Transcript
0:00 In this episode, you'll learn a lot more about how ARK and Kensho have partnered and how maybe this is the start of a major new financial innovation wave. Greetings everyone. My name is Cathie Wood, CEO and CIO of ARK Invest. And we have a very special in the know today. No, it's not employment Friday, but it is with great pleasure that we announce our partnership with Kensho.
0:40 And with me here today is the person who made it happen. Nick Grouse, our director of research for consumer AI and fintech. Welcome Nick. Thank you, Cathie. So Nick, why don't you since you have been critical to establishing this partnership, why don't you set it up and give our viewers a sense of what they're going to see today? Yeah, thank you so much Cathie and thank you for having me on. I think this partnership is years, months in the making if you think about when we really started first looking at prediction markets for data insights.
1:18 This goes back a few years now, but it really is months in the making. We've been talking with the Kensho team because what we realized was we're looking at all of these markets that Kensho and and other platforms have created, but we realized is that there is a certain level of insight that we have looking at the technology platforms that we cover, the companies we cover, the macroeconomic statistics that you go over in this show, realizing that some of the markets we would like to see actually had not been created. And so we actually reached out to Kensho and said, "Hey, we think that this could be a great opportunity to collaborate, to share ideas, to surface data and insights that we think others will also find valuable, and create markets around those. And then be able to surface the wisdom of the crowd. Right now, we're not participating in these markets, we're using them as data insights. So, we're not trading in them, we're looking at them as data insights because we want to hear what you, the listener, and others around the world think about some of the opportunities we're looking at.
2:19 And so, that's what we've done with Kalshi. You'll see a number of those markets today. There's also some markets you won't see today because they're more focused in the genomic space. There's a new medicine tab now on Kalshi, and there's going to be plenty more markets listed that cover all the different sorts of interesting, innovative technologies going forward. This is an ongoing partnership that we're really excited about. Yeah, and Nick, as we were discussing this, or have been discussing this for several months, it occurred to me, in speaking with Kalshi, that wait a minute, this this movement is the beginnings, I think, of bringing active equity management back into style because we're we're talking about events that should move stocks. And if we have more people looking for and at those events, they're going to be interested in investing in some of these opportunities, and maybe taking a little bit out of that passive portfolio that is you know, tied to the broader based indexes. So, I'm pretty excited about this. This this could be the beginning of a resurgence in active equity management. Yeah, absolutely. And I think when we've talked about it, prediction markets really represent the purest form of risk out there because as you point out Kathy, you can go directly to the underlying discrete event that then moves the needle on an equity. And so I actually think of these tools is almost the inverse of derivatives, right? It's the underlying catalyst that will drive the performance of a stock up or down.
4:10 And so whereas you may want to hedge out some of that risk using a put call spread or many other forms of of of hedging, now you have direct access to those underlying events, business KPIs, macroeconomic events where you don't need to take on the extra extra risk that is associated with the market, right? If you don't want to be exposed to what is happening in Iran, well, you don't need to take on that exposure through derivatives which are going to inherently have some of that in it. You can go directly to the underlying event.
4:45 so I think it's a really amazing opportunity for the financial markets. When we started doing this research and I'll give a sneak preview, I think, you know, in the medium term, so over the next few years, we believe that this market could explode up to $5 trillion in notional volume. Now right now Kalshi is on an annualized run rate to do around 120, 130 billion dollars in notional volume for this year. So we're talking about a massive explosion of where this total market is headed. But when you put it into the perspective of the total derivatives market, which in 2024 was around $715 trillion in notional volume, you're only talking about 70 basis points, right?
5:25 That five five trillion dollar figure over 715. So it's a drop in the bucket compared to where traditional derivatives sit today. And as you point out, I think this is an expansion of the addressable market that derivatives don't necessarily give you today in terms of the risk profile. Yeah, pretty exciting. So innovation the financial world. Love it. We're going to go through some of these charts. We'll do a lot of our normal In the Know drill, but we've got some Cal- Cal- charts to accompany some some of the charts we normally show you.
6:06 So, here we go. Okay, so let's let's start with our first Cal- slide. And here you can see in the prediction markets one of the questions we put in is will the US federal deficit to GDP ratio drop below 5% for fiscal year 2026? Now, fiscal year means through the end of September, so the year through September of 26.
