We Study Billionaires - The Investor’s Podcast Network - TIP483: Down But Not Out w/ Cathie Wood

Starting point is 00:00:00 You're listening to TIP. Hey guys, I'm really excited to share an upcoming event hosted by the Investors Podcast Network. Beginning on Monday, October 17th, we're launching a stock pick competition for all of you to compete in. And the first place winner will receive $1,000 plus a year-long subscription to our TIP finance tool and more. So don't miss your chance to win $1,000. If you're interested, please visit the Investorspodcast.com slash stock dash competition for more information. The last day to submit your stock analysis will be Sunday, November 17th. And to compete, please make sure you're signed up for our daily newsletter, We Study Markets,

Starting point is 00:00:38 where we'll be announcing the winners. All entries can be submitted to the email, newsletters at theinvestorspodcast.com. Good luck. On today's show, we welcome back Kathy Wood of Arc Invest. Arc has struggled to perform under the new higher interest rate environment and has received a lot of criticism along the way. Kathy addresses the fund's performance today and her views on the future. In this episode, we discuss Kathy's belief that we will experience a deflationary surprise which could reverse the Fed's

Starting point is 00:01:06 current plan of action. Why Kathy recently stepped down as the portfolio manager for two of ARCS ETFs, the recent bids on credit default swaps through Credit Suisse, Deutsche Bank, and others, Kathy's thoughts on energy, unemployment numbers, and other market indicators, Arx's new venture fund and its opportunity for retail investors, an updated view on Bitcoin, micro strategy, and Coinbase, and much, much more. I always enjoyed chatting with Kathy and admire her practice of what she calls radical transparency by releasing her funds research and running public ETFs. So without further ado, please enjoy this wide-ranging discussion with Kathy Wood.

Starting point is 00:01:42 You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Welcome to the Investors podcast. I'm your host, Trey Lockerbie, and like I said in the introduction, we have back with us, Kathy Wood. Kathy, welcome back. Thank you, Trey.

Starting point is 00:02:16 Very happy to be back. Thank you for inviting me. Well, first of all, you moved from New York to St. Petersburg, so I have to ask you, how are you and the team fairing? Because we just had Hurricane Ian blow through there. Oh my goodness. When we were looking at all the cities that we thought would be innovation centers of the world, one of the things that was very attractive about St. Pete is it's surrounded by water. And the mantra time and again was, we have not had a hurricane in 56 years. And we have not been hit on head on for 101 years. So we move November 1st and the next year there's a hurricane. So thank God the eye of the storm, move to two to two and a half hour. south, and I feel terrible for those people. But that would have been a wicked hit to the Tampa Bay Area. And you saw how much destruction there was down there. We had no damage, just prelimbs

Starting point is 00:03:11 on the ground, really. Okay. I'm glad to hear that because it was certainly kind of scary there for a minute there. And a lot of people were affected. Since you and I last spoke, which is back now in January 2021, it was episode 334, arc has become quite polarizing. And it garnered. And it garnered a considerable amount of skepticism, especially as the macro environment has shifted into a higher inflation, higher interest rate world. How is Kathy Wood adapting to the new environment and how is ARC and its companies? Well, I think this is when we're at our best, when we're under pressure. When we were talking in January of 21, we could do no wrong, right? I think you'll remember, Trey, and I knew that was wrong. You know, that's just not the real world. Believe it or not,

Starting point is 00:03:59 for however difficult the performance has been for the past 18 months, and it certainly has been difficult. I think our team has never been closer. We moved into action, what I called fighting the ground war, because there was so much fear, uncertainty, and doubt, fud around our strategy. And it seems to me that what has happened in the last year and a half is we own this plays. We own the space for better or worse. I think it's for better. The skeptics think for worse. I would not bet against American ingenuity and innovation. But that seems to be where the market's gone and the excuse has been. And there is some truth to why one would veer away from our strategies. If interest rates are going to continue moving up, then the present value of future cash

Starting point is 00:04:53 flows will be moving down. We understand that. We believe the inflation and interest rate narrative is way overblown now. It got much further than we expected to be sure. We did not expect supply chain issues to last for two years, more than two years. We did not expect Russia to invade Ukraine. But I would put both of those into the shock category that happened because of COVID, the supply chain for sure. And I don't think when history is written, I do not believe that the inflation we're seeing now will be embedded in the system. And yet, Chairman Powell is using the same sledgehammer that Chairman Volcker did in the early 80s. Chairman Volker was fighting a 15 years worth of

Starting point is 00:05:44 inflation. Chairman Powell is fighting, when he started, 15 months using the same sledgehammer. And I think it's a big mistake. And we'll find out how it's a mistake. The first clue is the liability driven investment schemes in the UK experiencing a Lehman moment in the last few weeks. And I think we're going to see some of the same here. We've been wondering why credit default swaps on the strongest money center banks in the United States, like JPMorgan and Bank of America, they've been moving up toward COVID highs. So there's something out there. Yeah, another storm is brewing. I mean, a lot of skepticism around, or a lot of speculation, I should say, around Credit Suisse in particular. Is that, as you kind of mentioned, what's your takeaway on those CDS gaps in price? And do you think it's related to just simply the real estate market dropping off precipitously from the interest rates going up? Well, I do think real estate is in a bit of shock. And I do believe the Fed's policies are deflationary. We see the deflation in the pipeline in commodity prices. many of them down 30 to 80%. If you look at the BDIY, the Baltic Freight Index, it's down 75, 80%. That means

