Cathie Wood On Hedge Fund Shorts Against ARKK Fund

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Cathie Wood On Hedge Fund Shorts Against ARKK Fund
Image source: CNBC Video Screenshot

Following is the unofficial transcript of a CNBC interview with ARK Invest Founder & CEO Cathie Wood on CNBC’s “TechCheck” (M-F, 11AM-12PM ET) airing today, Thursday, August 19th. Following are links to video on CNBC.com:

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Ark Invest Founder Cathie Wood On Hedge Fund Shorts Against ARKK Fund

Ark Invest’s Cathie Wood: Several Industries Appear 'In Harm’s Way' From Lack Of Innovation

CARL QUINTANILLA: In the meantime, hedge funds jumping ship, investors including Michael Burry placing millions of put contracts against Cathie Wood’s ARK Innovation ETF. The fund grew a whopping 149% in 2020, this year down just about 6%. She hit back, said Burry doesn't understand the explosive growth in innovation investing right now. ARK Invest Founder and CEO Cathie Wood joins us here on TechCheck this morning. Cathie, always good to have you. Thanks for the time.

CATHIE WOOD: Thank you for inviting me, Carl. Always happy to be here.

QUINTANILLA: So let's talk about the short community at large. What is your message to them right now?

WOOD: Well, you know, when I see such negative sentiment out there, especially when it comes to valuation and longer time horizons, investment time horizons, I actually feel a little more comfortable. I like bad news, and maybe news that's not – the discounting is worse now than the news actually will be. I actually feel better in that kind of environment for our strategies. I don't think we're in a bubble, which is what I think many bears think we are. In a bubble, and I remember the late 90s, you know, our strategy would have been cheered on. Rah, rah, rah. Go get ‘em. Right? You know, and you remember the leap frogging of analysts, making estimates one higher than the other. Price targets one higher than the other. We have nothing like that right now. In fact, you see a lot of IPOs or SPACs coming out and falling to Earth. We couldn't be further away from a bubble. And the reason for that is the innovation around which we have centered our research. These five platforms – DNA sequencing, robotics, energy storage, artificial intelligence, and blockchain technology – are barely off the ground. The seeds for all of these platforms were planted in the 20 years that ended in the tech and telecom bust. And ended in tears. And there's a lot of muscle memory around that, but that's not what's going on right now. The seeds planted back then are beginning to flourish now and it's just beginning with five platforms involving 14 different technologies, all of which are about to experience S-curves and feed one another's S-curves. I don't think the market is ready for this. That's what I meant. We've dedicated our research and investing to innovation because we think we've never been at a more provocative time for innovation in history.

QUINTANILLA: Right. And I do want to get to how some of those forces are playing out on your macro thesis, which you've talked about a lot in recent months. But as far as the shorts go, in terms of how they have their eyes set on ARK, specifically, is it just do you think – is it general macro bearishness, or does it have something more to do with your ability to analyze all these companies that you're now in and stay on top of that game?

WOOD: I actually think it's more of a macro call. When I read the bearish analyses, they seem to be centered on inflation and interest rates going higher, which will kill valuations. And if anything, as you mentioned, Carl, we're focused on the deflationary forces that are building up in the economy. I think that's going to be the shocker out there – that deflation is the greater risk now, not inflation. And not all deflation is bad. There's really good deflation associated with these technologically enabled platforms. They follow learning curves which are characterized by declining costs and prices, and enables more and more sectors to have access to these powerful new technologies. So that's good deflation. The bad deflation is going to be associated with companies who paid too much attention to short term oriented shareholders who wanted their profits now, wanted their dividends now, and did not want companies to sacrifice short term profitability in order to capitalize on some of these massive trends that we see building. They are going to be stuck with obsolete products, and yet in the meantime, they've leveraged up their balance sheets to buyback sales and satisfy short term oriented shareholders. How are they going to service that debt? They're going to have to cut prices of these products and services that are not going to be as popular in the future as they have been in the past. And then the third source of deflation, which is really starting to come through now in a noticeable way, started in mid-May when lumber prices broke. We're seeing commodity price deflation. We've gone from – lumber prices have been cut to one-third – less than one-third of their peak, 1711 to 500 right now. You've got copper down roughly 15% – 15 to 20%. You now have oil down nearly 15 to 20%. And I think the cream of the crop here and the reason this may be happening and may accelerate to the downside, is the dollar is going up. And that of course might be associated with what's going on in China.

DEIRDRE BOSA: And Cathie, good morning, it's Deirdre. I know you've talked about commodity prices before and I wonder if you're willing to mention any of the companies or industries that you're referring to those that are perhaps sacrificing those long term innovations that you're not a fan of?