6:39 And as you can see here, as the war in the Middle East has has extended the odds that the GDP the debt deficit to GDP ratio drops below 5%. Those have dropped understandably. So, let's take a look at where we are. So, here is the deficit to GDP. It's at about 5.12%.
7:10 And you can see it was moving in the right direction before the war. And we really thought it was going to drop below 5% and head for that 3%, which is Treasury Secretary Bessent's goal for the end of 28. In fact, we thought that it was going to drop below that 3% well before before the end of 28. Well, the war has changed that. Now, the defense budget is going up.
7:44 and it was already at about a trillion dollars. And just to put this in in perspective, the deficit is is at about well, the total government spending is at about $7 trillion. and so one of that is defense, two of that is health care. And one of the downward pressures on the budget is health care. We've heard about Medicare actually cutting prices dramatically in in terms of some of the most heavily used drugs out there.
8:23 We're also seeing DOJ continue to cut back on federal employment. and yet we do have this war. So the odds have gone down, certainly have in the short term. But if we if we get past this period into fiscal '27, we think we'll have another shot at getting below 5% and heading actually very quickly to 3%. And the reason for that is we see GDP growing so much more quickly than many economists expect. but very short term, the odds the odds have dropped.
9:09 here's another reason the odds have dropped, but this is a good news reason. I've mentioned on on past in the nose the accelerated depreciation that was in the tax package last year. And you can see the impact already that it's having. So corporate tax receipts are going to be I think because of the accelerated depreciation, roughly 150 billion dollars lower. Now, obviously that's good news for the economy. It's one reason that we expect GDP growth to accelerate fairly dramatically in in the not too distant future.
9:55 and here and we've presented these deficits together. Deficit the I just showed you the federal deficit as a percent of GDP. Here's the other deficit that bothers well, especially President Trump. I don't think it bothers too many other people, but his objective is to move us into surplus. And you can see we have spent many many years in a deficit position. And from our point of view, we'll probably continue to spend more years in deficit. Why is that? It is because we think with the stimulative fiscal policy, especially that tax package, that the US economy is going to boom relative to other economies. So, we're going to be importing more than we export.
10:49 now the other side of this which makes which which takes away the sting that I think President Trump thinks exists is a capital surplus. It means more investment dollars coming into the United States relative to our dollars going elsewhere in the world. So, a capital surplus. here is another take and I'm going to credit Don Luskin from Trend Macro for this chart.
11:25 And what he does trying to help people understand the the debt and the deficit situation is he says, "You know, when you compare debt to GDP, what you're comparing is an a balance sheet item to an income statement item, the equivalent of. really, you should be comparing debt to equity. So, equity is the the black line. debt is the purple and GDP is the red. And if we go to the next chart, you will see that while debt to GDP is above one here, the one ratio, you can see debt to equity is at.5.
12:21 And actually, it's very low by historical standards. the other thing I will say is if you look at debt to assets, another balance sheet item, the asset side of the US balance sheet is really at cost. What did the land cost? What did the gold cost when it went onto the federal balance sheet? well, some of these costs were 50 to 75 years ago. And so, if we if we really thought about this, we could sell some of our land and I forget how much land the government owns. It's a substan- I think it's over a quarter of all the land in the United States. so, we could defray the debt that way. Now, I'm not recommending it and we do want a discipline, so I'm very happy that there is a concern about the deficit and the debt because if you think about government spending, which is the problem, every incremental, dollar in government spending is effectively an incremental tax dollar. Where you've either got to pay for it today in taxes, tomorrow in taxes, or the most regressive tax of all is inflated away, which we don't think that's going to happen, but that is what happened during the 70s.
14:01 So, back to Calcha, another, hotly debated issue is the dollar. DXY is the trade weighted dollar. It's only six countries. It's not the 26 countries in the Fed's measure. it doesn't include China, the the Yuan, for example. but how high will the dollar get? Last year the narrative was the US exceptionalism is dead, the dollar is in decline, and, it's, inexorable.
