ARK Founder Cathie Wood talks inflation, Fed, Tesla, Twitter, stocks, gold, and more

ARK Founder Cathie Wood joins Yahoo Finance for a wide-ranging interview.

Video Transcript

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BRAD SMITH: It is Thursday, October 13 here in New York City. I’m Brad Smith with Julie Hyman and Brian Sozzi. An ugly day on Wall Street after another red-hot inflation report. CPI month-over-month coming in at 4/10 of a percent in a move higher. The economic data keeps on coming, Jules. Over to you for some housing news as well right now.

JULIE HYMAN: 6.92%, Brad– that is now the average 30-year fixed-rate mortgage. That data just coming out to us from Freddie Mac. 6.92%, by the way, is the highest going back to April of 2002. All of this, of course, goes back to the Fed raising interest rates and also has already had ripple effects throughout the housing market, putting pressure on pricing, putting pressure on demand and affordability. We’ve been watching these mortgage numbers very, very closely because, obviously, they have really ratcheted up the monthly cost for people who are taking out a 30-year mortgage in order to buy a house. So we’ve got that number. We’ve got that CPI number, all of it pointing to continued inflation, at least for now.

But now we’re joined by someone who has her eyes on potential deflation. That, of course, is Cathie Wood, ARK Invest founder and CEO. And you recently wrote an open letter to the Fed where you warned about deflation. We talked to Michael Darda of MKM at the top of the show, where he said the Fed is making the mistake of looking at backward-looking indicators. What should the Fed be looking at, Cathie, when it’s trying to really assess what is happening with inflation?

CATHIE WOOD: Sure. Hi, Julie and Brian. Well, if you look at what’s happening in the pipeline, what you’re seeing in terms of commodity prices are some very serious declines, both from their peaks and year-over-year now. So that is sort of– we would say that’s upstream inflation that is heading towards the PPI and then ultimately the CPI.

So we’ve got gold prices– and, in fact, I looked at them yesterday. I had thought that the last two years gold had been trading within a $1,700 to nearly $2,100 range. And that’s true. It has. And it has broken down. This is a really good leading indicator of inflation.

What caught my surprise yesterday was looking at where gold was in 2011, it was roughly this level. So you can say since 2011, more than 10 years, we haven’t had a big burst, a big breakout in the gold price. And that is informing our decision here. Gold is a leading indicator of inflation. And it has not broken out. It is breaking down.

And then the second thing that we’re looking at is the inventory glut around the world, and especially in the United States. It looks like some of the best supply chain managed companies in the world have overordered. They ignored their automated enterprise resource planning system, so ERP systems, and double ordered, triple ordered, so that Nike, for example, its sales were up only 3 and 1/2% globally last quarter. And yet its inventories were up 44%. And in the United States they were up 68%. And if you look at in-transit, they’re up 85%.

So that’s just one indication. We’re seeing lots of inventory overhangs. And even online sales are suffering. Amazon just had its second Prime Day. And it showed no increase, which is really from a year-over-year, which is telling us that either units are down or prices are down.

So I think the CPI that we got today is a lagging indicator. It always is a lagging indicator. And we’re seeing a lot of prices in the pipeline that are falling.

JULIE HYMAN: So, Cathie, let’s talk about what this means for the Fed and your open letter to the Fed, where you urged them to consider some of what you’re talking about right now. The market after today’s data is now more fully pricing and not just a 75-basis-point increase at this upcoming meeting, but at the one after that as well. Do you think the Fed should be done? Do you think they should even raise 75 basis points at this upcoming meeting? Or do you think they should stop here and give some time for their increases to make their way through the economy?

CATHIE WOOD: Yes, as we’re thinking about this question, we compare what Chairman Powell is doing to what Chairman Volcker did in the late ’70s or early ’80s when he was fighting an inflation problem that had been building for 15 years. Vietnam War, Great Society, closing the gold window– that was a real inflation problem that built up over 15 years. This inflation problem has been 12 to 15 months by the time the Fed started addressing it. And we think it’s much more a function of supply chain imbalances caused by COVID and then again by Russia’s invasion of Ukraine. These are very, very different circumstances.

So what the Fed has done this time around is it has increased interest rates. If they go another 75 basis points, which is very likely on November 2, they will have increased interest rates from 0.25% to 4%. And that’s a 16-fold increase.

What did Volcker do in the early ’80s? He took interest rates from 10% to 20%. That’s a two-fold increase after consumers and businesses had gotten used to dealing with inflation and working around it over 15 years.

This is a real shock to the system. And I do believe we will see the ramifications in many ways. We’re seeing housing shutting down. And I think we’re going to see a lot of other activities shutting down as well.

We believe we’re in a recession. And we believe this recession now will be sustained. And if we see an increase in GDP, it’s probably because either inventories are continuing to increase or imports are coming down as companies try to unwind their inventories.

