The Breakdown - Why Cathie Wood Thinks Bitcoin Could Replace Bonds

Starting point is 00:00:00 I bet you can almost feel the rage of the Talibs of the world screaming at their computer screens about the volatility, the volatility. This is the last truly free market in the world. So yeah, that's going to be volatile in the short term. The question is whether you think Bitcoin is going to be higher and by how much on a one, three, five, and ten year time scale. Start to look at it that way and it looks a lot different. Welcome back to the breakdown.

Starting point is 00:00:30 with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexo.io and produced and distributed by CoinDesk. What's going on, guys? It is Friday, February 26th, and today we are talking about why Kathy Wood thinks Bitcoin could one day replace bonds. First up, however, let's do the brief. First on the brief today is the S-E-E-Wood. Today, in absurdities, there are rumors abounding that the SEC is investigating Elon Musk's

Starting point is 00:01:09 frequent tweet about Doge for potential securities violations. If this sounds absurd to you, it gets better. Elon responded to someone's tweet about this rumor saying, quote, I hope they do, exclamation point, it would be awesome, exclamation point, with two crying, laughing face emojis. Two crying, laughing face emojis is a pretty good description of how one would feel reading this whole exchange. The tweet he responded to actually pretty perfectly summed things up, saying, the SEC investigating dog memes sent by a memeer about a meme coin is peak 2021. Let's hope for the sake of any reasonable use of time that the SEC is not actually doing this investigation. Next up on the brief today, a big pop in US income growth. So what happened? The U.S. household income grew 10% in January.

Starting point is 00:02:02 Alongside this consumer spending rose 2.4%. This growth came primarily from the latest round of stimulus and was in fact the second largest monthly income growth on record after last April when the initial pandemic payments were sent out. This was also the first month since October that consumer spending rose. Interestingly, the thing to really pay attention to around this is in fact the bond markets. We're going to discuss them a little bit more in our main topic, but effectively what we're seeing right now is a situation where investors think that, regardless of what Jerome

Starting point is 00:02:37 Powell and the Fed says, an improving economy will force them to back off the aggressive monetary policy that has helped asset prices remain so high. In response, they're backing off of high-price stocks and pushing treasury yields higher. Some are calling this the taperless tantrum, and this refers to a 2013 market episode where the Fed tried to taper its post-GFC policies and markets absolutely freak the hell out. The Fed this time is saying that it's actually not going to do any such tapering, but the market is still freaking out believing they won't be able to not. Hence the taparless tantrum. Anyway, these types of stats around income and consumer spending are exactly the sort of evidence those taperless tantrumers are pointing to. Last up on the brief today, crypto mainstreaming,

Starting point is 00:03:26 question mark, question mark? This one is a little mixed for me. So the news first, Robin Hood Crypto has signed up 6 million new people this year, about 3 million a month. That is a 1400% increase year over year. On the one hand, this shows a clear new wave of retail investors in crypto, which is a good thing. We want more people participating. On the other hand, screw Robin Hood. Their decision making around GME and AMC and other meme stocks has been suspect at best, their explanations for their decision-making has been worse. Another reason to not love Robin Hood as an on-ramp to crypto is that they historically haven't allowed people to withdraw their capital. Now, this is changing. They're allowing traders to transfer holdings on and off, so at least that's an improvement.

Starting point is 00:04:12 But as for me, I'm going to stay skeptical of Robin Hood for a while. Meanwhile, GME is back in the news, and I wish all of them over at R-slash-W-SB, good fortune, and solidarity. With that, let's shift to our main discussion why Kathy Wood thinks Bitcoin could replace bonds. First, a little primer on Kathy Wood for the uninitiated. If you zoomed back three to four years ago, Kathy Wood might have been characterized as a renegade, a brilliant renegade, but a renegade nonetheless. She was setting out to build a fund organized around thematic ETFs, exchange-traded funds. And the meta-theme for all those ETFs was innovation. She was interested in segments of the market that were on the frontier of human experience, and which she believed were underserved and inaccessible

Starting point is 00:05:00 to public markets. Importantly, there is a macro context happening at the same time that helps explain just how out there ARC really was. Since the great financial crisis, the low interest rate world has pushed many institutions farther out on the risk curve than they've ever been. Firms that would have historically been more conservative had to start investing in riskier asset categories to get the returns they needed. One place that this showed up was money flooding into venture capital and private equity, and there were a few consequences of this happening. One impact was higher valuations among private startups. This is something that venture capitalists in Silicon Valley have been bemoaning for a decade or more. The other impact, however, was more

Starting point is 00:05:44 money available at later and later stages for companies to stay private longer, whereas a company might have traditionally had to go public to access mezzanine-type funding, they could simply get it from a soft bank or another PE player that was new to the venture space. What this means is that as Kathy Wood was starting arc, there were extremely limited ways for public market investors to get exposure to these frontier companies without diving into private markets. Now, if you were looking at Wood again in that time period four years ago or so, you also might have had questions around her conviction for some of her bets. She was one of the first loud advocates for Bitcoin on Wall Street, for example, and as we all know how long it took for that crowd to finally start coming

Starting point is 00:06:30 around, that was a pretty fringe position. Wood has also historically had extremely high conviction around Tesla and Elon Musk. Tesla, of course, has gone through many cycles when it comes to how the public market feels, but Wood has been high conviction throughout never really wavering at all. Looking for the best way to stay on top of your investment game, nexo.io has you covered in three easy steps with their high-yield savings account for digital assets. Step one, create an account at nexo.i. Step two, transfer assets to your secure nexo wallet with no minimum or maximum limits on funds deposited. Step three, sit back, relax, and earn up to 12% compounding interest paid out daily on your crypto and fiat.