WOOD: Well, I think that if – when we look at the S&P 500, for example, we think that because of technology changes, and importantly, that a lot of industries are in harm's way. Energy, certainly is because of electric vehicles and the move towards autonomous electric. And you can throw in autos and the auto supply chain. They're scrambling to try and get into this new world, it's going to be very difficult. Even when you think of retail, many, many investors I'm sure think, okay well, we've seen the destruction there. We think it's just begun in a way because online retail sales have only hit 20% of total sales here in the United States. When a trend moves from, you know, 10 through 20%, it's usually moving into overdrive. So we think a lot of much higher percentage of sales will be online. So even retail and any business that can be done online – financial services, I would say digital wallets defy a big problem, a big challenge for financial services.

BOSA: Right. And Cathie, a few moments ago you talked about the innovative way that you guys at ARK structure your research and I wonder what does someone shorting ARK miss about your approach, the advantages or perhaps the differences of being an ETF versus say a hedge fund?

WOOD: I don't think the wrapper matters that much. I think our research is the differentiator and the way we've set up our research department is a differentiator. Unlike traditional asset management firms, our analysts do not follow sectors. They follow technologies – the 14 different technologies that I mentioned, involved in these five major innovation platforms. So they are technology specialists and they are generalists when it comes to sectors. So we have a very good idea, based on our analysis of these technologies and Wright’s law – Wright’s law, we've centered our research around it. Wright’s law is a relative of Moore's law. But Moore's law is a function of time, Wright’s law is a function of units. And Wright’s law has worked better in the semiconductor industry recently than Moore's law has. So we think that's a very important gauge of how quickly these costs are going to decline over time, and we also pay a lot of attention to price elasticity of demand. At what point in this cost – or in price – decline trajectory will new sectors open up to these new technologies. And so I think what we are able to see are exponential growth trends that are not priced into the market. I'll give you the easiest example. Last year, EV sales were 2.2 million units around the world. We think based on the declining costs of battery pack systems that electric vehicle prices will drop below gas powered prices in a year or so. They're already lower from a total cost of ownership point of view. So we think that 2.2 million will be 40 million in five years – in 2025. Not even five years. No one is forecasting that. So the starting point from the top down using Wright’s law, getting a sense of how quickly the costs associated with these technologies are falling, and how quickly therefore, they will be taken up by more and more sectors and industries over time.

QUINTANILLA: Cathie, two things on China. One is, I'm curious why you're drawing such a direct line to dollar strength and China. The other would be, you had said recently you thought China names did deserve a reset, but after all of these new regs and President Xi talking about common prosperity, are some of these names in China now truly uninvestable?

WOOD: We have never said the Chinese names are uninvestable. What we have said is because of the social engineering, it seems or re-engineering that's taking place in China, that the valuations associated with these companies are damaged and we don't think they're going to go up anytime soon. Linking to the dollar to China, what we're saying is there it has been a capital reallocation away from China to you might say the dollar’s a flight to safety currency, you might say Bitcoin is a flight to safety currency as well. Both have done well recently and I would link that to China in some measure. In fact, you know, there's an article today on, on Bloomberg about the inability of the Chinese population to get as they are leaving the country to get their retirement funds out, you know, that's, that's pretty daunting I think for those of us in, in the asset management world to consider as we're trying to figure out is, is China investable. The one thing I will say is China wants to win. The only way they're going to win is if they embrace innovation as aggressively as, or more aggressively than any other country and they're trying to do that but I fear for them that becoming more insular is, is going to harm their, their speed in terms of innovation so you know we're weighing this back and forth and I would say nationalizing an industry like the online education industry is that's going to sear our memories for a long time. That could happen to any industry.

QUINTANILLA: Right. I wonder what do you say to those who wonder why, if there are these fraying elements of capital in and out of China, why some of our own companies for whom China is a tentpole, I'm thinking of Apple and Nike just as a couple of examples, why they don't seem to be reflecting that kind of that kind of fear?

WOOD: Well we don't know what the talk in the boardrooms is and we also don't know what the dialogue between those companies and, and the government is. I know we can tell just by looking at what Tesla is doing in China that it is listening very closely to what the government is saying. Safety is paramount and, and it is taking more precautions I think than my otherwise might have been the case. And I think the other side of this is China wants to manufacture very high-end goods. It does not want to be considered the commoditizer of, of the world and so I know that Tesla Inc (NASDAQ:TSLA), Apple Inc (NASDAQ:AAPL), Nike Inc (NYSE:NKE), they're all exporting from China which says something about China's manufacturing prowess and if you are listening to President Xi Jinping these days, he's saying we need to accelerate our, our movement up the stack in terms of quality and design when it comes to manufacturing. So, I think they are serving the Chinese government's purpose in some way and the labor costs still are much lower in China so serving those companies as well.

