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‘I know it sounds crazy’: Cathie Wood’s next big idea

James Thomson
Australian Financial Review, Chanticleer
Nov 17, 2023

It’s been a sneakily good year for the world’s most divisive investor, Cathie Wood.

Her flagship Ark Innovation ETF is up 41 per cent, or more than twice the broader market. Her long-held belief in the transformative power of artificial intelligence has become a mainstream investor narrative.

The price of her beloved bitcoin has doubled to almost $US38,000 this year, while the share price of Tesla, Ark’s most prominent holding, has jumped 124 per cent.

Ark Invest CEO Cathie Wood remains as big-picture as ever. Picture: David Rowe

And perhaps most importantly, Wood’s view that US inflation would rapidly fade appears to be playing out, with soft consumer price and producer price data released this week coming in softer than expected, sparking an impressive rally on Wall Street.

Speaking from Ark’s headquarters in Florida ahead of her appearance at the Sohn Hearts & Minds Conference on Friday, Wood says she believes disinflation is now just around the corner in the US.

The dramatic fall in the share price of Cisco on Thursday night after it warned of a slowdown in orders, is indicative of a broader slowdown in capital spending that Wood believes will force the Federal Reserve to pivot rapidly towards rate cuts.

“I think they’re going to see [inflation back at their target of] 2 per cent all right. I think they’re going to see minus 2 per cent, and that is going to precipitate a very significant shift in Fed policy,” she says.

Wood’s army of (often male) critics will point out that while she may have called many of the big themes in markets this year, her longer-term predictions continue to look extreme. Ark has tipped bitcoin to hit $US1.48 million by 2030, and believes Tesla’s share price can jump nine-fold by 2027. And despite this year’s gains, Wood’s flagship fund is down 73 per cent off its 2021 peak, and basically flat over five years.

Her call for deflation and rate cuts raises an obvious issue: while lower rates will help long-duration growth stocks, a sharp economic slowdown will also hit consumer-facing tech stocks such as Tesla.

Wood does expect a harder landing than many pundits, but argues the US has been in a series of rolling recessions in various sectors – including housing – for two years, and there is unlikely to be the sort of systemic problems seen during the GFC.

The price cuts Tesla boss Elon Musk has pushed through on the firm’s vehicles are proof he sees the potential for an economic slowdown, but Wood argues that the recent decisions by Ford and GM to wind back their expansions into electric vehicles should mean Tesla’s market share can stay higher for longer.

And she says EVs will continue to capture a bigger share of the car market as drivers seek vehicles that are cheaper to run and maintain. “Innovation tends to gain share at an accelerated rate during a recession.”

Ark continues to bet that Tesla, via its plans to make its vehicles fully autonomous, remains the best AI play in the world. But while markets have embraced the potential for AI this year, Wood has become more selective in the sector.

Ark’s flagship fund has sold its holding in Nvidia, for example, and Wood has warned Alphabet (owner of Google) faces a classic innovator’s dilemma; the more it expands into AI, the more it threatens its revenue from web search.

She favours companies that are already leaders in a tech field; have real AI expertise and commitment; have strong, preferably global distribution; and have data no one else has. US robotic process automation software UiPath (up 52 per cent this year) is an example, but Tesla is the clear leader, Wood says.

While she concedes the deployment of full self-driving has taken longer than she expected, she remains convinced it will be approved by regulators who are seeing road accidents surge; Tesla’s self-driving tests are running one incident every 3.2 million miles, compared to one per 500,000 miles for the average car on the road. With full self-driving comes autonomous taxis, central to Ark’s bullish Tesla case.

If Wood’s enthusiasm for Tesla is undiminished by the human controversy machine that is Elon Musk, her support for bitcoin has, incredibly, been enhanced by Sam Bankman-Fried’s fraud conviction.

“FTX was a centralised entity. It was completely opaque, not at all transparent and completely fraudulent. Bitcoin is completely decentralised and completely transparent.”

The fact it has risen as US regional banks have come under increasing pressure this year is proof investors are looking for assets that will protect them from counterparty risk.

Wood sees a role for bitcoin in emerging markets and argues that, unlike gold, a rising bitcoin price cannot incentivise new supply because there will only ever be 21 million bitcoin created. On Ark’s numbers, a diversified portfolio should have between 2 per cent and 6.5 per cent in bitcoin; the mooted approval of spot bitcoin ETFs could make that diversification easier, and provide an extra tailwind for the asset class.

If Wood’s credentials as an investor are regularly questioned, her skills as a marketer are as sharp as ever. She never sits on the fence, and seems totally unchastened by that sharp fall in her flagship fund from the frothy days of 2021.

That justifiably grates with many in markets; there is none of the public self-reflection we typically see from great investors who have had tough years. But since Chanticleer first met Wood in Melbourne in 2017, she has never strayed from focusing on very large, very long-term ideas. The question is whether the changes she sees arriving by the end of this decade – bitcoin up 39-fold in seven years, for example – actually arrive.

As Chanticleer’s time with Wood winds up, I ask her to nominate the big idea that we’re not thinking enough about.

For all the focus on the damage AI could do to civilisation, Wood says we’re ignoring the potential benefits to humanity.

She gives the example of AI providing companionship to the elderly or even younger people; testing is under way to explore the benefits of an AI companion who knows your interests, can converse in topics of the day, and offer support, encouragement and guidance.

“I know it sounds crazy,” Wood says. Then again, that’s never really worried her.

This article was originally posted by The Australian Financial Review here.

Licensed by Copyright Agency. You must not copy this work without permission.

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