Starting point is 00:07:00 supply chain problems are no problem now, or very little of the problem. We think you never know where the crisis is going to occur. But when we heard about the swaps based crisis in the UK, you could see it in the swaps market. It was seizing up. And the collateral calls, the pension funds were not going to make them, and therefore the banks would be yet again in trouble. And the Bank of England had to resolve that problem. We're looking here in the United States, and the swaps market is also acting very strangely. And I don't pretend to be an expert here. I'm just looking at the charts of markets that seem somewhat esoteric to those of us on the equity side,

Starting point is 00:07:47 and they're in a bit of turmoil. So there could be some liability-driven investment dislocations. Again, why is this? It is because unlike in the early 80s when Volcker raised interest rates twofold from 10 to 20 percent, that's the Fed Funds rate in an environment where people kind of were used to inflation and were used to interest rates going up to catch inflation, unlike that, this time around, within six months, we've had a 13. 12-fold increase in interest rates from 0.25 to 3.25. And, you know, the way that argument is dismissed

Starting point is 00:08:27 is, oh, well, we're starting from such a low base. That is the point. We're starting from such a low base. It is a massive shock to the system after 10 to 12 years, post-08-09, of extremely low interest rates. And so I think we're going to see some fallout. And I do believe the Fed will pivot because of it. So I want to get into that as well, but sticking with the ARC performance, I am kind of curious about the AUM of ARC because it exploded in a very short amount of time. Did that have an impact on the strategies, and did you have to shift strategies at all to kind of accommodate the amount of capital? It's very interesting. Last year, we had net inflows of 17 billion, gross inflows of $21 billion, which meant we retained a lot of those assets.

Starting point is 00:09:17 Now, what's beautiful about the ETF construct, the ETF wrapper, is as a portfolio manager, I don't have to worry about flows. We have an entire ecosystem around us, market makers, authorized participants who are managing the flows, and they're doing it algorithmically. They're doing it with lots of tools of the trade. They've got access to securities lending and all kinds of derivatives. So we have barely seen a budge in our spreads, which would indicate difficulty in deploying funds. They've been very tight.

Starting point is 00:09:57 And one of the reasons is, and this is the wonderful thing about having so much controversy around our funds, We've got a lot of investors shorting, our underlying stocks, our ETFs, and we've got others buying. So there's a lot of volume. And that's been excellent for us, for our strategy. We could accommodate a lot more even than that $21 billion in such a short period last year. Is this sort of like, you know, Bezos likes to talk about when Amazon went down around 92%, I believe, in the dot-com bubble, but the fundamentals were strong. Are you seeing the new environment having an impact on the fundamentals of some of the innovative companies that you just mentioned might be being short by a lot of people?

Starting point is 00:10:40 Well, you know, you never say no impact. But the way we've approached innovation, that the platforms that are writing down learning curve, cost curve declines, that are cutting across economic sectors so that they can go mass market and that are launching pads for more innovation, innovation solves problems. And we have so many problems now. We believe what happened right before COVID and then during COVID is kind of was a warm up for the next few years in our strategy. And I'll describe what I mean by that. In the space of just one month as we were recognizing what a disaster, the coronavirus crisis was, our fund, our flagship fund went down 46%.

Starting point is 00:11:25 The market was maybe down 25%. 46%. And many of our genomic stocks went through a near-death experience because they had small cash cushions, right? And they were in a cash burn situation. And we were saying back then, wait a minute, this makes no sense. How are we going to solve this crisis? It's a coronavirus crisis. It's the genomic revolution's going to solve it. And of course, from the low during COVID to February of 21, we were up 360 percent.

Starting point is 00:11:54 And that was less than a year. 360% led by the genomics names. And during that time, they did a lot of secondaries because of that near-death experience. Okay, since then, since that peak at our low in May, which was May, that's also very important. All the other major indices have gone to lower lows. We have not. I don't want to tempt fade, but we have not. And so that 75%, we bottomed in May.

Starting point is 00:12:23 And we believe now that we have so many more problems. The supply chain issues were introduced bottlenecks throughout the world. We've got China as a problem. We've got Europe with its energy prices as a problem. And we have the invasion of Ukraine as another problem to solve. Innovation solves problems. Better, cheaper, faster, more productive, more creative solutions to problems. and it usually gains traction during tough times.

