Arc invest and 21 Shares are teaming up To introduce a new suite of digital Asset ETFs actively managed digital Asset ETFs and I'm joined Now by Kathy Wood of Ark invest to talk about uh These products um why now with the this Suite of products and sort of how does It add to what Arc already Does well our Focus always from the Beginning has been on disruptive Innovation and uh we believe uh that Blockchain technology is one of the most Disruptive innovation platforms evolving Today I think uh We've uh uh interviewed Or I've interviewed with you a number of Times so you know it's robotics energy Storage artificial intelligence Blockchain technology and multiomic Sequencing so it's one of the five major Platforms we've been focused on since The beginning of Arc we celebrate our 10 Year anniversary in January Uh we took our first exposure in Bitcoin When it was $250 in 2015 and we wrote a paper back Then uh and we knew we wanted to be Involved back then and actually prior to That the director of research and I at Another firm had been focused on it Um this is the First Global uh Digital Private rules-based
Monetary system in history it's a very Big idea when we wrote the paper in Collaboration with art laugher you know Art laugher supply side economics Laugher curve uh he said I've been Waiting for this since they closed the Gold window in 1971 so he's been waiting 50 years for This right and he's so excited about Everything crypto uh but especially Bitcoin Because he believes uh and it is True monetary uh monetary policy around The world is unhinged it's not hinged to Anything except human decisionmaking uh And this is going to put discipline Rigor back into these particular Products you're talking about well Bitcoin is uh the the monetary system is Bitcoin and so yes the why now for these We've beening working with 21 shares Since I met ofilia at an etfc Fab in 20188 they had really just started their Business and I said um you know we want To move towards crypto you are Completely crypto they were focused on The infrastructure the regulations Really blazing a trail they had to Invent things in order to make this Happen and we knew that was not our our Core Competency um and so we but we did start Talking our core competency is research On disruptive innovation uh and they do Research they they do deep technical
Research on the market uh our research Is on the disruptive innovation that it Represents and we've just been coming Together for five years it was a natural For us to come together they are or 21 Shares is the Largest uh crypto ETP provider in the World $1.5 billion dollar they have 35 Different funds most of them in Europe In and around Europe they were looking For a US entree and uh we were looking For infrastructure and you know we we're Just delighted to be uh partnering with Them given how much groundwork they had To lay for this to happen um speaking of Groundwork on another product that You're working on of course the spot Bitcoin ETF which you are also Partnering with them on and you've got Your filing in there's a lot of filings In every day seemingly there is a new Rumor about approval of one of these Things um what are you hearing from the SEC at this point are are you know There's a January deadline I know that People have been looking to how Confident are you that you're going to Get approval well something has Changed um so we had put in a number of Times of filing and we were just denied Never got any questions really never got Any response this time uh this summer we Got questions back from the SEC now Normally when you get questions from the
SEC you're just saying oh my goodness we Were thrilled to get questions back Because it means they're engaged now now We have met uh a number of the research People at the SEC on the research side And and they are extremely sophisticated They know what they're talking about and The level of sophistication of their Questions suggested okay now they're Moving deeply into this and we answered Those questions we have not heard back That's a good sign too they never tell That tell you that you've satisfied them But if you don't hear from them uh they They uh that usually means that you have Satisfied uh the answers to the uh to The requests So that was New and uh the we also know that black Rock got questions uh we we put our Answers in first I think they have Followed and I'm not sure uh about Anyone else um that was different and it Says okay there's movement and we are The first in line just because we kept Refiling others gave up and so but we Just kept refiling we just kept and we Became first in line so David against Goliaths right um and that's January 10th is the final deadline they've been Able to push it it's uh very Orchestrated push it push it but the Final they either approve or deny on uh January 10th and what do you think well