Starting point is 00:07:17 Your passive income made simple. Get started at nexo.io. Now zoom up to last year and ARC funds aren't looking so renegade anymore. They're just looking right. COVID was a mass acceleration of a number of longer-term technology-driven trends that pushed the market right into the ready and waiting arms of the ARC ETFs. Over the course of 2020, those ETFs of which there are numerous split across different technology themes went from about $3 billion under management to over $30 billion under management. That trend has only continued into 2021, as five of ARCS ETFs have been in the top 20 in terms of fund flows, ballooning assets under management to near $60 billion. These funds are really in rarefied air alongside BlackRock's funds, alongside Vanguard's funds, alongside the most

Starting point is 00:08:19 traditional type of ETF investing instruments that the market has to offer. All that said, the last few weeks have seen a little bit of a reversal. First, some have been posing questions about how big ARC can grow. The fear is that it could be constrained by the size of its ownership positions in its innovation companies. Remember, by the very definition of being innovation companies, there simply aren't that many of them. And the concern is that if ARC owns too big a percent of this small handful of companies, it creates new types of risk both for ARC and for the companies themselves. Second, however, there is a more general macro narrative this week around the Fed unwinding monetary support that has sustained the extremely high valuations, particularly those of tech stocks.

Starting point is 00:09:06 Here's how Bloomberg put it. Investors are getting increasingly worried that accelerating inflation could trigger a pullback in monetary policy support that has fueled gains and risks amid the pandemic. Federal Reserve Chairman Jerome Powell says higher treasury yields reflect optimism on the outlook for growth and officials have stressed that the central bank has no plans to tighten policy given lingering weakness in the labor market. Matt Malley, the chief market strategist at Miller-Taback and Co., said higher rates will create a situation where investors will not accept the kind of sky-high valuations that they've been willing to accept in recent years. Although what Chairman Powell

Starting point is 00:09:41 said this week was bullish for the economy, it was not particularly bullish for the stock market. This bond piece is the last of the relevant background for the main part of this discussion which is Kathy Woods' comments at this week's Bloomberg Crypto Summit. The specific comment that captured the most media attention was her notion that Bitcoin could start to subsume the role traditionally played by bonds. Here are a couple quotes. You think about the traditional 60-40 stock bond portfolio, but look what's happening to bonds right now.

Starting point is 00:10:14 If we are ending a 40-year secular decline in interest rates, that asset class has done its thing. What's next? we think crypto could be the solution. We know there's a concern given all the quantitative easing and the no-rules-based monetary policy out there. Fixed income has done 40 years of really hard work. If Bitcoin represents a new asset class, why not invest in it? So what's the logic here? Bond yields are incredibly low. In many parts of the world, they are officially negative. In the U.S., the real interest rate that accounts for inflation is effectively negative,

Starting point is 00:10:47 and this would only be exacerbated if inflation heats up. In that context, it is inevitable that people go looking for something else that retains value better than those bonds, which seem almost guaranteed to lose value over time. Last year, there was some discussion of pensions and other large funds increasing their gold holdings, but of course, as it played out, that was not in fact the big shift. The big shift was institutions starting to adopt Bitcoin for this role. This is also something called out by Wood in these comments, saying, quote, the dollar Dixie 0.4%, dropping 7% on a trade weighted basis last year and falling further this year is another stimulus. It should be a stimulus for gold, but Bitcoin is getting the

Starting point is 00:11:28 incremental flows that might go to gold. Now, lest you think Wood is all seeing, here's what she said about those institutional investors coming in. Quote, we expected institutional investors to start moving in. What we did not expect from institutions was the diversification on their balance sheet and a diversification of their cash assets into Bitcoin. Now, listening to this, I bet you can almost feel the rage of the Talibs of the world screaming at their computer screens about the volatility, the volatility. How could anything that could go up 100% in a month and then lose 50% in a day be a store of value, right? Hold aside the fact that increased volatility is just a mainstay of the modern economy.

Starting point is 00:12:09 And in fact, if you're interested in that, go check out my podcast with Corey Hofstein. I think it's probably the podcast that is the most informative that the least number of people have heard. But the real point is that we're talking about 10-year bonds, 30-year bonds. When you're thinking about Bitcoin as a replacement, you have to think on a similar timescale. We are in the Cambrian explosion period of Bitcoin. Of course there are going to be eruptions and earthquakes. You've got a situation now where institutions are piling in, driving up the price, but also a slew of traders who are watching that have huge leverage.

Starting point is 00:12:43 messing around because this is the last truly free market in the world. So yeah, that's going to be volatile in the short term. The question is whether you think Bitcoin is going to be higher and by how much on a one, three, five, and 10 year time scale. Start to look at it that way and it looks a lot different. Anyways, guys, when Kathy Wood talks, I listen and then I tell you what she said and then I give you my own interpretation. I hope you enjoyed it and I hope you're headed off to a great weekend. wherever you are. I appreciate you listening. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - Why Cathie Wood Thinks Bitcoin Could Replace Bonds

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