Starting point is 00:12:54 Now, the reason there's been a lot of confusion as it relates to our strategy, one inflation, sure, you kept from a macro point of view, but we believe inflation peaked in February. If you look at the PCE deflator core and you look at the pipeline of commodity prices, just swift declines. And then as important, maybe more important, the massive inventory overhang that retailers are facing, Nike reported sales up 3%, inventories up 44%, and in North America,

Starting point is 00:13:27 inventories up 68%, and in transit from probably China, inventories up 85%. I mean, we're being overwhelmed here. So that's going to end up in price discounting. So that inflation argument is, we believe, going to go away. The other problem we faced in this difficult period was this mantra that we were nothing but a stay-at-home strategy, right? We needed a crisis like COVID in order to shine, and partly because interest rates and inflation came down. Nonetheless, during this last year and a half, two-year period, the comparisons against the booms that we saw during COVID

Starting point is 00:14:07 have been difficult. Zoom's toughest comparison, I think was, I think it was in the first quarter and it was against 390% revenue growth the previous year. Zoom's revenue is, is still growing. The fact that it's still growing says it all. There's something going on here. There's a massive shift of enterprise communications from on-prem and hardware-oriented into the cloud software-oriented. So I think that fear uncertainty and doubt around the tough comparison issue has also given hedge funds and others reason to trade around our stocks. And if you'll notice, what we do is average down into our highest conviction names all the way down. And we concentrate our portfolios from 58 names at the peak in February of 21 to 33 now. So we are concentrating

Starting point is 00:15:01 towards our highest conviction names and averaging down with them as the market gives us these opportunities. Speaking of your portfolios, you actually step down from two of them this year, the ARC 3D printing ETF and the ARC Israel Innovative Tech ETF. Both have been down as well. But I'm curious if the underperformance has led to

Starting point is 00:15:25 increase pressure on you to sort of develop a succession plan. Well, it hasn't just been performance. It's been good business sense, right? And so once we were in charge of our own destiny, after we bought out our partners, minority,

Starting point is 00:15:42 interest, we started putting in place the succession plans for me and for Brett Winton, who was our director of research and now is our chief futurist. We have three directors of research. And so I have brought on two associate portfolio managers, one who had come from due diligence at Maryland and has been with us for a while, wanted to get on the investment side incredibly smart, Dan White. And then the other who came out of our research team, Nick Bruce. He's very focused on next generation internet. So we have been using this period, actually, to go on the offense. Sure, the succession plan, but now we have openings for five associates, associate analysts. So we can announce them here. You know, we are, and the requirement is domain expertise in one of our technologies,

Starting point is 00:16:39 meaning that's what they studied in school or what their first job really was all about. And the willingness to move to St. Pete for at least two, well, for two years would be the commitment because we really want to bring this new cohort together. So a lot of people think we've been, you know, shrinking and cost cutting. We have been doing the opposite. And one of the reasons we've been able to do it is our asset retention. I think people are shocked. Our flagship strategy still is down nearly 60% year to date.

Starting point is 00:17:16 And its share count has been moving. It's been flat to up. I actually was in Europe a little while ago, and the chief investment officer of a big bank came in with his CEO and said, can you believe they're down 60% and their shares are flat to up? How does that happen? And the reason it's happening is radical transparency. We disclose our holdings at the end of every day.

Starting point is 00:17:44 We disclose our trades. We give our research away. We're out there on Twitter. We're out there doing webinars. We are out there for our clients. And we want them to understand what we're doing, why we're doing it, and how exciting these opportunities are. Our research is unlike any other you'll find out there, if you can find it.

Starting point is 00:18:03 Right? And when I say that, most people, are not doing the research we're doing, and yet we're giving it away. And one of the reasons we are is because we believe, well, first we want to. We believe transparency is incredibly important to the new cohorts of investors coming in, especially after 0809. But we also want them to understand how provocative these new technologies are, how transformative. And they're not getting that from anywhere else. So what we have done over the last year is I think convinced people as we were on our ground war offensive with a paper out on the NASDAQ 100

Starting point is 00:18:45 and exposing that the NASDAQ 100, only 25% of it touches any of our stocks, any in any of our portfolios. So we are maybe boldly, but we're trying to make a point. We said, we're the new NASDAQ. We are the NASDAQ that I grew up with in the 80s and 90s, which was all about innovation. The new broad-based indices, or the broad-based indices, I should say, they are beginning to look more like each other. They don't want to take risks. You know, they want to be diversified, even if it means the NASDAQ has to own energy, utilities, bricks and mortar retail, rails. That's not the new, new world. We're the new world. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo,

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Starting point is 00:23:29 Go to Shopify.com slash WSB. That's Shopify.com slash WSB. All right. Back to the show. You mentioned the big debate that's been going on around inflation and how you think will actually be surprised with lower prints in the coming months. I'm kind of curious if that were to come true and we are sort of in the bottoming process right now, would that be enough for the Fed to change its course on its policy and not

Starting point is 00:23:58 only stop hiking rates but actually begin easing or you think rates would kind of stay where they are for a long time? Depends on how much damage they've done already. And we're not going to know that exactly. I think we're in a recession. Now finally, other people are starting to talk about recession when we've already had two negative real GDP quarters. Third one might be positive, but if it's because of inventories, that doesn't count in our book. And we believe that profits are going to be under significant pressure during the next six months to year. And that's going to cause all kinds of ramifications, including rising unemployment and so forth. So I don't know how much damage they've done. Credit default swaps are telling me they're doing damage. And we do believe that before a year is out,

Starting point is 00:24:47 that they will be reversing their position. Now, I think all they'll have to do to get this market going, though, is change their rhetoric. I think the most disappointing, result from the last board meeting was it's unanimity. They say they're data driven. And so they have unanimous support for a 75 basis point increase. Even though commodity prices are coming down, many of them are now lower than they were last year, including gold, by the way. And in fact, many, I think, of us are going to help people understand that the gold price peaked two years ago. August of 2020. Most people don't know that and held in a trading range between 1700 and nearly 2100 for two years, more than two years, and recently broke below that. Copper, same thing,

