positions and things like Coinbase and Grayscale. Whether or not crypto and the blockchain innovation solves per problems, if the sentiment surrounding these new assets is bad and people don't want to buy them, to some extent does it even matter if the technology is good or not if people don't want to buy Bitcoin, for example?

CATHIE WOOD: Yes. And first, before I answer that, I just want to say that these strategies are for advisors who do read our research, very sophisticated in their understanding, on the Eagle Brook platform. So that's really important to state. I think what we're learning because of FTX is how much more important fully transparent decentralized networks will be to financial services going forward. FTX, Celsius, 3AC were all closed networks, opaque systems. You couldn't see what was going on.

And what happened as they were going down? The people who were on the fully transparent distributed networks were able to get out scot free. They saw what was going on. There were margin calls for those who were overleveraged. But the system worked. It didn't skip a beat. Those other companies went out of business. It's a little bit like '08-'09. The old financial world is very opaque, not transparent.

The new world that we're entering-- and we do believe DeFi will actually get a boost coming out of this because it's so obvious now. Decentralized and transparent is the way to go. Those networks didn't skip a beat. All of the transactions were completed. And there are all kinds of metrics saying they're getting stronger now. It's very interesting to note that Sam Bankman-Fried, who has either committed gross negligence or outright fraud, he didn't like Bitcoin. He didn't like it. And why didn't he like it? It's decentralized. It's fully transparent. And he couldn't control it.

He was trying to control the crypto world. Master of the universe. And that was a recipe for failure. It's been most unfortunate because so many people have been hurt because of it. But I do think the big lesson-- and even the newest SEC commissioner is saying, you know what, we really have to double down on this idea of decentralization and transparency and help to propagate this new world with the right kind of regulation.

And it's not like they have to change regulations. As Brian Armstrong says at Coinbase, we don't need new regulations. We need clear regulations. And we certainly need more clarity from Gary Gensler at the SEC. And the other thing we need, I would submit, is we would have saved a lot of people from some of the catastrophe that FTX has presented them with something like a Bitcoin ETF, a regulated-- instead, a lot of people went offshore and then got carried away with it. So I think the SEC deserves some blame for what has gone on as well.

JULIE HYMAN: Cathie, can I sneak in one more? Or do you have to run? I know you have another meeting you have to get to.

CATHIE WOOD: Yes. Yes.

JULIE HYMAN: OK. You do have to go?

CATHIE WOOD: No. One more. I do have to go.

JULIE HYMAN: OK. Great. I want to ask you about Tesla. I just want to sneak in one on Tesla, which you still have a big position in. Man, Elon Musk has been busy, as he always is. And there's new reporting today that his bankers are considering replacing some of the debt he used to buy Twitter with new margin loans backed by Tesla. There's also some reporting out of China that the production there is actually slowing down. Is your faith shaken in him at all in terms of running Tesla? Is there anything that would shake your faith in him in terms of how Tesla is doing?

CATHIE WOOD: So on Tesla, the end demand is the end demand. And in Shanghai, it does appear perhaps that high-end demand is giving way to a little bit of low end from a pricing point of view demand because of the economy there. And yet in thinking about Tesla's positioning, now that its supply chains have loosened up, I believe what's going to happen is Tesla is going to be at the forefront of being able to drive down costs and prices so that this idea of electric vehicles moving into the mass market is going to start to take root.

And Tesla is very aggressive at cutting costs and prices once we get out of this situation. So, no, I'm not worried. In terms of manufacturing, which is the gating factor here, we need new plants as EV scale, we believe, from 8.5 million units globally this year to perhaps 60 million in 2027. We think Tesla is going to be at the forefront of that. And so our conviction there has not diminished.

Elon's main role at Tesla right now is moving it towards an autonomous taxi platform, which we think will happen in 2024. I think he thinks it'll happen next year. I think he is as focused as ever on that. And, yes, he has had his hands full with Twitter. I think he's surrounding himself by the right engineers. And he's going to bring in new leadership.

I notice-- I mean, I don't know if this is going to be the case, but Bret Taylor, who just left Salesforce.com, was on the board of Twitter and certainly understands that company. He's an incredible operator. It'd be interesting to see him come in. I don't know if that's going to be the case at all. But I know he's going to surround himself by the right business leaders. He's not going to be running that company on a day to day basis.

JULIE HYMAN: Cathie, just to be clear, you think Bret Taylor would be a good choice of CEO of Twitter is what you're saying?

CATHIE WOOD: When I saw him step down-- now, there are others stepping down as well, so maybe there's just an outright restructuring going on there. But I thought he was on the Twitter board. Maybe. You never know. This is not even a rumor. I'm just saying he's the kind of person that I believe Elon Musk is attracted to and will surround himself with at Twitter.

JULIE HYMAN: Interesting stuff, as always. Thought provoking. Cathie, thanks so much for the time. Really appreciate it. Cathie Wood of ARK Invest. Appreciate it. Be well.

CATHIE WOOD: All right. You as well. Thank you so much.