Again I I mentioned something has Changed that's good um the odds have Gone up Uh there is only one wrinkle just Occurred to us in the last couple of Days um they will approve a number at Once it won't be just one uh that would Be choosing a winner given the way ETFs Work um but we know grayscale wants to Convert to an ETF I don't know how practical that is Or if the SEC will let them or if they Need a special dispensation I just don't Know the rules um great Ray scale has Said it will sue the SEC again if it Denies uh the conversion um if they were To do that before January 10th I don't Know if that would throw everything up In the air again I just for the others As well for everyone right yeah I I just Don't know I don't know so there's still A lot of unknowns out there um you Mentioned you guys bought into Bitcoin At 250 way back when so the return from 250 to 35 36 looks pretty good but it's Not 100,000 that I think you and I have Talked about at various points or even Loftier numbers where are we in that Cycle I think uh so if we look at the The reasons that Bitcoin will scale so Our base cases today 600 to 650 $650,000 and our bull case um based on The scarcity that is now developing We're at roughly 19 and a half million
Bitcoin out there there will only be 21 Million ever and we do believe that um We think that institutions if the SEC Blesses a Bitcoin ETF institutions will Feel like the coast is clear uh for them To pursue we know a lot of Institutions Uh have been researching crypto assets For a while and do agree that it is a New asset class uh Bitcoin was the first In new asset class we CL uh class we Wrote uh um we wrote a paper in 200 I think it was 16 ringing the bell For a new asset class and uh our Director of digital assets said to me do You realize that happened today we rang The bell for a new asset class I said I Didn't make that connection anyway um so Institutions understand when there is a New asset class it's um there there's an Opportunity to to diversify and increase Returns per unit of risk that's very Important uh they've also learned that Uh that Bitcoin in particular can be a Hedge against both inflation and Deflation everyone understood the Inflation part of it because right now It's pretty much considered like digital Gold a hedge against inflation but we Learned something very important during The uh March Regional Bank crisis what Happened to bitcoin then now that was Riskof and a deflationary Vibe about it Right uh Banks going bankrupt Bitcoin Went from 19,000 almost 30,000 up up
50% what was that that was proof of Concept that it's a hedge against Deflation too what what can cause Deflation in a financial crisis it's Counterparty risk you don't know what is On the books of the banks and which ones Are going to go bankrupt and which ones Aren't so there's a seizing up so you Know just get away from that move into An ecosystem where there is no Counterparty risk that is Bitcoin Completely decentralized completely Transparent and no counterparty risk uh So I think more people are beginning to Understand that sure it's a risk on Asset uh but it's also a risk off asset And gold has some of that but uh but Bitcoin has has that on steroids I would Say we could talk for another 30 minutes About Bitcoin but I wanna I want to Cover some other topics with you um that I want to move on to and one of them is The Federal Reserve because you and I Have talked about this before and you've Talked about that you think the FED has Been too aggressive in raising rates Looks like they might be done um if the CPI numbers today today or any Indication and the conclusions that the Market seems to be drawing so where are We now in you know you've talked about That deflation is coming we haven't been Seeing it r large as of yet so what are Your current thoughts on all of this
Yeah we're getting more uh proof of Concept on deflation too so it starts at The commodity level always does right uh Copper prices peaked at $5 they're now About 350 oil even you know uh is down To well it's in the 7s but even more Interesting to us is gasoline is Pointing to much lower oil prices the Demand destruction in gasoline right now Because of the pricing is uh so high I Think gasoline demand was it around the Labor Day holiday uh hadn't been this Low in 25 years something like that big Demand destruction in all kinds of Categories including Staples uh now the the Proctor and Gambles and uh you know Staples Companies they took full advantage of Supply chain crises and jacked prices up Guess what their volumes are falling That is not a good recipe for a Manufacturing Company you want to keep Your manufacturing plants running Fulltime and now they're seeing a Pullback in unit volume um we're seeing In the S&P 500 about a third of the& P 500 a third Of the companies are showing falling Revenues falling revenues that means the Combination of units and pricing that Combination is down if you look at Commodity prices as measured by the Bloomberg commodity price index they are Today where they were in the early 80s
They've gone nowhere so then what is the Implication for rates for the economy For I mean that's the picture sounds Dire from what you're talking well M2 Growth has been negative all this year On a year-over-year Basis uh the yield curve has been Inverted all year actually almost a year And a half now roughly a year and a half But no recession yet rolling Recession housing by some measure sales Down 40% that's a recession there Auto Sales 15 million units that's Recessionary um falling prices as units Fall That sounds recessionary and that's Happening in Staples Home Depot today Sure it was one of the biggest Beneficiaries but it's been two to three Years now and it's still saying minus 3% Same store sales growth that's both Price and profits and deeper negative Here in the US minus 3.8 so I'm looking at statistics and I'm Listening to earnings calls uh when I Listen to earnings calls and I I listen Listen not just to ours but to other More cyclical companies just to get a Sense of the economy you listen to them And you think we're in a recession now It depends on the area um we're in Today's CPI you saw Auto prices coming Down you saw Airline uh prices coming