BRIAN SOZZI: Cathy, so do you see a severe recession? And then how long do you think this bear market will continue?

CATHIE WOOD: Well, what’s interesting, I think many people are coming around to the idea that we’re in a recession or we’re going into a recession. The first two quarters with real GDP growth negative to us means we’re in a recession. And now that many people are worried and are beginning to see recession for as far as the eye can see, we are looking at this recession a little bit differently. We think it’s going to be a function of this massive inventory overhang and that it’s going to be a serious inventory correction.

But it’s not going to be anything like we saw in ’08, ’09. That was a systemic financial problem caused by the mortgage and financial meltdown. We don’t think this is the same thing. So now that many economists are starting to agree with us that we’re in a recession or going into a recession, we feel that they might become a little bit too alarmist if this is just an inventory recession. And I think the Fed will have a lot to do with whether or not it is.

This is a shock, though, to the system. And this idea that we have an inventory overhang we think is going to get bigger as consumers pull back. Low saving rates, 3.5%, versus 8%, where it was before COVID. And so we’ll see. We think this holiday season is going to be pretty tough.

BRAD SMITH: And so as you ready your shopping list for that holiday season, Cathie, when you think about some of the ways that equity valuations are starting to price in that recession to the best of their ability, is there a big buy that you now think through or evaluate going into the end of the year here?

CATHIE WOOD: Well, you have to consider the source here. And our focus, our sole focus is on disruptive innovation. And we also believe that innovation solves problems. We had a tough time going into COVID with our kind of strategy.

And then we had a boom in our strategy during COVID because guess what? We needed the genomic revolution to help sequence the coronavirus and figure out tests and vaccines. And our kinds of companies helped with that.

We think with supply chain issues and with the food and energy prices caused by this shock, this Russia’s invasion of Ukraine, that once again innovation is going to help solve these problems. Electric vehicles, there’s an accelerated consumer preference shift towards electric vehicles, like Tesla, because of oil prices. And we think there’s no stopping that trend now.

And in terms of food prices, we do believe that gene editing is going to help us figure out how to produce crops in areas that are less fertile than the Ukraine, the breadbasket of Europe, with less water, less fertilizer, less pesticide. So we’re going to continue to see the miracles associated with the genomic revolution. But our other strategies as well, whether we’re talking about robotics, solving the labor shortage, energy storage, I mentioned electric vehicles pulling us away from oil consumption, artificial intelligence, which is going to help every company become more competitive if they use their data and combine it with other data in effective ways, and then blockchain technologies, which is going to take the middlemen out of a lot of businesses and take the cost out of a lot of businesses, helping us to solve this inflation problem.

So again, consider the source. We think innovation solves problems. It certainly gave us an appreciation of that during COVID. Our strategy was high flying. And we think we have even more problems right now. So stay tuned.

BRIAN SOZZI: Cathie, this economic shock that you talk about, in large part at the hands of the Fed, does that cause a shock to one of your long-term holdings in Tesla in terms of the stock price and also the company’s financials?

CATHIE WOOD: Well, certainly all stocks are experiencing difficulty in this environment as the market tries to understand how far the Fed is going to go and how deep this recession is going to be. So Tesla, as I mentioned, is a solution to the problem. It’s very interesting, if you look at gasoline demand this summer in the United States, it dropped below COVID levels, the worst of COVID, and it dropped to levels that we have not seen since 1997.

That’s real demand destruction. And it couldn’t have happened, we do not believe, without electric vehicles at the margin taking huge share from traditional automobiles. So if we had to be concerned about an industry, it would be the traditional auto industry.

We think that gas-powered vehicles are going to be obsolete within the next 5 to 10 years. And the traditional auto industry has to figure out a way to migrate into electric vehicles and into the next big phase, which we think Tesla is leading, the autonomous taxi platform phase. So lots of changes here. Traditional industries are in harm’s way as innovation pushes through, accelerated by some of the turmoil out there.

JULIE HYMAN: Cathie, when we last talked back in the spring, I believe it was just at the beginning of the Elon Musk Twitter saga. Now we are maybe, maybe getting to a little bit of closure in that case. But I would pose to you the same question that I asked you then because a lot of time is elapsed and different events have happened. Are you at all concerned about Musk’s attention wavering now that it looks like he is, in fact, going to be taking over and likely at least having a pretty heavy hand in running Twitter?

CATHIE WOOD: Well, we are prolific users of Twitter. ARK gives away its research. We give away our research not when it’s finished, but as it’s evolving. And our most prolific platform, social platform out there is Twitter. I’m kind of excited to see what Elon will do. I actually think he’ll work closely with Jack Dorsey and maybe open up the ecosystem, take away the censorship, make it much more transparent, and I think add more value to that ecosystem. We noticed that–

JULIE HYMAN: You don’t think it would be a mess if that happens, that it’ll just be sort of a free-for-all, where it’s tougher to find commentary of value?