Starting point is 00:25:41 a year between four to five dollars per pound and recently broke down. I believe that inventories there are a part of the problem. We know that China has been bulking up on inventories, especially food inventories. The food inflation seems to be the stickiest. And I think one of the issues there is China is hoarding food. And there's a lot of unhappiness, I would say, generally in China evolving. And the one thing they cannot let happen, as they've learned from history, they cannot let their public go hungry. So I think inventory hoarding has happened across the board. Now prices are coming down. If you've hoarded inventories and you think your biggest risk is inventory profits as you sell the inventory at higher and higher profits, that's not a big problem. If you've hoarded inventory

Starting point is 00:26:33 and prices start falling and you have to book inventory losses, that's a problem. You're probably going to try it and sell them faster than otherwise would have been the case. You mentioned the food inflation being the stickiness. I believe that deflation in order for it to happen, you have to assume that the energy prices will collapse because that's such a huge contributor. There's this narrative floating around that it'll take years to get the oil capacity back up to sufficient levels, assuming the demand stays constant or increases. Is there another way you're seeing oil prices come down in the near term? The energy is how is that factoring into your deflation equation? Well, I do think that in the United States, we do not consider enough what's

Starting point is 00:27:16 going on in the rest of the world. China and Europe are in recession. Many emerging markets are being strangled by debt service because they've got dollar denominated debt. The dollar's up 25% in one year. And their currencies, many of them have collapsed. They're down more than half. So there's a big problem out there. But even in the United States, when I saw that gasoline demand this summer, including July 4th, was down to 25-year lows, think about that. It's even lower than 2020 during the depths of the coronavirus. Think about the demand destruction that has taken place and that has been caused by these higher oil prices. Think about the accelerated shift to electric vehicles.

Starting point is 00:28:09 Innovation solves problems. Tesla. That is also hurting oil demand. So when you raise the price of something dramatically, expect a substitution. expect decreased demand. And at the same time, it looks like in the United States, we will be back next year at peak oil production. So that's 12.7 million barrels a day. We'll be the largest producer once again, despite this administration's focus on renewables, which we think is good, but renewables cannot satisfy all the demands out there. We're still, it's still a very small part of the energy complex. We think it's going to get much bigger.

Starting point is 00:28:57 And we do believe that creative uses of Bitcoin technology, for example, placing Bitcoin mining machines in natural gas fields so that they can take off the flaring natural gas and save us from methane emissions that are 150 times as toxic as carbon dioxide in year one. You know, that's a very creative solution. But the other creative one for Bitcoin is to be made part of utility ecosystems where utilities can now using all of the energy after their storage units are filled and pouring that excess energy into Bitcoin mining, they can now overbuild both solar and wind. This is going to accelerate that trend.

Starting point is 00:29:42 So again, innovation solves problems. Even that one is interesting because a year ago, the mantra was, this is terrible. Bitcoin is so environmentally dangerous. Bitcoin is helping us with the environment, given this movement I just discussed. You know, up until recently, we've seen the 10-year Treasury struggling to stay above 3%. And in the last month, we've seen it increase to 4%. And it's now hovering right below. What is this telling us?

Starting point is 00:30:11 And does that kind of make you rethink the idea of deflation in the near-tree? term. It's very interesting because we were saying, we were remarking saying, hey, inflation is in the double digits when it was and the bond yield can't get above three percent convincingly. So why did it do so in this last few weeks? I think it is for the same reason UK bonds sold off. If a pension fund or a company or an investment manager is getting margin calls, what is the most liquid investment you have out there. It's a government bond. When we saw all assets, including bonds, selling off, we said, okay, something's wrong out there. And frankly, I was happy to learn, and I actually was in Europe, when we learned about the UK's LDI problem. Many people assumed, oh, it's because of their tax

Starting point is 00:31:03 package. That's ridiculous. That is ridiculous. There was maybe an emotional reaction to that tax package. We think it's misplaced. We actually like tax cuts. I'm a disciple. of Art Laffer, as you may know. So tax cuts are a good thing and they'll distinguish the UK from the rest of Europe, we think. But for whatever reason, the margin calls on pension funds forced the selling of their most liquid asset. So I think yields are going to unwind here, continue unwinding. Now, again, the crisis may still be upon us. As I said, these credit default swaps are, you know, telling us something. And so there could be margin calls still around the world. And everyone around the world, all the major institutions have a good slug of U.S. government

Starting point is 00:31:51 bonds. And those probably are the most liquid bonds they have. So that's what I think happened. What are your thoughts around the household employment numbers we've seen in the last month? Okay. So there's a difference between non-farm payroll employment and household employment. Non-farm payroll employment is derived from a survey of companies. household employment is derived from a survey of households. And the latter captures many more small businesses. Non-farm payroll employment, what we believe happened, it has happened there. There are two things going on.

