Tech Sell Off, Bubble Comparisons, China | ITK with Cathie Wood

[Music] [Music] greetings everyone and happy new year uh this is our first employment friday of the year and uh as you know uh ever since the uh crisis started uh i have been giving weekly or monthly updates now why why have i done that um for a couple of reasons during the coronavirus crisis when it hit it was clear to me that the headlines that people were reading generally both investors and the general public were not capturing what was really going on in the economy there were a lot of economist famous economists and others strategists as well who were looking at the economy shutting down and uh we're basically preparing people for a depression if you'll remember and you can go back to those uh videos in the early days they were called uh stay at home with kathy uh and then we switched to in the know uh and as you know back then i was uh very focused on the possibility that this was a shock from which we would recover very quickly that turned out to be a correct call and uh every week in the beginning and then monthly i was delving into the economic reports that were coming out and into the earnings reports and pulling out evidence that supported or refuted that point of view and that worked well today we have a very different point of view once again about what's going on out there and uh and so that's why we do these videos and i will get into that in a moment uh first i'd like to um i'd like you to look to alert you to a blog that i wrote in mid-december it's on our website and it goes into why we believe that innovation is in deep value territory and goes through and refutes a lot of what we believe are the myths out there about innovation we believe uh that kovid 19 the coronavirus uh crisis accelerated the shift towards the innovation platforms around which we have based all of our research and i'm going to give you a few examples of that in a minute uh i do want you to know that of course we've been through a very difficult time since the uh significant rotation from growth into values started nearly a year ago in mid-february and uh and i want you to know that we're in there with you uh uh between the company and uh arc funds which uh are more than half of my i ira um and the the uh significant potent uh percentage of my total net worth um we're all in and my conviction uh couldn't be higher uh that the innovation that has been evolving and was accelerated coming out of the coronavirus crisis is unstoppable and the convergence uh between and among the 14 different technologies uh that we are researching uh that they are on that convergence is underway now and is and is causing and will continue to cause explosive growth really the likes of which we haven't seen in our lifetimes and when i say explosive growth i mean when it comes to those innovation platforms they're going to cause a lot of problems for the underlying economy the traditional world order and i'll explain a little bit more about that in a moment uh so what has happened is in the early stages of the coronavirus when i was doing those videos we had algorithms and quantitative strategies focused on just a few variables and they were at that time cash burn and cash cushion and a lot of our stocks did not have big cash cushions and were burning cash especially in the genomic space and uh they were taken down by 75 percent many of them uh in a a month just in a month three weeks to a month uh and of course that was the wrong answer the algorithms got it wrong and that there was a massive head fake caused a lot of consternation for the quantitative strategies out there because of course genomics was a big part of the solution to a problem we were facing in the coronavirus and since february as this rotation into value from growth really accelerated these same algorithms have had good success with this strategy uh they've been focused on inflation inflation fears interest rates and valuations uh and they have likened what we're going through right now to to the tech and telecom bubble and the bust and so the algorithms as well are basically looking at momentum and saying once uh the bubble pops uh that that's what they're calling this uh you know it doesn't stop you know it's 80 90 percent uh we think that that is um a vestige of the tekken telecom bubble and bust a lot of strategies started moving towards benchmark sensitivity because of the tech and telecom bubble and bust and they really stopped focusing on true innovation transformative innovation disruptive innovation uh so the the gleam in the eye the dream during the tech and telecom bubble uh investors were falling all over themselves to get the next deal and uh and and to ride it you know up hundreds of percent uh within a few days uh and of course that was not real i'm going to read you some of the companies that uh went poof uh from that time these were the largest dot-com busts pets.com webcam webvan e-toys geocities theglobe.com go.comflues.comcoop.com and cosman.com uh many of these were out of business within a few years because they were being priced on nothing but eyeballs not just current eyeballs dr coop for example uh averaged 1.4 million monthly average users or the equivalent thereof and uh it went public in june of 99 and was out of business in december of 01 because the valuations that people chased were simply based on eyeballs that might materialize and never did materialize we are nowhere near that situation now the dreams back then so the internet was quite transformative and led to the cloud and artificial