Forget the Magnificent 7: It’s the Era of Mag 6 and... | Cathie Wood, ARK Invest

Well, Kathy, founder, CEO, CIO of Arc Invest. Welcome back to Sampru TV.

Invest. Welcome back to Sampru TV.

>> I'm thrilled to be here, Dan. Thank you.

>> Okay, so let's uh let's start with the slightly hawkish Fed or the slightly dovish Fed, um, however you want to put it. Um you recently talked about it um

it. Um you recently talked about it um talked about in your monthly update video how the Fed is missing some deflationary signals and your view is

that inflation will come down significantly next year. For those who didn't see your latest monthly video which everyone should go check uh check

out at ArcInvest YouTube channel. Um

what are some of those deflationary signals? I think one number that no one

signals? I think one number that no one really is uh focused on, I haven't seen it in the press at least, is the unemployment rate for new uh college

graduates.

And that jumped from August to September from 9.3% to 10.2%. Now that's in the double

to 10.2%. Now that's in the double digits. Uh the overall employment rate

digits. Uh the overall employment rate ticked up to 4.4%. So this is more than twice the overall unemployment rate. Uh

and the other thing on the inflation front is oil prices have cracked below $60 as measured by West Texas

Intermediate. I think we're in the 58 59

Intermediate. I think we're in the 58 59 range. Uh and on a year-over-year basis,

range. Uh and on a year-over-year basis, that's about a 20% decline. And we're

also seeing broaderbased declines in rent um in the United States and that will get into the inflation rate uh

slowly but surely over the next year.

[snorts] Uh and then finally we're our research is focused on the deflation associated with all of the technologies

um that that uh we research and invest in and the deflationary pressures especially from AI. Many people think oh

these large language models is so expensive so many GPUs. People using

these models and not building them are enjoying um well enjoy some of some of it is free and then there's the step up

uh in subscriptions but most is free certainly for the consumer world and the testing uh is also free for the for the

corporate world. Got it. Um, so these

corporate world. Got it. Um, so these signals, they're not good. I mean, they're good if you want the Fed to be cutting, but

they're not good for the economy. So if

I recognize that the Fed is getting these as well um but if they continue to um either call it miss it or dismiss it,

what would be in your view the ramifications of that to one to the ARC portfolio uh but also to the broader equity

markets?

Well, I think first of all, let's let's say that the market is beginning to understand that the Fed is beginning to understand. So, it has already turned.

understand. So, it has already turned.

Maybe it's premature. I don't think it is.

>> Um, many people say, "Oh, well then all this means for your strategy is you need lower interest rates or else this is not going to work." Both on the AI side and

on the crypto side. We disagree mightily on that. In fact, we already have proof

on that. In fact, we already have proof in 2017 and 2018.

Interest rates moved up and we had two very significant outperformance years outperforming the benchmarks. Now, we

don't measure ourselves against benchmarks, but most other uh other people do. So, we we we give that uh as

people do. So, we we we give that uh as a comparison. Uh and it wasn't just in

a comparison. Uh and it wasn't just in an up year. 2018 was a down year and ARC

outperformed. So I just uh I I want to

outperformed. So I just uh I I want to diffuse that myth you know that we if interest rates are going up that ARC's

kind of strategy will underperform that that has not generally been so except for the massive interest rate hike we

saw during COVID and or in the aftermath of COVID and by the way I don't think we'll see that again and the reason is while we might have another pandemic

mic. Hopefully not, but if we did, I

mic. Hopefully not, but if we did, I don't think governments would react the same way. They see all of the

same way. They see all of the ramifications uh that are still lingering are still lingering. Uh and uh just like China in

lingering. Uh and uh just like China in 089, it did not it was the most disciplined in terms of uh COVID and not throwing

money at it because it had learned from 089. I think most other governments have

089. I think most other governments have learned from uh the the COVID crisis.

>> What do you think it could mean for the broader equity markets? [snorts]

>> I think that a lot of our strategies innovation, they are hitting escape velocity in terms of the costs are low enough and the technologies are ready to scale.

um unlike in the tech and telecom bubble, what I think for the broader markets and and you can see this in our big ideas 2025

um in Brett Winton's section. Brett's

our chief futurist uh we we uh put a table which delineated what we expect in

terms of uh market appreciation from three categories. One was the mag six,

three categories. One was the mag six, one was truly disruptive uh innovation companies technologically enabled and

one was the rest of the market. Um now

consider the source. Uh but if we're right, if our research is correct and we're we're both top down and bottom up

in in uh coming to these numbers, uh we believe that the MAG 6 and we take Tesla out. Uh it was banished because it

out. Uh it was banished because it didn't act like the rest of them. Uh we

think that the MAG 6 will do fine. Uh

you know, we wouldn't be surprised. 15

to 25% appreciation. Of course, there there's going to be some uh disruption or disintermediation to their models

potentially. So, uh maybe one or two

potentially. So, uh maybe one or two will fall out.

