Cathie Wood – Many Don’t Realize The Collapse Has begun

‘The other thing that’s going on is that the consumer is railing against these price increases. Consumer sentiment as measured by the University of Michigan, which we think is the best measure out there, is down to record low levels below 809, below 80 and below 81. I had just started my career and inflation and interest rates were in the double digits, 15 to 20 percent. Consumer sentiment today is lower than it was back then.’ – Cathie Wood.

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Despite record high prices, existing supply chain issues, and interest rate hikes, ArcInvest CEO and founder Kathy Wood is one of the few market experts who has remained optimistic that the US economy will not enter a recession.

However, in her recent interview with CNBC, she seems to have taken a different stance as the economic decline appears to be worsening. Many forward-looking indicators, which would previously have seemed positive, have taken a quick turn around. After a reading of 8.5% in March, things appeared to be improving slightly until we dropped to 8.6% in May. Other economic indicators, including the purchasing managers index and the consumer sentiment index, are also at record lows.

In addition, the International Monetary Fund says it expects an overall global economic decline in 2022. In her interview, Cathie Wood discusses her ARC Invest stocks, most of which are gown. She also speaks about the things she might have done differently, considering the economic decline and the war in Ukraine.

The Federal Reserve had a lot of money out there. It pushed investors into riskier assets, and now we’ve seen it come back down. The Federal Reserve is tightening funds. You may not see a money supply like that out there again. It may take years for some of these companies may take years to grow into the stock multiples that they are now, as opposed to the stock levels that they were at previously. What do you think about that thesis? What makes you think we’ll get back to those higher multiples?

Well, we don’t need the higher multiples. We have a five-year investment time horizon. Just to give you a sense of our flagship portfolio, enterprise values. That’s both equity and debt. Enterprise market value to EBITDA, so effectively cash flow is around 69 times, so I know a lot of people say profit less technology. We are not profiting less on balance. We make the assumption that in five years, that number will be close to the market multiple on that basis, which is roughly 16 times. So in our models, we’re starting to publish our models because we really want people to understand this. We just published Zoom. We published Tesla. You can find them on GitHub. Experiment change the variables we think will move the needle, and you can see how your assumptions might work into our five-year investment time horizon.

We assume a 20 annualized headwind from declining valuations, and so our return expectation, which is quite substantial right now, is based solely on revenue growth and rising profitability. The narrative you just gave many people to cite when they’re talking about the Tekken telecom bubble and burst. We’ve analyzed our portfolio relative to that as well, because there are memes around that it’s astonishing to us that Zoom’s revenue pre-coronavirus is up roughly six-fold and the stock is almost down to where it was pre-COVID, with Teledoc up fourfold and Tesla up threefold, although Tesla has now that’s in the indexes. It has held up better than the rest of our portfolios, but that narrative in 2000, if I could just say, would suggest that by now we would be seeing negative revenue growth in our expectations for the next year and declining gross margins. We are seeing the opposite. We’re seeing north of 25% revenue growth if you’re just using consensus estimates. It’s 25. Our estimates are much higher because we’re focused on exponential growth trajectories being driven by powerful new technologies.’

She also talks about things she might have done differently with her picks for the investment management firm. She explains that while the team did everything right, they were wrong about inflation and the direction the economy was taking. Cathie Wood speaks about inflation, consumer sentiments, and the added effect of the war in Ukraine:

We were wrong on one thing, and that was inflation. Uh, being as sustained as it has been in the supply chain, I can’t believe it’s taken more than two years and, uh, Russia’s invasion of Ukraine. Of course, we couldn’t have seen that. So, while inflation has been a bigger issue, I believe it has set us up for deflation.

I’ve been listening to your program. I heard Ken Langone talk about being in a recession now. Jeremy Siegel said we think we’re in a recession and we think a really big problem out there is inventories, the likes of the increase of which I’ve never seen this large in my career and I’ve been around for 45 years and we’re talking about the best managed companies in the world. If you’re talking about Walmart and Target, they know how to manage supply chains if they have problems, we think there are a lot more problems.

The other thing that’s going on is that the consumer is railing against these price increases. Consumer sentiment as measured by the University of Michigan, which we think is the best measure of there. It is down to record low levels below 0,809, below 80, and 81. I had just begun my career when inflation and interest rates were in the double digits, 15 to 20%, and consumer sentiment today is lower than it was back then.

Most interestingly in the last report, many people think that the heavy spenders will keep this thing going. Consumer sentiment in the highest income groups is lower than in the lowest income groups. And the latter group is being really tormented by food and energy prices which is really a regressive tax increase.’

With so much fear, uncertainty, and doubt in the market, it is difficult not to feel some form of anxiety, but that is what happens during all bear markets and all investors, especially in the crypto space, must expect some form of volatility sooner or later. But this is just a part of the market cycle; the other part is going to come around sooner or later and it is going to be even more profitable and liberating than it was previously with the increasing adoption of cryptocurrencies worldwide.

What do you think about Cathie Wood’s interview?

[This article is a transcription of a video made by Savvy Finance]

Original video:  ]