Down so you saw education prices coming Down oil and energy transportation we Knew about rents uh the the pop last Month reversed um not didn't go negative But in the real world in the real world We're hearing about serious rent Declines or serious discounts like six Months free or one month or one year Free so I think it's all around us uh The FED is paying attention to lagging Indicators uh one is the CPI it's gone From nine to now roughly three uh we Think it's going to turn negative before All is said and done um the other one is Employment now what the heck is going on In employment if what I just told you is True right um we know how many companies Had such trouble finding anyone as we Were coming out of coid they're Reluctant to fire people even though Their margins are starting to fall so They don't want to go through that again Right if their margins do get crushed as We think they will as they lose pricing Power then you could Lay people so so then let me ask you I Mean it seems like given all of this the Environment in markets has been Surprisingly risk on as of late right Look at today not just today though but If you look at at what investors are Doing you know you guys were up this Year and you tend to be a group of Companies that is a risk on trade so to
Speak yes so what what gives then are People just looking past all of this are They looking ahead to a rebound from What you're talking about so until today This year has been a tale of two Markets uh through July it was risk on Why because the market was seeing uh Surprises in terms of oil prices coming Down Auto prices coming down and saying Oh the FED must surely be done and then We get a CPI print or a pce print that Disappoints and and the FED continuing To say oh no no no no we're higher for Longer and we AB absolutely will raise Interest rates if we need if we cannot See 2% inflation so I think they're in The process uh of making a mistake but In the beginning of the year people were Saying okay the numbers are coming down Inflation's you know doing what it Should do then we had this pause where Oh is it are we stuck here at three Three to four% many people think we are Because they see these wage hikes going Through 10% per year 6% per year year And they say surely we're back in a 70 Style inflation and that you know that's With the Stanley Drillers and and you Know the Bears out there are thinking we Think that is absolutely wrong that the Resolution uh of that 10% push in wages Per year will end up in lower margins Big problem not in higher prices big Difference very big difference and so I
Think it's uh it's from from the end of July through really it was through the End of October we went through this ve Big nervous period where the long bond Yield Right started Rising relative to The short uh short-term yields still an Inverted yield curve but long yields Were Rising it was a bare flattening not A bull flattening a bull flattening is When short rates come down relative to Long rates so a bare flattening went Risk off people sold our strategy sold Anything riskof and moved back to their Benchmarks moved into Cash Cash huge Amounts of cash on the sidelines now We're getting more prints again that are Saying the FED probably has overdone it And just listen to quarterly company Calls and you'll listen to these Management teams and we have lots of Call backs with managements and they say Why are you the only one seeing Recession why can't the FED see this This is what we're going through and I Do think that the FED is is um uh using Lagging indicators for monetary policy Which is unfortunate um I want to turn To some of your individual Holdings but Just quickly what does 2024 look like For Arc for your strategy specifically I Think we paid our dues during 21 and 22 We were down in 21 when the market hit All-time highs just on the expectation Of rates going up uh and then on the
Reality of rates going up we were were Crushed in 2022 the market has discounted what the FED has done I don't think the fed's Going any further uh if the market can Feel comfortable that that is indeed the Case uh we don't have to have rates even Come down we think they will uh but we Think we have that our certainly our Strategy has discounted the worst um I Don't think value stocks have discounted The worst of the cyclical part of the Recession we tend to be recession Resistant uh the last leg here is going To be consumption and uh we'll see how The holidays Fair how how deal driven uh Consumers are we think they're really Deal driven yeah we're starting to hear Some of that um okay I want to turn to Some individual stocks okay do I don't I Wouldn't call it a lightning round but We you know I want to dig into a couple Things um when we're talking about Consumption we're talking about concerns You would think it's going to affect one Of your top Holdings and that is Tesla And we've been hearing some commentary From the company that is not that Positive it's Fallen to third in your Portfolio is that why so what we did Earlier this year it was especially in July summer months we looked at Tesla up 150% and many of our multiomics names in The life science Spas they were negative