We think that technologically enabled disruptive innovation emerging

that that will uh appreciate in the 40 to 50% compound annual rate again because they're ready for prime time.

And we think the rest of the market which you know is really a representation of the traditional world order [snorts] uh will probably

depreciate because um technologically enabled innovation is going to disrupt every sector, every industry, every subindustry.

>> Got it.

I know your trades, your buys and sells get a lot of attention in media coverage, but a large part of your trades is simply responding to to the

flows in and out of the ETF, not really um you expressing your views or first of all, is that true?

>> Okay, I'll just clarify that. So, the

wonderful thing about ETFs as a as a portfolio manager, I don't have to worry about flows. Mutual funds have to worry

about flows. Mutual funds have to worry about flows, when to put inflows to work and how uh and they have to meet

redemptions as well. Uh with ETFs, the infrastructure around ETFs and the

infrastructure is outside of ARC largely and any ETF provider. So the authorized participants which are primarily all the

brokers out there and the market makers are um are managing the flows. Now, so

what you do see when we and I I know the most uh controversial sales are Tesla for example, when when you see Tesla

when you see it taking taken down, what are we doing? Typically, it's gone through a nice appreciation move relative to other stocks. Right.

>> And in the latest round um we used Tesla to uh we take we took some profits from Tesla which is nearer to

its high uh and allocated them into uh or some of those profits into crypto which just went through uh thanks to the

flash crash on 1010 uh and thanks to MSCI's uh I guess it was a a a either a press

release or or some um information flow uh that MSCI put out saying that it was reconsidering

uh reconsidering including DATs in its indices and that happened on the same day as the flash crash but nobody noticed it and so that information got

out more slowly. So those two dynamics hit crypto hard and Tesla was appreciating and uh as of today it's

roughly 12 a.5% of the portfolio. So we

tend to rebalance the portfolio in that way when one stock moves up relative to others that are uh going through a painful moment.

>> Right. Got it. So that was actually so the where I was getting to with that question about your buys and sells was actually around or to give you an

opportunity to tell the viewers about over the last uh past couple of months since we last spoke. What were some of your most meaningful trades where you

had a change of view either positive or negative and why? And one of the those things you just touched on would be um

uh crypto and the trimming of Tesla was not necessarily a change in view was simply rebalancing. Um any other sort of

simply rebalancing. Um any other sort of meaningful trades that uh >> yes so you like to share

>> absolutely what what we will do in a down round like we've just seen it was kind of a compressed down round and I

think I think we're on the other side of it though one never knows. um we we uh consolidated towards higher conviction

names and um we got and one of our companies um is being taken out at the same time.

So Exact Sciences I think we had roughly a one and a half% position in it. Um we

the the uh acquisition of Exact Sciences by Abbott Labs got the whole multiomic sector going and and believe me it's

lagged so far behind that we think it has miles to go. So we weren't taking profits per se from them but we uh we

were selling exact because it went to within 5% of the takeout price. pretty

high probability that it's going to happen within the next six months. Um so

that became a source of cash uh as did uh another name uh GitLab. Uh so what we

do is we concentrate towards our highest uh our highest conviction names. GitLab

because GitLab because of a changeover in a number of people on the its management team um has reduced one of

our bottomup scores. Uh whereas um Tempest AI we we uh put more so within the AI space. Both of them are touch AI

uh in important ways. We recycled some of the funds into Tempest which had been hit hard. Um, and we we bought some

hit hard. Um, and we we bought some Coinbase.

Uh, we bought some Circle and Bitmine immersion. So, it was very interesting.

immersion. So, it was very interesting.

The AI hype fears occurred at the same time as the crypto fears and they almost seem to be feeding one another. Uh, and

so we took a takeout name and put it into AI and crypto. We did the same by swapping a little bit from one of our AI

names into a higher conviction AI name.

>> Got it. Makes sense. Um, so speaking of crypto, um, and building your position there, you maintain a significant

exposure to crypto equities. um

Coinbase, Bit Mine Circle, bullish, etc. Um you're obviously bullish on Bitcoin, you're bullish on uh stable coin adoption and therefore Ethereum

rather than asking you a gener generic sort of what is your V1 crypto. um if

you were to actually rank them in terms of relative attractiveness over the next 3 to 5 years. So, Bitcoin,

Ethereum, and various crypto equities, which is also a diverse group, exchanges, DATs, you know, the treasury companies, um the stable coin issuers.

What would that ranking look like?

>> Oh, okay. So, you're asking let me start with the crypto first. Um I think during the flash crash uh one of the major

exchanges out there had to sell Bitcoin.