BOSA: Right and we know that they're trying to move up especially when it comes to the design and manufacturing of semis. Cathie, I want to ask you about Robinhood though. We got earnings last night and the CFO was asked about raising capital on the back of this retail interest and he said that they don't have any plans to do so but when I think about that I think about Tesla, how it used its momentum to raise money, grow its business and the fundamentals. Would you encourage Robinhood or other names that you hold to raise money on the back of retail interest especially companies that are looking to diversify their revenue?

WOOD: Well in terms of our companies, we are very involved in the innovation space. We are not afraid as an investor, we're not afraid of dilution, if we, if we think they're doing it for the right reason. Tesla, very high fixed cost base. Robinhood very different, very low fixed cost base so they're a little bit night and day. We were, we wanted Tesla to I'm not going to say to dilute us but we wanted them to scale as quickly as possible because we think if we're right on autonomous that they, that Tesla could get the lion's share of that market certainly in the United States. I think Robinhood is a very different, they're moving very quickly I don't think they need to raise funds, maybe they'll make an acquisition to diversify internationally which they seem to suggest is, is their strategy that, by that I mean their global expansion. I don't know if they'll raise if they were making a sensible acquisition, we wouldn't object to it at all.

BOSA: Okay also want to know how you're thinking about the crypto space these days. We've seen sort of this explosion of stablecoins, regulators are looking at it, we've seen the popularity of stablecoins like Tether and USDC on the rise that are not in fact backed one to one to the US dollar. Does their rising function and utility, does it concern you at all as well as their lack of transparency?

WOOD: Well, well, I think that, I think that there's so much more transparency in the crypto asset world than there is in the traditional financial services world. That, that's where I'll start. But I think that the movement towards DeFi, which is really taking middlemen out of the financial services sector, taking the toll collectors out, cutting costs for traditional financial services companies and creating many opportunities for other companies. I think this whole space is, you know, the vanguard of innovation, the likes of which we have not seen before. The internet gives us just a clue.

QUINTANILLA: Cathie, you know, one thing people wonder about, about ARK is you have a nontraditional way of hiring analysts. We're in an interesting world right now in terms of, especially junior analysts as the big banks are throwing more money at them, but you hire from nontraditional tracks and some wonder whether or not they are well enough steeped in traditional methods of valuing companies. The other thing we hear sometimes is that, how many funds are too many and at what point do people start to legitimately worry about ARK spreading itself too thin?

WOOD: Okay, well, I consider our research and our analysts are secret weapons and I say secret because, so, so much of what I read out there has no appreciation for how important it is when you're investing in innovation to hire individuals with domain expertise and one foot in the new world. Coming out of college, many of our analysts are steeped in genomic research. Our latest hire just finished a PhD program in genomics around agriculture. So, having that domain expertise I think is much more important than having an MBA. In fact, we, we seek the domain expertise with this thought in mind and this is, this is harkens back to the Sanford C. Bernstein days where they would say, you know, it is much easier to hire a rocket scientist and to teach that rocket scientist how to read financials and understand valuation in the, in the equity market than it is to hire a MBA and have, and train that MBA the same way our PhD has been trained and it's not just coming out of school, it's actually industry so I think we actually have a big competitive advantage relative to our peers because of our analysts and one other thing, because of our open research ecosystem, we are pushing our research out, we give it away because we want to engage with and become a part of the communities who are innovating. We may love our analysis sizing their markets and understanding the competitive dynamics. We love their analysis, understanding how these different technologies are evolving and who the winners are going to be.

BOSA: Are any of them looking at the gig economy because for a long time, companies in this space or the sharing economy space like Uber, Lyft, Airbnb were considered disruptors but I don't think that you guys have been buyers so I wonder where you stand on this such as some of them, you know, say that they're involved in autonomous technology and robotics.

WOOD: So, we call ourselves the first sharing economy company in the asset management space when it comes to research, again we're sharing. If you don't give, you don't get in the sharing economy, but no we haven't invested in, in this space yet. It doesn't mean we won’t. I think, you know, the, the opportunities in our portfolio are there because we're, we understand the actual technologies and how they are going to decline and cost, what their current learning curves are all about. And we feel, many of them are more in their infancy than some of the companies you mentioned like Airbnb.

QUINTANILLA: Cathie I'm sure it won't surprise you to hear that everyone's listening to everything you're saying very closely. Really good to have you. We always love getting insight into how you're thinking about things. Thanks so much for the time.

WOOD: Thank you Carl. Thank you Deirdre.

 

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