CATHIE WOOD: You know what’s interesting about Twitter, and we found this, we have a lot of debate around ARK’s own strategies, we can filter that debate ourselves. So we can unfollow people if we think there’s bad behavior. But that’s our choice. And we can follow those people who we think are moving discussions, whether it’s about innovation or the economy, moving discussions along.

So I think there’s a lot of wisdom out there. And we’re kind of sick of the nonsense that we see on some of these social platforms. And Twitter, I think, is going to give us more tools to filter out the nonsense and get right down to business.

JULIE HYMAN: I certainly would like to filter out a lot of the nonsense sometimes on there, Cathie. I want to ask you more broadly about ARK Invest and your funds. I was looking at ARKK in particular and the fund flows that we have seen, which were seeing sort of bigger swings to the up and to the downside earlier in the year. They’ve gotten a little more muted as of late. You talk a lot about your three-to-five-year time horizon, which I think makes sense, but I wonder how long– how patient investors are going to be, particularly in an environment where they are seeing losses not just in ARKK, but in lots of other areas as well?

CATHIE WOOD: Yes, and I think one thing that helps our clients is our research. And they see that it’s first principles research. We have the long-term time horizon. And we’re seeing spectacular exponential growth opportunities, and not only one by one, the various platforms I just described, but the convergence of those platforms, so one S-curve feeding another.

And I think many of our clients understand that they’re short innovation, truly disruptive innovation. If you own the NASDAQ or the NASDAQ 100 right now and you look through that index, this is not the index that I grew up with. In the ’80s and ’90s when we were looking for innovation, we’d go to the NASDAQ.

But if you look through the NASDAQ now, and especially the NASDAQ 100, what you see are 25% of the names touching disruptive innovation. The rest of them are kind of me, too. They look like other indexes– the FAANGs, Microsoft, Nvidia. Tesla would be our only overlap.

And then you look further and more deeply into these indices and you see names that you never expect to be there– food and beverage, utilities, rails, brick-and-mortar retail. These are not innovation companies. And so what we’ve done at ARK is we are pure play innovation. And we’d like to think we are what the NASDAQ used to be in the ’80s and ’90s.

And it used to be a very productive place to invest with a long-term investment time horizon. So I think our sharing our research and our pointing out to investors, look, what you think you own in innovation is not what it used to be– and what ARK is doing is really back to the future. We’re all about investing in the future as opposed to indexes, which are more about past success, those companies that have been extremely successful, have risen to the top of these indexes. But if we’re right and these five platforms that involve 14 different technologies are going to disrupt the traditional world order, then investors need to get to the right side of change.

And one of the other things that we do, it’s one of our missions and values, is to educate. That’s why we give our research away. And we want to educate not only investors, but parents and grandparents, about how the world is changing, how radically it’s changing, and how it’s ever more important to get especially students on the right side of change so that they can enjoy these incredible growth opportunities and not be disrupted by industries that will be sunsetting, shall I say.

BRAD SMITH: Cathie, a three-to-five-year time horizon means not only midterm or recession proofing your companies. You’re not just recession proofing your portfolio, you’re also midterm proofing your portfolio. You’re general election proofing your portfolio. And so at ARK how do you go about identifying disruptive innovation that then doesn’t get disrupted by public policy or political agenda?

CATHIE WOOD: Well, one we have a six-metric scoring system, very much focused on innovation. One of the scores is thesis risk. Thesis risk has a lot to do with government policy.

And so in the early days of ARK in 2014, ’15, we were thinking, OK, government may be very concerned about the safety of autonomous vehicles. But as we’ve moved through these last eight years, what we’ve seen, thankfully, is the government and regulators in particular very focused on data. And what does the data say? The data says that most fatalities and accidents, 85%, almost 90% of them are caused by human error.

If we take the human being out of the equation, then we’re going to save up to 35,000, 40,000 lives in the United States, the fatalities per year, and up to 1.25 million around the world. So that is a noble goal. And we’ve been very gratified to see the regulators looking at the fatalities in Tesla’s vehicles and informing us that for the most part, most of those fatalities were caused by human error, and for the second that people who are driving Tesla vehicles are much safer thanks to the various automated driving capabilities now, up to 40% safer than in most other cars.

So we’re very focused on what governments are studying in terms of the data. And if they stick to the data, innovation typically solves problems and makes the world a better place.

BRIAN SOZZI: Really always a treat to get some time with you. Cathie Wood, ARK Invest founder and CEO, always nice to see you. We’ll talk to you soon. Appreciate the time.

CATHIE WOOD: Thanks, Brian, Julie as well. Thank you.

BRIAN SOZZI: Thank you.

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