Starting point is 00:32:27 One, I believe the corporation started hoarding labor, just like they started hoarding inventories when they were losing orders. So they double-tripled order so that they could meet demand. And then they over did it. They also had so much trouble during the past two years in attracting talent to their companies that once they've gotten them in the door, are they going to be, are they going to let them go? No, they're probably going to hold them until they can't. And I think when margins come under extreme pressures, a pressure, that's when we will see

Starting point is 00:33:03 unemployment going up. Now, on the household side, if you look at that survey, it has been essential. flat for I believe five months. So big divergence between the two. In the early part of five months ago, household employment actually was falling and then came back a bit in this last one, but has been basically flat over five months or so. That is telling us that small businesses are acting. They are laying people off. And they will act much more quickly than large corporations, of course, because they have to. They don't have the buffers of cash that large corporations do. And if you look at the purchasing managers index, the one I think we got yesterday, employment negative, orders negative.

Starting point is 00:33:50 So at the margin, these reports are confirming that employment, there are going to be distortions out there. And of course, claims have been coming down. And that's a big head scratcher. The second thing that I think is going on, I mentioned two. So this distinction between non-franchis. farm payroll and household, that being small businesses, and two seasonal factors. Now, early in my career, very early in my career, I was a bit of an expert in seasonal factors because I started in economics and learned the census X11 method. Now I guess they're on census X13. But if you look at those programs, you'll find that whether they are seven years in terms of figuring out seasonality or 10 years long. They wait the last two years most heavily. Now, of course, the last two years were COVID.

Starting point is 00:34:40 So maybe the seasonal factors were expecting great weakness in these last few months and they didn't get that weakness. Well, that was a distortion because of COVID. Now, the government does try and adjust for these sorts of things, but I do believe there's some residual going on here. Maybe claims weren't going up as quickly earlier in the year, and maybe they're not coming down. Maybe the truth is somewhere in between. You mentioned the different use cases for Bitcoin, and the narrative around Bitcoin is constantly changing, almost on a monthly basis, it seems. And with Bitcoin's performance suffering through the rise of inflation, the narrative has

Starting point is 00:35:20 kind of shifted away from, okay, it's an inflation hedge to now, oh, it's a hedge against monetary debasement. What is your most compelling narrative for Bitcoin today? and what are your thoughts about the flatness of the M2 this year? All right. So we've been with Bitcoin for a long time. And in 2015, the narrative we were facing was Ponzi scheme. So it has certainly changed, right?

Starting point is 00:35:44 At least we're talking about inflation and monetary debasement, which to me is the same thing. You know? So and not even gold has escaped this. This is another manifestation of the Fed being too tight. And assets across the board. selling off. Bitcoin has been more of a victim of the risk off technology sell-off. And, you know, maybe, I mean, if you're talking to me, I say the bigger risk is deflation, right? Maybe, you know, we're seeing a little bit of that as well. So we're as convinced as ever that Bitcoin is the first

Starting point is 00:36:21 global, private, digital, rules-based monetary system. And it is a very big idea. We think it is the biggest idea in the crypto asset world. And I do believe, you know, when we look at, just looking at charts, Turkey, it's money growth up 84%. When the British pound was plummeting, you looked at the volume for Bitcoin, and it went up nicely. There was this, okay, what is this? And Bitcoin's an insurance policy.

Starting point is 00:36:54 We have a really good chart in our big ideas presentation. which delineates why we think Bitcoin's going to get to $1.3 million per Bitcoin by the year 2030. And we're not making any huge assumptions about institutional demand or the percentage of volume that takes place in the emerging markets or with high net worth individuals who are, you know, protecting themselves from outright confiscation of wealth or inflation, which is another confiscation of wealth. So we think Bitcoin's a very big idea. If anything, our confidence has gone up as we have watched, you know, ether and the dislocations in the market that took place around defy and, you know, Celsius and so forth. And as we're seeing more centralization take place in

Starting point is 00:37:49 the Ethereum world, while there is, sure, some centralization in Bitcoin with the exchanges, But then I've just given you probably the biggest decentralization story Bitcoin will ever enjoy. And that's the utility and energy ecosystems globally. So if anything, our confidence in the network security of Bitcoin has gone up here dramatically, while we wonder about the centralization characteristics of ether, especially now that it's gone proof of stake. Well, the last time you and I saw each other, we bumped into each other at XH at the Bitcoin conference in Miami.

Starting point is 00:38:24 I mean, you were doing a panel with Michael Saylor of micro strategies who just announced, actually, that they're building on the lightning network, probably not surprisingly to most. But, you know, when you and I spoke back in January last year, you were a little bit suspect of micro strategy, I think at the time, and more around the SEC and maybe how they would kind of like the strategy that we're putting into place. I know that ARC also wouldn't prefer micro strategy for the underlying Bitcoin. But as they pivot to maybe being more of like a lightning. technology company.

Starting point is 00:38:56 We're getting more interested. Yeah, to get back into consideration. You know, I mean, and I love what Michael Saylor has done for the Bitcoin community in terms of bringing it a lot of attention. And it is unfortunate that I don't know if he had to step down. I don't know what happened if it was SEC driven or what have you. But I love the fact that they're now doubling down and actually, you know, not just using their balance sheet, but activating, you know,

Starting point is 00:39:24 the Lightning Network in a way that could be quite productive. In lieu of micro strategy, you've been owning GBT for a very long time. What on earth is happening with this discount? And when do you see that maybe resolving itself? Well, it will resolve if Grayscale is granted a Bitcoin ETF, if it's allowed to get it. And that's a nice call option embedded in GBT right now. It's the only security that we could have owned. And at one point it was at a significant premium over 100%.