intelligence uh we are living in the reality that that dream started and uh this reality has companies like uh teledoc and zoom just to give you a sense of the contrast here you know teledoc has about 2 billion 2 billion in sales its revenues have gone up four-fold uh since the beginning of the coronavirus and we don't think that its revenues are going to go down what we're seeing in the market is um a focus on year-over-year momentum and the the comparison that we're going to see and this is the last of the really tough comparisons uh zoom's revenue uh one year ago fourth quarter uh was up 370 percent and uh in this fourth quarter the quarter they will report soon we believe and their guidance is that that revenue will be up 19 to 20 percent think about that on top of 370 percent up 19 to 20 percent and that's probably the low point of its growth rate uh and we're going to accelerate uh we believe or zoom's uh revenue growth is going to accelerate from there um i gave you a zoom it's revenue sorry is up six and a half fold uh since the beginning of the coronavirus teledoc another stock telehealth uh its revenue is up fourfold and the teledocs revenue is two billion dollars uh on average per year or this last year zooms about one billion dollars so these are real companies they're gross margins uh for teledoc they're in the 60s high 60s for a zoom in the low 70s i may be mixing some of these numbers up but you've got the point very high gross margins solid revenues uh growth continuing from uh from very tough comparisons and we've got two companies here that are being dismissed as stay-at-home stocks that are going to fall back to earth and and we believe they are not stay-at-home stocks they are stay connected stocks stay globally connected stay competitive stay globally competitive uh teledoc being the backbone of the healthcare system from an information point of view here in the united states and zoom uh becoming one of the most important companies we believe in the enterprise communication space communications is a 1.5 trillion dollar market enterprise uh communications globally and we believe that microsoft and zoom together are going to benefit from the first quote unquote rip and replace cycle since the early days of the internet in the in the early 90s when cisco came of age uh and uh we believe that the dismissal of these stocks is quite misplaced and suggests that analysts or investors are not doing their homework and sizing these markets appropriately so what i'd like to do in terms of focusing now on inflation interest rates and valuation is leave those aside for a moment while we go through monetary policy fiscal policy economic indicators and market signals and i'll loop back uh to those variables uh to give you another point of view of how the algorithms and the quantitative strategies we believe are going to be wrong once again so let's start with monetary policy uh what has riled the market uh in the last week or so is uh fed minutes being released suggesting that the fed is going to become more aggressive at uh raising interest rates perhaps sooner than many expected maybe in the march time frame now what we believe has happened here is that the fed having suggested that inflation was transitory uh since the beginning of the coronavirus uh was becoming uh concerned uh when it saw cpi inflation headline inflation year-over-year at 6.8 and it does not want to be blamed uh for inflation um being sustained and and certainly not moving out of control uh we think this is a bit of jawboing boning here we think that some of the economic statistics that i'm going to share with you in a bit the fed knows very well and those statistics suggest that inflation is indeed transitory but on the off chance and i'm sure there's a big debate going on at the fed there are going to be some fed governors and and and fed presidents who are looking at statistics and uh are citing some that are still on their way up there are others who are going to be citing statistics uh that are on their way down but they want to err on the side of hawkishness or being too tight right now certainly from a jaw boning point of view because they don't want inflation to to continue to escalate um we see m2 growth uh still around that 13 range having uh peaked at 27 in march of 2020 so the deceleration is there although it's leveled out at 13 and uh what we think is quite significant is this concept of velocity which means that uh money growth is faster than gdp growth uh that velocity going down uh we think is beginning to reassert itself which would be anti-inflationary again we have to wait for more statistics to make sure we're right on that but we do think uh that m1 m2 growth is higher than gdp growth which means uh velocity is continuing to go down if velocity were starting to go up meaning the rate at which money changes uh over turns over in the economy if that were starting to go up that would be an inflationary signal we're not seeing that now uh on fiscal policy uh that one's easy um senator manchin from west virginia is basically saying he's not going to negotiate i think he too has been citing inflation uh debt and taxes as three reasons not to spend more money so we think the good news there is that some of the onerous tax increases that uh that were part of that package will not go through and uh so that's good news that's good news um now on to economic statistics and here again this is this is the sort of analysis that uh we were doing at the beginning of the coronavirus pulling out of these reports data that you are not hearing on uh