For the year we're this is portfolio Management kind of 101 uh huge profits There losses here let's do some uh Rebalancing and so we did that but we Did not sell after their quarter and we Did hear uh we did hear Elon loudly and Clearly and we had been anticipating it Consumer demand is weak uh all that Tesla's price Cuts have done is offset The interest rate hit so really the the Monthly payments haven't gone anywhere Tesla will continue to cut prices Because it can its technology costs are Falling and it's profitable you'll Notice that the GM and Ford have Basically pulled back on their EV Strategy and said we can't we can't do This unless it's profitable well this is Chicken in the egg it can't be Profitable for them just like it wasn't For t Until they scale so if they're not going To scale they won't be profitable uh Meanwhile we do think the consumer Preference shift towards electric Vehicles is in full force and uh you Know the there there will be demand Destruction on the uh internal Combustion engine side of the business It it it won't disappear overnight but Uh the share gains will go to Electric So no fundamental qualms on Tesla no um In fact the the GM and Ford pulling away Tells us Tesla's market share in our
Five-year investment time Horizon is Going to be higher than we thought so Absolutely not have we bought any back Well uh as I mentioned many stocks During the summer period had you know Waterfalls especially in the multiomic Space uh because they tend to be earlier Stage much earlier than Tesla so you Preferred to buy there rather we buying Because we really do believe we're at The end of the interest rate move um There's one more stock I want to ask you About but it's not one that you own you Can probably guess maybe Invidia any Regrets We own it in more specialized Strategies that's the first thing we've Taken it down everywhere the flagship Strategy does not own it because of our Research now everyone knows Nvidia has been the enabler of these Amazing breakthroughs in AI but they're Not thinking about who the prime Beneficiaries are going to be and we've Taken a strong point of view on that Every stock in our portfolio practically Is there with AI as a reason there are Four four things they have in common one They have deep domain expertise in their Own business they're really good at what They do to begin with two they have a They have brought in AI expertise they Are taking this very serious Ly three they have good Distribution preferably Global but maybe
Us only or Regionally and then after that most Important is proprietary data our Companies have data that nobody else has And uh they're going to be able to use The foundation models like open Ai and Anthropic and uh llama 2 which is metas Those are free they're open source and They with their own AI expertise will Build specialized models on top of those Using their proprietary data and they Will get to better answers than any of Their competitors and continue to leave Their competitors in the dust so this Also implies that even if say Nvidia Came down in price that you wouldn't add It back to the to the Benchmark Portfolio you know it's interesting it Came down in price uh at the end of last Year like everything and we did buy it Back in because according to our Estimates it was going to be able at the At its lows to deliver a 30% compound Annual rate of return we thought based On our research compliance is listing uh 30% at a compound annual rate of return That's a good return it wasn't as good As many of the other stocks in our Portfolio but this is a special company And to see it back down there we said Okay and then it took off because more And more people were talking about chat Gbt and our other stocks continued to Wallow and so we did some readjustments
At the beginning of the year again but Going forward do you think so we we are Always open we are very much uh driven By that rate of return estimate based on Our fiveyear uh model right uh and we Focus on uh Enterprise Value so that Incorporates bonds it's not just so it's Conservative and E da uh earnings be Before interest taxes depreciation and Amortization you can't play games with Those numbers like you can with EPS so We've got a very conservative profile we Think just in terms of valuation that's A question we get a lot how can you pay These multiples the reason we're paying These multiples now is because we want And we applaud that our companies invest Aggressively now to get to capitalize On and The Winner Takes most um Competitor out there uh and and so what We assume is that the multiples you see On our stocks today are going to Compress dramatically during the next Five years to little more than market Likee in terms of even though we don't Believe that's the case and our rate of Return expectations are driven by Revenue growth margin growth fighting That headwind of of multiple compression All right Kath thank you so much for Spending so much time with me I Apprciate thank you thank you so Much