Starting point is 00:39:56 And now a significant discount. I think we will get a Bitcoin ETF, not anytime soon, but we will. And so we're looking at that as a call option on that possibility. That's what's going on. It's certainly through a lot of hedge funds, too, who assumed that it would close. It's not going to close until the SEC is on board. Speaking of the SEC, you also sold some Coinbase due to the, increasing uncertainty and counterparty risk it would seem from the SEC. How are you viewing Coinbase

Starting point is 00:40:27 today? We have a high degree of confidence in Coinbase. We took a very small. It was 20 basis points. And I think the position at the time was close to 5%. So to 20 basis points, this is the downside of our radical transparency is we've got our trades are analyzed, which is a good thing. You know, at least people are paying attention to what we're doing. But it is also, we're not trying to send a signal about Coinbase. On that day, it is true, the SEC came out and said that it thought that seven of the securities on Coinbase's platform are securities. I mean, seven of the tokens, I should have said, are securities. And they're still up there. They're still up there. So that is somewhat of a risk. On the same day, Shopify dropped 15%. So they were both down a lot.

Starting point is 00:41:22 What we will often do just at the margin, this is not deliberately for tax efficiency. That's as an outcome of it, but we have a big loss in Bitcoin. We take some of those losses. We move into something else that has a big loss and which didn't just get a regulatory slap on the hand. So that's all that was. But it was not an indication that we are losing confidence. in Coinbase broadly. We think they're, you know, they're doing a heavy lift having to figure out the regulatory system, but someone's got to do it and we're happy that they are. We talk to them about it quite a bit and, you know, I think they're acting with conviction and resolve and really trying to educate regulators. I don't know how open the SEC is to listening to them, but we know

Starting point is 00:42:11 that they are talking to the CFTC quite regularly. And so their idea now is to really try and educate regulators. Why, in the case of Tornado Cash, you cannot, you cannot ban or regulate software code. That's just like there's something called free speech. So, you know, it's been interesting and they're fighting the battles and, you know, many people will stay away from that kind of regulatory risk, but we think they're doing the ecosystem a favor. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up,

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Starting point is 00:45:57 risks, charges, and expenses. This and other information can be found in the income funds prospectus at fundrise.com slash income. This is a paid advertisement. All right. Back to the show. All right. So I want to shift gears a little bit and talk about your new project here. You've recently launched a venture capital fund in partnership with Titan where investors can participate with a minimum of investment of only $500. Talk to us about the impetus of this fund and how it came about. Yes. It's been very interesting over where ARC has been, And ARCS funds have been in business for roughly eight years now. And what is one of the most common

Starting point is 00:46:36 questions I've gotten over those eight years? From younger investors who do not meet the asset and income thresholds to have access to venture funds, it is, why can't we have access to these companies that many of which could become 10 and 100 baggers? That's what you're looking at when you're looking at venture capital. Now, you're also looking at failures. So, but you just need a few of those hundred baggers. And with all the innovation taking place today, we certainly believe that we will have more than a few, especially given the way we've set it up with our existing analyst base, which is already set up to be specialized in technologies and to be generalists when it comes to sectors. These people, if I were to, and I've talked to Hester Perce at the SEC about

Starting point is 00:47:27 this, if we were to define accreditation with the word. knowledge, if the threshold was knowledge, our investor base would be the accredited investor base. And many of the investors in venture funds would not be the investor base. So we felt it was important to do something about this. And we searched around for a structure, a wrapper that would accommodate this in a way that the SEC would appreciate. The Interval Fund Rapper actually came about in 1993 for this reason, but it was never used because private equity has the tax advantages associated with carried interest, whereas if you want to reach unaccredited investors, you cannot charge a carry. And so this wrapper went by the wayside as far as private equity

Starting point is 00:48:20 is concerned. We are resurrecting it. We're doing in this space, a little bit of what we did in the ETF space. When we put an active, fully transparent equities into an ETF, the industry thought we were going to fail, that it just wouldn't work. And it's worked beautifully in the way I described earlier to you. And so they've certainly done a double take when it comes to active equity ETFs. We think the interval fund where we can have daily inflows, quarterly outflows, and it's a public-private fund, meaning it's a crossover fund. We will be able to own companies and stocks from early stage to mega-cap. And our other ETFs are going to be able to buy these once they go public as well.

Starting point is 00:49:09 So it's a win-win. And I think we are getting deals and relationships with venture capital, participating with them, the best venture capital firms in the world I would submit because, not just because we're a curiosity, but because we will be helping their companies. We will raise their visibility. We will be doing podcasts with them. They will be on the Titan app. We will be interviewing CEOs and chief technology officers to help people understand how powerful these technologies are going to be on the Titan app. And what we found already from our podcast is it's a talent acquisition benefit to be interviewed by ARC. So it's a win-win on both

Starting point is 00:49:57 sides. We've been very gratified by the welcome we've gotten into the venture world, especially because of what we're doing, away from carried interest, different fee structure altogether. So we're pretty excited about it and Titans a fantastic partner. Yeah, I was kind of curious about the timing of it, right? And do you see what the recession we're either in and coming out of or going deeper into liquidity drying up? Is this sort of, you know, an opportunity in the timeframe sense where you're going to be able to step in and provide some liquidity and maybe capture some upside of these companies or maybe struggling elsewhere? Well, certainly we would love to provide that role. But if you look at what happened during the tech and telecom bust,

Starting point is 00:50:39 The cohorts of funds that were started during that three-year period ended up delivering some of the best venture capital returns really ever. And that's because fear, uncertainty and doubt, and, you know, not a crowding in of capital, easier to hire talent as the public world is under great duress. So these are very, this is very experienced talent. The best time to start a company and the best time to start a business, and the best time to start a venture fund, we believe, is when times are tough and expectations are more realistic, if not pessimistic. And we think expectations right now for innovation broadly are pessimistic.