cnbc bloomberg newspapers they're just not making the headlines before i do that we'll go through employment since this is employment friday and today's employment report had something for the bulls and the bears headline non-farm payrolls much lower than expected 199 000 expectations 420 000 there was a slight increase but not enough to make up for that difference an increase in in terms of revisions on the other hand uh there's another measure of employment uh in in this report it's called household employment that that measure was up 650 000 after being up a million uh in the previous month that's very strong uh and uh so that is more consistent with the adp report uh that we got earlier in the week uh which suggested that the increase was closer to 650 000 so that was um that's a healthy sign for infl employment uh the unemployment rate dropped below four percent so now we're getting back to the levels where we were uh in the early stages of the corona virus and one of the reasons is the labor force is growing much more slowly it went up only 168 000 uh in this last month so the unemployment rate keeps coming down uh what the bears those who are expecting higher interest rates and higher inflation focused on is average hourly earnings which were up 0.6 interestingly as we look through the report uh it is the lower uh end of the wage range that is seeing some dramatic increases and we're hearing about it about them anecdotally as restaurants and fast food restaurants are bidding up to to bring new workers in now uh so that's employment so some for the bears some for the bulls um i would say more for the bears from an interest rate point of view and and on the average hourly earnings i'm sure the fed took a close look at that now what we've been trying to size up for the last few months is where is real demand and now that all of these employees are coming back to work and we're revving up the engine even faster the engine of the economy we're looking at other statistics that show a divergence from that one of them the most important is consumer sentiment university of michigan has the best consumer sentiment uh survey out there richard curtin who's just retiring started this survey in 1974 and it is recognized as the uh as the best in measuring consumer sentiment consumer sentiment is down to levels that uh we last saw at the depth of the coronavirus both in november and december now that's a very important part of the time of the year for the consumer to be feeling uh a little uh unconfident because it's the biggest selling season of the year and uh so that we believe has become a problem we have numbers for november retail sales were down 0. i mean they were up 0.3 percent but when you take inflation out what did real spending do so what what what was unit growth in retail it was down 0.3 percent if you annualize that that's about three and a half percent at a really important time in the year if you retail sales are mostly goods if you add in services um you see that real consumption in total goods and services was flat again very important time of the year and a time also when we thought this pent-up demand for services would cause a burst in service consumption we didn't see it um so that that is one indicator saying us telling us something is not right out there the other is again reflecting on third quarter gdp statistics in the third quarter of last year real gdp was up 2.3 percent it was a big disappointment relative to expectations but what the headlines did not feature and i and still are not featuring is that practically all of that growth went into inventories it wasn't sold real final sales were were up a tenth or maybe two tenths so even in the third quarter now remember that's reaching back to to june uh even in the third quarter inventories were starting to build at a time when everyone was talking about supply chain problems and i think what we're we were beginning to see is the consumer getting quite upset that necessities the prices of necessities were escalating and destroying purchasing power so so that's interesting now what gets even more interesting is watching the inventory numbers in the fourth quarter uh wholesale inventories in october were up something like two and a half percent two to two and a half percent now that's month to month that's not year over year annualize that and we're talking about 25 to 35 percent increase in inventories remember this is when supply chain issues were causing all kinds of shortages and then again in november wholesale inventories up 1.2 percent again double digit rate annualized part of the reason is consumption was was not playing ball and then you look at retail inventories in november up two percent that's month to month annualize annualized 24 plus uh so this is this is something i don't think the headlines have captured you might be surprised to hear it as well now we have some other very interesting statistics imports in november were up 4.7 uh again supply chains clearing up uh the ships finally being cleared not completely but a lot faster uh did that go into inventories uh it didn't make they didn't make it into consumption at least unless there was a barn burner of a december and we do hear the credit card companies talking about strong sales but they've been talking about strong sales for quite some time the economic statistics which are much broader based are suggesting that that's some kind of overstatement or share shift make shift then we get to autos i think this is the most fascinating part of what's going on in the economy right now the