14:37 It's it's going to continue. And you can see here, many, people, believe that the dollar will, end the year as measured by the DXY at 103.6. Now, that is very interesting to us because you can see on the next page where we are in the context of history. we are just below 99. So, what Calcha is suggesting is, the the people who are, willing to trade or make a prediction, they actually think the dollar is going to go up. and that goes against conventional wisdom. Now, we agree that it is going to go up mostly because of what I just mentioned about foreign direct investment and our capital-friendly, business-friendly, tax policies, also deregulation is we think going to increase the return on investment in the United States relative to that in the rest of the world. That is dollar positive. And we take this chart all the way back into the early '80s. Why? it is because we like to illustrate what happened during Reaganomics and we think Trumpanomics resembles greatly actually Reaganomics. And look what happened to the dollar back then. Now, it was coming from the depths of despair in the late '70s, but it really went into overdrive to the point where all the Treasury and monetary ministers around the world got together and said, "This is becoming a deflationary risk to the rest of the world because a lot of dollar a a lot of debt is denominated, was, and still is denominated in dollars. So, the dollar the debt service was getting more and more expensive back then. we think we're not going to see a surge like we did in the early '80s, but we think the pressure is to the upside and if you look at this chart in in the context of history, you will see that we are closer, if you take out that that boom in the early '80s, we're closer to the higher end of the dollar's range than we are to the lower end. And again, I think that goes against con- conventional thinking right now.
17:14 here we're moving into monetary policy and and away from fiscal policy. And you can see money growth is up to roughly 5%. So it has continued to accelerate it having spent some time in negative territory after the uncontrolled money growth post COVID. You can see that is mapped in green against the CPI.
17:47 And this is important it's setting us up for for another Calcha chart. And you can see that there there is a loose connection between these two metrics. Part of the reason there's a loose connection is velocity. Sometimes when the velocity of money moves down that takes this the stimulus out of money growth because the rate at which money is turning is slowing down and that typically happens when people are afraid, concerned or or feeling somewhat negative about their circumstances.
18:32 So you can see here that velocity actually has been in a downtrend since the late 90s and that is when baby boomers started to retire very very those were the very early baby boomers but also it was around the time that China entered the WTO and there there was a lot of concern in the United States our manufacturing sector effectively was exported to China and so there were concerns and I I think those two variables caused the secular decline. Well, baby boomers are still retiring and again, when they retire, you know, they're not as free spending.
19:23 and we are now seeing, however, the reversal of the the the shipment of our manufacturing sector over to China. and I think our tax package is one reason for that. So, maybe we're seeing a secular turn in velocity. if if not, it will probably flatline here and and you know, because baby boomers are retiring, but the manufacturing is coming back and other kinds of investment coming back. Maybe we flatline here and that 5% money growth is what is impacting directly the economy. And if you think about 5% money growth, that would effectively mean nominal GDP growth would be around 5% and that would give us room.
20:13 we think real growth, thanks to productivity, is going to accelerate into the 3 4 5% range. That would leave very little room for inflation. So, here's another look at monetary policy from a very short-term point of view, meaning it's the yield curve as measured by the two-year Treasury yield minus the three-month Treasury yield. in negative territory, that would suggest the Fed was leaning I would say hawkish or restrictive. And you can see we've just crossed into a positive slope. just crossed, so maybe the Fed is operating at a neutral rate. It's not too hawkish, it's not too dovish. we're in a neutral zone right now.
21:13 And this chart I've featured a number of times. I I find it fascinating. this is the yield curve again, but it's the 10-year Treasury yield minus the 2-year Treasury yield. And this is the one most commonly referenced. And you can see the downtrend that's been in place really since the '08 '09 debacle, the global financial crisis. And the reason I'm interested is even after COVID, when monetary authorities around the world were, you know, put the accelerator to the floor, and fiscal policy was profligate. I mean, just money thrown at the problem around the world, we couldn't get this measure of the yield curve back into that 200 to 300 basis point range.
22:13 and I just have been wondering, what does that mean? effectively, it means that that the long-term Treasury yield was not following short rates the way it normally does. and why would that be? and here again, have we hit another peak, and are we tipping over again? I don't know. But what that would tell us, and of course consider the source, it would fit in with our sort of deflationary undercurrent thesis around technology.