This is what always happens. Um Bitcoin

is the most liquid of all of the crypto assets out there. So it usually is the first one to get sold and drag the

others down. The others go down more.

others down. The others go down more.

Um, so we think, and again, we're we're at a moment where we think we've seen the bottom because the news is out. Uh,

JP Morgan posted the report about MSEI.

Now, everyone knows that, uh, everyone knows about the flash crash. Um and you know while Binance is very very

profitable I think there are memories of Bitfinex which um uh which have left scarred tissue and you know the the

ramifications thereof. Uh so we think uh

ramifications thereof. Uh so we think uh from the beginning when we talk about Bitcoin we say look it's a very big

idea. It is a global monetary system.

idea. It is a global monetary system.

It is a technology and it is a new asset class. It's

leading the charge into a completely new asset class. So, it's the leader and

asset class. So, it's the leader and it's where all institutions are going to dip their toes in first. So, that one has to be at the top of the list. Just

in terms of the big three, I think in terms of Ether and Salana, the the the narratives are shifting a little bit.

Absolutely. Ethereum is what institutions are choosing um as they're building on top of the

Ethereum uh layer 1 with layer twos. Now

the big debate out there is are lay layer twos and you know they're proliferating widely now. are

they going to commoditize because they're not close enough to the consumer except for base which is Coinbase is one

they're not close enough to the consumer uh and the they are um dependent on the layer ones. So over time as these

layer ones. So over time as these proliferate is there going to be a commoditization and the value will flip to those closer

to the consumer and to the layer ones?

Um we're thinking that could be uh the case here. Uh but all that said uh the

case here. Uh but all that said uh the proliferation of building layer 2s on Ethereum continues. So that would be our

Ethereum continues. So that would be our our second choice. Um and really it's I think as I described on the last call really an institutional play. And then

Salana is more the consumer play though of course it also would like to be part of the uh institutional uh scaling of crypto crypto uh so we

shall see there and of course Salana is just a layer one so much simpler so uh I I think those are the big three in terms

of uh equities and you'll see in the flagship strategy we cannot hold um the pure delays in in terms of ETFs. In

other strategies, we can. It's just what our clients would and would not accept uh as we were evolving our strategy. And

so, we have to rely on the stock. So,

you'll see Coinbase is right up there as number one. Robin Hood is number two in

number one. Robin Hood is number two in terms of it is moving quickly towards the digital wallet space and understands this is the game. Who's going to have

that digital wallet? [snorts] Uh and then you'll see us trying to expose our clients u to stable coins. So circle is

uh that one further down the pack and a little bit of ether and salana. Uh so I

think including the last two one is very small the Salana for for technical reasons right now it's still in pre-registration

and the uh ether one is around 2% of the portfolio. So taking crypto altogether

portfolio. So taking crypto altogether we're probably talking about a 12 13% position uh in in the portfolio and that

feels the right size. Let's see how this recovery tests the various technicals and uh if um you know decisions by

institutions like the the the warehouses Morgan Stanley uh BFA Maril Lynch, Wells Fargo, UBS, if

any of them decide to put Bitcoin on their platform through the ETFs, they have not done so yet. Uh so we're waiting to see when that happens and

they may have been waiting for this four-year cycle to play out, right? Uh

because that's what they've heard since uh since the having and and now we're seeing a down round. Let's see if they step in. We don't know. Just for a

step in. We don't know. Just for a clarification particularly for the viewers when you say the warehouses quote put it on their platform you're referring to um sort of they're re

they're putting into the asset allocation recommendation to the to the clients.

>> Yes. So what they're saying is we have approved this spot ETF. It can be spot bitcoin spot e. We have approved this uh

on our platform and you can put it in your models. Uh you can buy it for your

your models. Uh you can buy it for your PAS, your personal accounts. Uh so it's a pretty big deal and it's really demand

pull from the advisors if they want it, if their clients are clamoring for it, saying, "Hey, now is the time. Let's

let's get into these uh into these new assets."

assets." >> Got it. Um, I know Nvidia is not a big position for you, uh, but wanted to get your take on what Nvidia potentially

means for the broader market. Um, so

Nvidia reported a blowout quarter. I

don't recall hearing from a single analyst or an investor who thought Nvidia had a bad earnings call last week, yet the stock went down in a in a

big intraday reversal. Um, that clearly spooked the market. Um,

I know you don't think we're in an AI bubble, but how do you reconcile that with the reality versus expectations

dynamics of what forms a stock price where Nvidia's price action suggests that expectations may now be

ahead of reality?

Yeah, I think well a couple of points there and you'll notice that we did buy on that setback and you're right, it's not a huge position. It's about 1 and a.5%.

a.5%.