mannheim used car index has been screaming i think the prices of used cars at their peak had increased on a year-over-year basis something like 60 and that was adding to the cpi well very interestingly we've had a few uh uh reports now that suggest that the bubble the bubble was in used cars and that it might be bursting we can see this a few ways on a year-over-year basis now used-car price used car sales units are falling they're down four percent uh november to december they were flat but year over year that was down uh four percent uh we're seeing prices finally start to fall they were down 1.2 percent month to month again annual that's a big decrease uh month to month annualized roughly 12 on a year-over-year basis they're still up 46 percent but they have started to fall and what tells us that they will continue to fall and mind you they've had a disproportionate impact on the cpi what what tells us they will continue to fall is now an inventory buildup in the used car space normal uh inventories for used cars are i believe 43 days now they're at now they are at 54 days so well above average and i believe at their lows they were in the 20-day supply range now many people are looking at the hike in used car prices and they've probably been thinking about selling that car and that extra car maybe that they bought to avoid mass transit during the corona virus if they see prices coming down they probably will move a little more quickly and then on the wholesale front uh this mannheim index says that inventory levels typically are 23 days now they are 33 days so that's interesting on the used car front on the new car front fascinating at an annual rate here in the united states new auto sales peaked in april at 18.25 million units now when we got to october and uh the audio auto oems were were talking on earnings reports each one of them uh including elon musk was saying okay the chip shortage is beginning to alleviate now they have been blaming the decline in sales because it started in april and it was cl declining declined to 13 million units from 18 and a quarter um that 13 is uh an october number uh chips were the missing link okay they're starting to be replenished uh november 12.86 december we just got this number 12.44 meanwhile you've got electric vehicle sales up near nearly 100 at an annual rate what's going on here well it could be a combination of consumer sentiment not being consumer not being happy about what's going on and a consumer preference shift towards electric vehicles that is why at the ces show the consumer electronics show you heard these auto oems talking more about electric vehicles of course it was the uh electronic show and we saw that ford's f-150 lightning that they were going to have to double production given all of the demand well what they don't tell you during those um appearances at ces and so forth is that electric vehicles make up maybe two to three percent of the sales and that 97 of their revenue bases uh are gas-powered vehicles uh and and it's probably 90 plus of their production now if there is the combination of the consumer uh turning off not wanting to spend as much money certainly not on big ticket items and a preference shift if they're going to spend they're going to spend on electric then these oems have an issue they have a problem and and we think uh we we think we're going to hear more about it in uh the quarterly reports and we hope analysts start asking about it now i look at the i look at the performance of stocks like gm and ford uh they soared on those electric vehicle announcements think about that that's ridiculous it's only two percent of their sales and what if the other 98 or so forth are on their way out as the consumer preference shifts toward electric they have problems they have problems because their gross margins depending on the company are somewhere between 10 and 20 percent those are very low gross margins and if you look at the bloomberg estimates for net this year 2022 after a very weak 2021 you see growth estimates in the 10 15 20 range the one you the us-based ones are at the higher end of that well um that may not happen and again they don't have a lot of room for error uh and we have seen them pivoting and announcing that they're pivoting ever more quickly towards electric but the problem is almost 100 percent of their base is going to go obsolete over time uh so very very interesting there and the other december statistics that we got besides autos um are the pmis uh the total pmi and pmi for services both of them came down and prices paid in the purchasing managers index uh came down a lot more than uh people were expecting uh it was i think the expectation was somewhere around high 70s 80 this is a diffusion index instead it was 62. now that still means prices are up because they're still above 50 that diffusion index but coming down we think pretty fast now one other thing i'd like to focus on here is china uh so much is going on in china that again that the headlines are getting some of this but within one week um uh a bloomberg journalist sophia horta acosta acosta reported that all of this happened in greater china this week i'm going to just read you a few of these to give you a sense of the drama here evergrand suspends trading on the stock exchange and the developer evergrand was ordered think about this to demolish 39 illegal buildings because they weren't they didn't have the right permits can you imagine if that happened in the united states uh the largest hundred largest developers in china reported that their contracted sales were