22:49 and and we saw this in the 50 years that ended in the late '20s, the late '20s in the 1900s, which was also ripe with innovation. So, telephone, electricity, internal combustion engine, all riding on top of the railroads that were built out in the 1800s. well, the equivalent to the railroads this time were is the internet and the digital world. And now we have we have robotics, energy storage, AI, very importantly AI, blockchain technology, and multiomics technology. All of those are highly deflationary trends. and could the yield curve be picking up on that? We think it might.
23:47 Now, here's productivity, which is a part of that story. the technology the innovation platforms that I just mentioned involve 15 different technologies. they're converging, and we think that productivity growth is going to soar in in the next few years. So, here we ask the question, will nonfarm productivity increase above 3% in any quarter?
24:22 This is on a year-over-year basis. In any quarter in '26. And you can see there's a 42% probability. well, we think the probability actually is is much higher than that. And it's actually a for a statistical reason. If you look at productivity today, you can see we're at roughly 2.5%, and you can also see, again if you look across this chart, this is in the higher half of the history of this chart. So, pretty strong, and as we have said on in the know many times, we've been in a rolling recession and this is what has happened. That's so interesting. Housing has been down and out. Manufacturing's been down and out. Small business, down and out. Consumers have been in a funk as measured by sentiment and productivity is at 2.5%. So, we believe that these technologies are already having an impact on productivity.
25:25 And we think in the first quarter when the numbers are reported and they'll be revised two times, I think. But when the the first quarter number is reported, if it is up at all on a quarter-to-quarter basis, so from the fourth quarter to the first quarter, because last year's first quarter was down roughly 0.9% on a quarter-to-quarter basis. If it's up at all, now that's annualized. If it's up at all in the first quarter, and we think it will be on a quarter-to-quarter basis, that will take the year-over-year above 3%. Now, I know why it's probably at a low 42%. It's because people are looking at some very big productivity numbers in the second and third quarter of last year, 4.2%, 5.2%.
26:28 And if we're below those numbers, then, you know, this will come back down. Nonetheless, that first quarter might actually be above 3%. So, and here's unit labor cost, 2.3, 2.4% on a year-over-year basis. and so, for those of you worried about inflation, you can see this looks very different from post COVID. Unit labor costs soared, and one of the reasons is wage growth is very well-behaved, very well-behaved. It was not after COVID as companies were scrambling to find employees to so that they could survive, the companies could survive, and the employees actually.
27:18 that's not the case right now. In fact, a lot of employment indicators suggest we're we're in a weak environment, and part of it is AI. Entry-level jobs are not there for college graduates the way they have been in the past. So, unit labor costs, this is underlying inflation 2.4%. What's interesting about that is if you look at the TIPS market, that's what market says inflation is going to be. In other words, no real improvement for from here. If we're right and productivity starts scaling three and into next year four or five percent, this unit labor cost growth rate will come down, and underlying inflation will come down.
28:14 here are some other reasons inflation's coming down. Again, very different from post COVID when we had that supply shock, and many people are saying we're in another supply shock, and we are when it comes to oil for sure, but we are not in a broad-based supply shock like we were after COVID. Nothing like it. In fact, quite the opposite in housing. Housing inflation is nil for existing home prices, and still negative for for new home prices.
28:47 And, and yet here you do see the supply shock when it comes to oil. How long will this last? Well, the longer the Middle East turmoil continues, the longer this supply shock will last. And the question is, who's going to pay for it? Is it going to get through to the consumer price level? Or is it going to be eaten by the the by by the consumer companies who have to pay up, but can't get their pricing through to the end consumer. And we have a strong point of view about that. Here's another chart. This is commodity broad-based commodity index. And you can see a bit of a supply shock, but I would submit that it is more than that. It is demand going up relative to supply. And this is a call for action, a call for more supply.
29:52 again, who's going to pay for this is the question. Is it going to get through to the consumer price level? Now, here is the Cal- Cal- she's betting on that. this is the PPI year-over-year percent change minus the CPI year-over-year percent change. is it going to be is the PPI inflation rate going to be above the CPI inflation rate for three consecutive months in 2026?