Starting point is 00:51:22 And a lot of the investing has become very careful around it. So yes, you're right. There is some neglect taking place out there. And we know the technologies we're looking for. We know the companies we're looking for. That's, I think, one thing that makes us different. We have a wish list. And we can go to companies honestly and say, we were looking for you before we knew you existed, like Caruso Energy. Now, it's not in our portfolio yet, but we are definitely taking a close look at it because we found it when we were doing our research around Bitcoin and energy ecosystems. And CEOs like nothing more than to see research on what they're doing, sizing the market, and understanding or believing that a group of an investment team really appreciates how transformative

Starting point is 00:52:14 they're going to be and how much they'll benefit the world. And that's what we're all about. You mentioned it's a closed end fund where there's inflows daily but then quarterly outflows. And it makes sense because the types of companies you're approaching like you just said, these are moonshot in some cases and very long term. You know, realistically, some of these might take years to pan out. Does it make you reconsider the ETF side, meaning the underperformance of the ETFs? Do you think it would have been better off if they were closed-in funds instead?

Starting point is 00:52:43 No. For the public asset management world, we love the ETF infrastructure, which I mentioned before. It makes investing so easy for a portfolio manager handling the flows. We don't do that. The ecosystem does. And if anything, what's happened here is they're developed by the end of last year, this huge arbitrage opportunity. finally, venture funding down rounds are suggesting the capitulation toward public, but we still believe private markets have valued these companies much more correctly than public markets. And so you say,

Starting point is 00:53:18 well, then why wouldn't you use a private store? Well, look at the arbitrage opportunity we have right now. You know, if we're right on where interest rates and inflation are going, the arbitrage opportunity is huge still in some cases, not all. The down. The down. rounds and venture have started. But we like having both and we like being of a service to private companies from, you know, early stage to the time they go public. They can stay in the fund. It's an evergreen fund. Till the time they go mega cap, which would be much, or as they're, you know, moving from startup to scaling, they'll be more appropriate for our ETFs, perhaps. So we want to own innovation. And you can't just do that in the public world. But the public world, given the

Starting point is 00:54:05 opportunities that we see for scaling, just had mentioned this for you, we believe that today in the public or in the equity markets globally, truly disruptive innovation is valued somewhere in the $8 trillion range, $7 to $8 trillion range. By 2030, we think that goes to $210 trillion. So that's a 30-fold increase. that doesn't seem possible. But when you look at what Tesla has done, Tesla is a microcosm of what's going to happen. It's one of the earliest examples of the kind of scaling opportunities

Starting point is 00:54:40 that are going to be available out there and they need the public markets to accomplish that. You know, with these private companies, how does the mark-to-market aspect work? Are they doing 409As every day? Or, you know, how do we understand the nav of the closing fund? Yeah, we're going to be very conservative. if there are no liquidity events or if there are no major movements in comps in the public markets,

Starting point is 00:55:06 we're probably going to wait for liquidity events. The other thing that we do have going on is the emergence of secondary markets for private companies. So we're getting marks that way. And again, we'll be able to tell if anything very significant is happening in the secondary markets. We're getting to know them all. And that will also inform. our decision making, but we're going to play it conservatively because we want our investors to think about this like they would think about a venture capital fund and hold it for seven to 10

Starting point is 00:55:41 years. And so these quarter to quarter marks, or in some cases in trach quarter, when there's some very major event, shouldn't matter that much. You mentioned Tesla and Arc has actually been taking profits on Tesla over the last year. I mean, hey, you know, even Elon is as well, so I can't fault you for that. But the debut of the Optimist Robot at this year's AI Day feels a bit mixed, right? Because it's got this potential to disrupt millions of jobs while also potentially boosting Tesla's valuation. How do you feel about this project on their plate and the debut that they rolled out? Well, I think we've been thinking about this for a while because Elon Musk describes himself as a manufacturer of factories. In other words, a manufacturer of automation.