down 35 percent in december and for the year as a whole they fell for the first time um sophia says in at least five years i don't think i've ever seen them fall in the last 20 years so real real change hong kong's instituted strict border controls banning arrivals from the us uk australia they are shutting down bars they're shutting down evening dining let's see there a few of the other developers uh went bust shimano which was rated investment grade in november defaulted on a trust product and rocked the credit market and the central bank withdrew liquidity a lot of people thought they were going to increase liquidity because they said they would a china regulator vowed stability after stock market's rocky start but they haven't done anything about it yet and very interestingly the yuan uh the the rmb the local currency after a very strong year held up and i think it held up probably helped by the government supported by the government um it is starting to weaken uh quite a telltale sign and one stock her wrong which had been um had not traded since last march opened this week and dropped 50 percent now when china catches a cold commodities usually catch pneumonia and we're seeing this in a few commodities iron ore prices and so forth but it isn't quite clear cut yet uh and i was saying to our team this morning how could this be happening and the economy not be falling apart and the and the consumer not getting restless there well uh the the the the consumers consumer savings is 75 in real estate but what i learned this morning and it does make sense uh one of our analysts our newest genomics analyst pierce uh uh worked in his lab as he was getting his ph.d at texas a m with chinese with other chinese students in fact he only worked with chinese students and he learned that a greeting in china the equivalent of a hello is basically i hope you have enough to eat and so pork prices and rice prices are critically important and what do we see happening there pork prices are down depending on the measure 33 to 50 percent rice prices are fairly flat and apparently uh that keeps the consumer happy now i don't know i think this property uh debacle is is quite something so we shall see uh before moving on i'd like to just uh talk about the fourth quarter gdp it will be strong now not as strong as some people thought it was going to be up seven percent and now i guess the atlanta fed said it'll be closer to 4.3 percent what we're going to be watching is how much of that is in inventories and i think quite a lot will be now on to market signals and i realize i'm spending a lot of time but i just want you to understand how we're pulling apart the data and we're seeing things that uh others are either not seeing or for some reason just not reporting um the yield curve peaked at 130 in it was february march of last year i think it was march and has been falling now the yield curve is the difference between short and long-term interest rates normally long-term interest rates are higher than short-term interest rates they were as measured by the treasury curve so government uh bonds and notes uh the yield curve the the longer-term bonds were 130 bases 130 basis points 1.3 percent higher than the two-year yields uh in march of last year at the end of last year that number was 80 basis points 0.8 percent today it's 0.6 even though bond yields are up short yields are up more in response to the employment report and that 0.6 on average hourly earnings the yield curve narrowing generally is not a good thing for financial stocks but this rotation into uh value stocks energy is up five percent this year financials up uh now i'm sorry energy's up 10 financials up 5 and they were two of the strongest sectors last year seems to be on automatic pilot this yield curve uh would suggest that financials should start to uh underperform uh so we shall see that the rotation is still towards value it is hurting growth uh we think it's long in the tooth we think it's going to end but it hasn't ended yet um in the fixed income uh department world we're also seeing credit spread so we look at junk uh spreads so how much higher are um low quality companies yields or interest rates than a higher quality and uh right now we're seeing no disturbances very little the the the fixed income market is buying into this uh rotation into cyclicals uh they they haven't uh they haven't been paying attention perhaps to inventories in the way we are commodity prices are quite mixed uh oil prices peaked in uh the early november time frame i believe it was around 85 86 dollars they went all the way down to 62 dollars so in the next uh a couple of inflation reports energy is going to be a negative that's that's that's interesting iron ore prices are still down uh quite significantly um from their peak and that does corroborate with what's going on in china but most are just meandering most prices in trading ranges the dollar is up and that is causing all kinds of problems in the emerging markets uh the turkish lira as i mentioned on our last video i mean the turkish people have lost half of their purchasing power in one year uh relative to the dollar that's the turkish lira's gone from seven to about 14. it was as high as 18 nearly 20 and i think it's going to go back there because their foreign exchange reserves were cut in half the last month to something like six billion dollars six billion is nothing to withstand the onslaught of the the currency uh speculators um we're also seeing kazakhstan the protests there shutting down the company countries internet i know russian