30:24 So, you can see here that the market is pretty sure that producer price inflation is going to surpass consumer price inflation on a year-over-year basis for three consecutive months this year. Now, that's very interesting. Now, what is this saying? Well, you can see it started out closer to 25 or 20% probability, moved to 30 as the initial stages of the war in Iran took off. And then everyone thought it was going to be over quickly, settled back, and you can see what has happened since. This is more extended than many observers predicted.
31:11 And so that's where there's certainty so far as you can see on the next chart. What's interesting about this is we already have two months where the PPI inflation rate has surpassed the CPI inflation rate two consecutive months. In February, the PPI was 3.4% at a year-over-year rate and the CPI 2.4. And so this, when the PPI is released on April 14th, this contract will probably close out and you know, will probably roll into another one, maybe six consecutive months or something like that. We shall see.
31:58 But let me show you. Yes. I've shown you the the total PPI and CPI. But here on this chart is the core CPI minus the core PPI. And you can see that even really before or maybe it is in conjunction with the war, a lot of the producer prices other than food and energy have been increasing at an accelerated rate while the CPI, which you see there in purple, has been decelerating.
32:39 That's interesting. That's really interesting. What does this say? It's saying, perhaps, that consumer goods companies are not able to pass the cost increases along and that their margins probably will be squeezed. And here you can see that that is true according to Trueflation. So, as measured by Trueflation, the year-over-year price consumer inflation rate is about 1.7%.
33:17 Now, it got as low, I think, as 1.4 or 1.3, has come up a little bit here, but has not gone anywhere near that 3.4% PPI inflation rate. Even though gasoline prices are a big a big psychological and and impactful category, other prices must either be coming down or or or I find it difficult to explain.
33:51 And even more so when we look at the core Trueflation inflation rate, it's at 1.1% and you can see it struggled in the 2 to 3% range for 2 and 1/2 years or so. It has resolved to the downside. If you look at what's going on right now, we haven't seen this kind of CPI inflation core inflation rate since COVID when we were in dire straits. So, that is very interesting. And here you can see one of the things that's going on with the PPI.
34:35 the PPI is reflecting what's going on in the manufacturing sector, to be sure. This is the purchasing managers index, and and there's a clear pickup. now, I think that this is related to our tax package as I explained before, and some of the stimulus is getting into our economy, stimulating the supply side of the economy, which will be good longer run for the overall inflation rate. Manufacturers are responding to those higher prices, and they are producing more.
35:15 here you can see this is an outright boom. it's an indicator that I I believe that Piper Sandler gave us or produced. and you can see it is flat This is US flatbed truck market demand index. So, this is an indicator that something's booming out there. and no one's using the word boom, but I think there is a call to action. The pricing certainly is is one reason. But, I also think there's a lot more foreign direct investment coming into the United States. Some of it might be tariff related. Some of it is because deregulation and tax policy are so friendly. so, that's interesting.
36:08 you can see on the services sector both orders and unfortunately prices, prices again I think being impacted by what's going on in the Middle East, and it may be opportunistic pricing around that. normally when we see new orders pick up the the prices are are coming down. and I do think that, that the the purple chart will resolve, to the downside once the Middle East turmoil clears up to some extent. Here is why the pricing's not getting through. Sentiment is terrible, as measured by the University of Michigan. And these are, the three income, levels, low, mid, and high.
36:54 the lower income level in the last month, dropped back to its recent low. So, affordability, unfortunately, still a massive problem and could really impact the midterm elections. un- unemployment. Here's confidence in, as measured by jobs easy to get minus jobs hard to get. confidence is deteriorating here. Now, a bright spot, is that the entry-level jobs, remember that employment unemployment rate went, before revisions, up to 11%.
37:32 It's now reversing, to 8.5% and maybe what's going on there is, just like Arc is doing, you know, we're a pretty lean machine and at one point, and I said, "You know, I don't think we'll be hiring people because AI is making us all so much more productive." But, on the business side, especially, we are we need to hire more people because what is the refrain I'm hearing from our employee base? It is, "You know, I know all these tools are out there, but I don't have any time to experiment.