Starting point is 00:56:32 What we find very interesting between Optimus and Dojo is he really is setting up a platform upon which other companies will be able to build. Now, should Optimus be human-like? There's a debate there. I think that Elon believes and Brett Winton or Chief Futures believes that that will enable backward compatibility. We've been doing things a certain way for so long. And so allowing for some backward compatibility so that we can transition to the fully automated new world is perhaps not a bad thing. So we didn't see anything wrong with it. I mean, this is very early days. I think this is the first time they've untethered the robot. So I mean, we're in such, such early days. But watching what Elon is doing in the various factories and how much factory to factory productivity increases

Starting point is 00:57:32 is quite phenomenal. I don't even think he understood he was embarked on this journey until he understood, okay, clean slate. How do I start over here? So he's gotten used to how much do I need backward compatibility and how much do I need the clean slate and just go? So I trust his judgment on this one. You mentioned the Dojo supercomputer, which they've also unveiled as well. And this is really fascinating to me. It apparently achieves double the computing power using less than half the number of chips with a significantly lower energy draw in a much smaller footprint than any previous supercomputer. So what does this do or what does it open up for Tesla? And how does it potentially rival maybe quantum computing? I don't think it rivals quantum computing. I don't think it rivals quantum

Starting point is 00:58:23 quantum computing is going to change the game. And that's one reason we've asked Brett Winton to take on quantum computing, quantum sensing, quantum anything. We're just, we must understand how transformative that's going to be. This is what we do, right? But we do think this is part of the foundation model. There are going to be very few companies with so-called foundation models that everyone, you know, everyone's going to want to use. And it's been very interesting to watch Tesla introduce natural language into some of these models and improve them. I've been a big fan of introducing genomics data into models because I believe that will improve them. I don't know if he's tried that or if he will try it.

Starting point is 00:59:06 So, you know, when you think about autonomous taxi networks, Tesla's going to be the foundation model for that. Others will build on top, we believe. And the kinds of capability that you just described are absolutely essential if autonomous taxi platforms are going to become a reality. We've seen major energy disruption this year with increasing concerns with regional power grid issues here, especially in the U.S. Are we possibly seeing that electric vehicles may actually have a negative impact on at least today's power grid? And the timeline of disruption is maybe no longer what we originally thought. Actually, as we've studied this for a while, in early in Arc's life, Japan decided that it could not use its electric grid. for transportation because it was taking all its nuclear down and so forth, so it just wouldn't be

Starting point is 00:59:59 possible. And we think that actually stunted their evolution. You know, with the Prius, they were halfway there. You know, they just needed to keep going. But at that time, we studied, they launched the Moray, hydrogen fuel power and everything. And we said, nope, the infrastructure costs there are way too, they're prohibitive. And then we analyzed our own electric grid. And And because really only, I think it's less than 15%, it's closer than 10% of all charging is done during the day at these stations, most of it takes place at night. What does that do? That really helps the utility with load balancing.

Starting point is 01:00:34 Historically, during the nighttime, there hasn't been much use for the grid, right? Now there's an important use for the grid. So it makes utilities more economic, we think. And it is very interesting to see Japan even, Toyota in particular. They still seem to believe that the hybrid strategy is the right strategy. I think they're giving up on the high. I don't hear much more about the hydrogen fuel cell. So even they have moved around.

Starting point is 01:01:02 And they're even bringing back nuclear as is Germany. And we think that's another big theme brewing out there. These new modular nuclear plants, the environmentalists are even coming around to those. So we think even cleaner energy is on the way. How far off are those? Is the technology actually there for this to exist? Or is that still down the line? No, no, no.

Starting point is 01:01:25 We believe it exists. The politics we're breaking through now. And just to give you a sense of how long we've been watching this, we did our first report on nuclear. It was called abating climate change. I believe it came out in 2010, late 2010. 10. And Brett Winton was, I think, the primary author there. And Fukushima happened the next year. So that research went up in smoke because the politics became impossible. To the point, when I would go to Germany, I was told I must not talk about that report. Now, of course, even Germany is bringing it back. There's been a lot more, I hope, instead of emotion, there's been a lot more science and technology. brought into the discussion and into the solution than there was back then. Fantastic. Well, Kathy, I always love talking to you because there's always so much to talk

Starting point is 01:02:23 about. And we covered some of it, but we're going to have to have you back and cover more. So I really appreciate it. Congrats on the Venture Fund. I hope it goes well. And I hope to have you back on in the near future. Thank you again. Can I put in one more plug? Of course. We are being very prolific today, you know, on the offense, ground war. With Eaglebrook, we are launching two new crypto SMA. So it's the ARC venture separately managed accounts. It's for advisors. So it's for the advisor channel. So this is separate and distinct from what we're doing with Titan, which is really more direct to consumer. But advisors have been trying to figure out how, how can we in a seamless and thoughtful way introduce crypto?

Starting point is 01:03:13 with this new asset class to our clients in a way that they recognize. And so we're excited. One's a cryptocurrency SMA and one is a crypto asset SMA. And those are out or those are coming out? Well, we got the okay to let advisors know they should approach Eaglebrook, which is dedicating itself to crypto in the retail space. So we got that okay, I think last week. and the actual launch will be very soon. Fantastic. Well, Kathy, thanks for coming back. I appreciate it.

Starting point is 01:03:51 Thank you so much. Thank you. Great interview, as always. All right, everybody, that's all we had for you this week. If you're loving the show, don't forget to follow us on your favorite podcast app. And if you'd be so kind, please leave us a review. It really helps the show. If you want to reach out directly, you can find me on Twitter at Trey Lockerby.

Starting point is 01:04:06 And don't forget to check out all of the amazing resources we've built for you at the investorspodcast.com. You can also simply Google TIP finance and it should pop right up. And with that, we'll see you again next time. Thank you for listening to TIP. Make sure to subscribe to Millennial Investing by the Investors Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts or courses, go to theinvestorspodcast.com.

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