forces are in there um i think we're going to see a lot of more hot spots in emerging markets and the dollar going up suggests a flight to safety and that is a downward force on inflation commodities are priced in dollars the dollar's going up all other things equal commodity prices would go down in the crypto markets we're seeing a correction they are starting to succumb to what we're seeing in the equity market which is this um strike against technology uh growth innovation uh we we think that's going to be uh short-lived uh and um and i'd like to end right now by talking through just one more thing going back to autos and giving you a sense of where the bubble might be in this market it is not in innovation stocks they've been cut in half many of them some by 75 percent um but listen to this i i gave you the the story about uh ford reporting that it would have to double its electric vehicle production of the f-150 lightning and the the stock just taking off uh not paying any attention to the uh auto statistics i just mentioned uh well when i think of what could happen in that space and i see these stocks uh ramping on sales that mean nothing to these companies uh in terms of their earnings shall we say a lot right now in fact they need to invest a lot more in electric to make it happen and to move the needle in these companies but what if we're right and the there is not a 20 increase in sales maybe sales are flattish year to year that would put them at roughly 15 million units um and they'd probably have to start cutting prices if we're right on the used car market and the pricing there which means they're probably going to be facing some credit issues uh since they uh they're hugely leveraged to the credit that people take out on their uh autos and as prices go down residual values go down uh and you know auto credit was the best performing credit in oh 809 and so there's a lot of complacency in that market uh in 0809 the um the the homeowner had to decide okay i can't pay everything i'm out of work uh what do i pay to just keep things going well they were going to pay their uh auto loan down and default on their mortgage because it would take a while for them to get kicked out of their house but they needed to get to their jobs today that would change because of ride hailing um so we think that complacency is misplaced and that the auto credits out there could become a mess so if i'm right on any of this there will be disappointments in terms of uh the auto sector and i wouldn't be surprised if at least one of the companies loses money next year which would be most unexpected and if it loses money what is that valuation where are the crazy valuations now are they in our stocks now that uh zoom is down to 33 or 35 times this year's earnings or is it in an auto stock where there might be losses and what's that p e ratio that's infinity that's where the bubble is and i think you're going to see a lot more cases in point as this year moves along and the innovation that we see evolving so rapidly dna sequencing transforming health care robotics solving the labor shortage problem we're having energy storage the consumer preference towards electric uh artificial intelligence which is the glue that is helping all of these technologies converge and the last one blockchain technology uh we think that we're in a period of innovation that was the dream in the late 90s uh but those those companies were vaporware they were based on nothing but eyeballs we have real revenues we have incredible growth rates and if we're right and the economy has an inventory problem then our growth rates are going to look far superior to anything you'd find in the value space and we are really looking forward to that so with that i want to wish you a happy new year again uh i want to thank all of the investors who have sent us words of support and and have shown their support our asset retention has been pretty phenomenal and i think it is because uh of the open source research ecosystem we are sharing our research and we've got this long-term investment time horizon keep your eye on that prize and if we're right the the technologies around which we have focused our research those technologies we believe will compound in terms of revenues and earnings for the companies involved is this going to happen in the next three months i don't know i can't tell you sometimes the market can remain irrational and i'll say what's going on right now is irrational sometimes it can remain irrational but i do think as we see these earnings reports coming in and the guidance for the first quarter and this fessing up out there into what's really going on with inventories uh that we're going to see the turn sooner rather than later and so we will be looking forward to that and so once again i thank you again for the words of support and belief in what we're doing uh we know we're doing the right thing and we're so happy uh to be with you on this journey and believe me the other side of what we've just been through is going to be delightful in our opinion so with that i will say goodbye [Music] you

Channel: ARK Invest

Views: 517,684

Keywords: ARK Invest, Cathie Wood, volatility, market, bubble, investing, innovation, stock market, stocks, jobs report, finance, econ, economics, macroeconomics, market update, blockchain, market sell-off, economy, inventory, invest, investment, cathie wood january update, cathie woods 2022 update, ark january update, ark jan update, cathy wood january update

Id: EamI_Eg1OW4

Length: 47min 24sec (2844 seconds)

Published: Fri Jan 07 2022