38:12 I I have too much on my plate." And so, we're bringing in younger people with one foot, through the AI door, and very eager to, introduce us to new productivity-enhancing ideas. Maybe that's what's going on a little bit more broadly here. I don't know. here you can see another, stress point, saving rate down. It dropped to 4% in today's report. as, income was very weak. but spending, again, mostly prices, was, lifted. and so, a low saving rate, is typically takes place when consumers have no choice, and I think that's where we are right now.
39:06 Or, when there's, an incredible amount of optimism out there. And, more and more people are willing, to live on the edge a bit more. We think it's, more of the former than the latter. Here, you can see an indicator, delinquency rates on autos, all-time highs for subprime. and, and even close to all-time highs for, the overall. Here, you can see existing home sales. This is not a booming economy at the consumer end, at least. That could change if manufacturing, is leading the way.
39:45 and, and we think it is. Of course, the it recent back up in interest rates does not help this. we also see builders trying to clear, clear their lots of houses. These are new, one-family houses for sale. Those are starting to come down. They're, they're cutting prices to move them. and then here are a few market indicators. We've spent a long time on In the Know, so we'll just quickly go through them. we're seeing the S&P to gold, and we've been watching this carefully.
40:18 Remember, it was it was a leading indicator for some very bad times in the '70s. And there are some strategists out there who think we're going back into those bad times. We do not, but this is uncomfortable in that it has tipped down. This is the offset to some extent and until very recently, it's crude oil S&P to crude oil, and that uptrend is still in place even with the the really near more than 50% increase in oil prices.
40:54 Here's Bitcoin to gold. Bitcoin is starting to outperform gold again. Gold peaked January 28th, the day that Warsh was announced as the next Fed chairman if Congress approves him. And and he is slightly hawkish, so Bitcoin has been moving up relative to gold. That's that's interesting. And then just the last two charts, two or three charts here. This one is still a puzzle. Why is that green line, metals to gold, still going down? Is it China?
41:30 Is something really wrong in China? I don't know if it's just China, but it is puzzling, especially especially now that the gold price has has gone down from nearly I think it was almost was it $5,600 down to $4,400. We haven't seen a clear turn in this in this variable, which is quite interesting. It used to correlate very well with the with the 10-year Treasury yield, which you see in purple there.
42:12 they they parted ways in 22 when the Fed started tightening. And I would say when central banks started selling gold, I mean buying gold and selling dollars. And again, the yen carry trade unwinding starting in the summer of 24. so all of those should be in there now and my guess is that the the the 10-year Treasury yield is probably going to fall because we've had a lot of major forces pushing it up. not the least is of which has been the recent flare-up in commodity prices.
42:57 if we're right and supply the supply side of the economy is coming to the rescue, we're we're probably going to be surprised at interest rates coming down as opposed to going up. And a final chart here, final two charts here, credit default swaps on banks, you know, private credit is this infecting is it going to be systemic issue? this chart would suggest no, it's not backing up into the banking system. And this is the high yield chart, so junk bonds relative to Treasuries. They're not seeing any any any thing on the horizon bothersome.
43:42 In in fact, they're near all-time lows. So the these charts these last two charts would say nothing to worry about. We know there's a lot to worry about. the market has gone through about a volatility here. but if we're right that there's a boom, that inflation is going to resolve to the downside after this conflict that and that productivity, profitability is going to increase.
44:13 we think that's very positive for the equity markets. and I will say one last thing, profit measures came out for the fourth quarter and they look very good. now, again, active management's going to be important here. Is margin compression going to be a problem for consumer goods and related companies? in the short term, we think it is. longer term, we think it will be another reason for companies to harness AI and other productivity tools to to stem decline in margins and and maybe even increase margins in the future.
44:55 So, with that, thank you very much. I know this has been a long one. We wanted to introduce Kalshi. We're excited about that partnership and we're really excited about the notion that this this these prediction markets could bring active equity management back into style. And which group would that help the most? We think and we have a lot of questions in the multi-omic sphere to put into prediction markets to help educate to help educate people about the unbelievable opportunities in the space and educate them about how inefficiently valued that part of the market is. so, with that, until next month, I will say goodbye and wish you a good month.
46:22 >> Mhm.