Um, and one of the reasons for that, we're watching the price action. That's

that's true. But I also think there was a crypto AI relationship here. the kinds of

relationship here. the kinds of investors interested in crypto are also interested in AI. Uh and you know there

there was a selloff and you're going to have uh some investors speculators certainly uh following the momentum. Uh

and that's all they're doing you know and they'll ask questions later. Uh in

terms of the Nvidia report it was spectacular. was a reaceleration in

spectacular. was a reaceleration in topline growth was an increase in margins. Uh but we do see other signs of

margins. Uh but we do see other signs of competition emerging out there. Uh and

you know the hyperscalers their cloud strategies probably do not have 75% gross margins. Uh and they're buying

gross margins. Uh and they're buying from Nvidia and now Nvidia is telegraphing our margins are higher than

our customers. So that that might be um

our customers. So that that might be um uh unsettling to them and and pushing

them to pursue a strategy involving AMD or involving Google's TPUs

um or uh involving Amazon's tranium or inferentia. So there there there are and

inferentia. So there there there are and then you've got the specialurpose GPUs.

Tesla is talking in very optimistic tones about its own AI chip and how it

expects to have the best chip for robo taxis for autonomous mobility [snorts] uh of of all out there because Nvidia's

is a special purpose I mean as a general purpose chip Tesla's will be a specialurpose chip so I always look at how customers and competitors are

acting. Um, and yes, the expectations uh

acting. Um, and yes, the expectations uh uh for Nvidia are high. They're very

high. Now, we have one acceleration quarter. Is the market now expecting

quarter. Is the market now expecting another acceleration? Their guidance

another acceleration? Their guidance suggests it could be, but maybe it won't be. Uh, so we're getting into that. So,

be. Uh, so we're getting into that. So,

you're right. The expectations are high and Nvidia has to deliver. So far,

Nvidia's delivered. Got it. And uh

speaking of a potential um competitor or competitors for Nvidia's GPU, um AMD is a much larger position for you

and clearly you're seeing it as a potential share gainer coming from a very small base. Um but there is a view out there that the likely

um the likely competition if there were to be some serious competition to Nvidia is um will likely be from these

application specific um chips whether you know the the the likes of Google's TPU or other custom um specific GPUs

which would I guess if that were to be true. It would put in uh AMD in sort of

true. It would put in uh AMD in sort of a lose-lose position. Meaning if Nvidia maintains its dominance and reigns um

holds on to its market share, then there's not much room for AMD.

if the future is more with these alternatives the you know the the application specific um chips and and uh

the likes of the Google TPUs then that that future won't be so good for AMD either. So how do you

either. So how do you >> Yeah, there's the thought with power being the constraint here. Um it

probably means that companies are going to choose the best chip and you know especially when it comes to the CUDA software around the Nvidia chip. Uh, one

of the things AMD has that Nvidia does not have yet, although it's on the road map, is it has much more memory

uh, for these large context windows that we need for reasoning. And so, so that's something that's benefiting AMD short term. And one of the other things that

term. And one of the other things that it has, it's taking share from Intel in the CPU space. It's up to 40% share.

That's unbelievable. in speaking with OpenAI uh for during a number of our conversations they say we think people

are missing the fact that we need both GPUs and CPUs. Uh so for right now we think AMD is in a very good spot. So in

our last conversation um you spoke about the AIdriven opportunities in healthcare um and multi uh multiomics in

particular. As a followup to that, what

particular. As a followup to that, what do you think happens to medical hardware with AI? There's obviously lots of

with AI? There's obviously lots of exciting innovation and um opportunities in the softwaredriven side of healthcare, but in terms of do you have

a view on medical hardware? Uh I'm

thinking for example robotics.

>> Yes. Uh well um Intuitive Surgical is the uh robot surgery company and we've talked to them uh and agree with them

that humanoid robots probably are a threat to to uh to intuitive surgical if it does not move aggressively in that direction. But not for years. Not for

direction. But not for years. Not for

years. And in fact, Brett Winton, our chief futurist, has uh done, it's a preliminary calculation, but uh humanoid

robots are going to be 200,000 times more complex than a robo taxi and uh and therefore are going to probably take longer. They'll be able to do, you know,

longer. They'll be able to do, you know, simple tasks, but to do something like surgery, that will take years and years and years. Uh and in terms of neuralink

and years. Uh and in terms of neuralink um Elon is already using robotics, not humanoid robots but robotics uh to

implant embed um neuralink into into uh human brains.

So uh I I think it's going to be very important robotics the hardware side.

>> Got it. Well Kathy, um that's all the time we have. Thank you so much. Hope to

see you again.

>> Great to see you. Thanks so much.

Bye-bye now.

>> Bye.

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