Cathie Wood Speaks On The ‘Stock Market Bubble’

Speaker 1: Recently in the stock market, we’ve seen the trend of investors getting out of stocks and it’s a cash, in fact, there is more cash held today and money market funds then there was in the great financial crisis in 2008. This means one thing that investors are concerned of, the stock market being in a bubble. 2008, we had the housing bubble where a lot of people lost a lot of money. 2000, we had the technology bubble again. A lot of people lost money. And what investors want to know today, 2021, are we in another one of these bubbles? Let’s first see what Kathy Wood has to say on it.

Speaker 2: Just to address one other question. This bubble question, we are not in a bubble, although compliance would have me say I do not believe we are in a bubble, rightly is is because of how many how many questions we get about being in a bubble and and how much fear there is that we’re in a bubble is because the seeds of what we believe will happen during the next five years. So these five innovation platforms involving Fortunata Technologies, the seeds for all of them, were planted more than 20 years ago in the tech and telecom bubble and even before that. So the PC and the Internet together and then the Internet, of course, the bubble caused a rush of capital into what they were actually the dream at the time. The dream was right. It was just 20 to 25 years too early. Amazon maybe being an exception, an important one, and showing the way. And so therefore, we’re in the period of reality, the seeds are beginning to flourish. We are ready for prime time.

Speaker 1: So she firmly believes that we are not in a bubble. Unlike the opinions of other famous investors, she thinks that the market justifies the current price levels. And the key reason behind this is because of future growth. As she said, the seeds of this growth were planted way back in 2000. That’s where we started developing technology, learning the basics of computers and phones and the Internet and building the base of businesses around that. And as you heard in the clip, she thinks that investors predicted this too early. And that’s why we saw the technology bubble collapse in the year 2000. But now the seeds have grown into something stronger where the businesses now have the base to start the leap and grow in the future. She thinks we’re going to be seeing a lot more potential Amazon type growth businesses over the next five, 10, 15 years. And she believes because of this type of growth, the current prices are justified in the markets. But also you’ve got quite a lot of investors, particularly institutional investors, who say, OK, strategy worked well during the strong bull market that we’ve had, but they don’t think it’s going to work as well in these current market conditions. Kathy strongly disagrees with these investor’s sentiments.

Speaker 2: The other thing I’ll say about this is what they should be worried about is, is not our strategies are innovation based strategies. They should be worried about their strategies because the other side of disruptive innovation is creative destruction. And when we’re talking about the S&P 500, we think creative destruction is going to impact nearly 50 percent of the S&P five.

Speaker 1: You know, if we take a look at some of these big businesses of the past and by that I mean the ones that have failed, they failed due to what would cause creative destruction. Blockbuster used to be a movie and game rental giants back in the day. But you don’t hear of them anymore. Why? Because Netflix innovated so you can watch movies online straight away instead of having to go to a store and Haaretz, Netflix innovated and it left creative destruction of businesses like Blockbuster in its wake. Toys R US. Do you remember how big that was back in the day? Now they’re filing for bankruptcy. Why? Because Amazon innovated and now with a few clicks, you can buy whatever toy you wants. So the point would and I am making is that when innovation comes, destruction is left behind. This is something that people often forget. And according to Wood’s prediction, she said that. Percent of the S&P 500 will be impacted by creative destruction. Some of these giant companies that have been built on the current system are at risk in the future because we all know how quickly the future changes. And if you have big businesses that can adapt well, well, they’ll end up melting away. And this is why Cathy says all of you who have been criticizing my strategy might want to think about your own strategy and how will it work in the future. You know, are you sure that Ford or Toyota will have a strong business in 15 years with the rise of EVs? Are you sure Disney will be strong with the rise of Netflix? Will Intel be strong with Mac’s new Anwan chips being used instead? These are the questions that regular institutional investors will need to ask themselves, because one of the strategies that a lot of these institutional investors use, as well as the algorithms used, is to focus on the traditional value type stocks. Cathy does not like the strategy. Here’s why.

Speaker 2: The algorithms out there and the market is highly algo driven these days. These algorithms, if they’re if they’re given just to two variables, they’re probably going to make a lot of mistakes. If the variables they’re using today are price to book and dividend yields, then then we think that they’re going to be very wrong because those kinds of value stocks probably haven’t been investing in very, very aggressively to become a part of the new world and the innovation that’s burgeoning today,

Speaker 1: because the thing that every value investor needs to watch out for something called a value trap, a value trap is a stock that seems like it’s going for an amazing price. It has a low price to book value. It pays an amazing dividend compared to the price and on paper all as well. But as word warns, a lot of these type of stocks are not going to do well in the future. In the modern day era, they pay their earnings as dividends instead of reinvesting in the business and innovating. Then you get new highly motivated companies who reinvest all of their earnings like Tesla, and they disrupt the markets. They leave creative destruction in its wake. Kathy Woods, big warning is to not invest in these type of businesses that are going to get disrupted, instead invest in the disruptive stocks. That’s what she’s been doing anyway. And she particularly warns about retail, financial services and the energy sector. She said online retail currently makes up roughly 20 percent of total retail sales. So 20 percent, that’s one fifth. Right. But if you look at s curves, where does the sweet spot occur? It starts around 10, 15, 20 percent market share, and that’s where they take off. People are becoming more and more comfortable buying things online that 20 percent of total retail sales is going to be a lot more in the future. So retail watch out for stocks in that sector that aren’t innovating. She also warns about the financial sector and energy, which have had a really strong run lately.

Speaker 2: I do believe, on the other hand, that energy and financial services are going to be two of the most disrupted sectors, thanks to electric vehicles, autonomous electric vehicles and thanks to digital wallet. Those are two and three of the biggest opportunities brewing out there. So the fact that energy and financials are leading the pack suggests to me that this is not going to be long left.

Speaker 1: Cathy thinks, and I agree with her on this points, that the future of energy is renewable energy. I think we all know that no need for oil, no need for gas, but use the sun, use the wind to power this world. And companies like Chevron, Exxon, even Ford, if they’re not innovating, they’re going to get wiped out. The question on every investor’s lips is how long will all of this take? And Kathy clearly thinks that it’s going to hurt these businesses quicker than some people may think. So maybe this bubble is in different areas to what some people may suspect. Maybe the bubble is more in the energy, traditional retail and financial sectors of the economy, this whole bubble thing, which a lot of investors seems to be. Concerned about and we can see this with how much money people have moved into cash.

Speaker 2: I was surprised to see that cash in money market mutual funds. Now, maybe there’s a technical explanation, but I don’t think it can be this big is higher now than it was in 08, 09. It had started to come down and now it’s moving back up again. And and I think this makes sense because as I’ve mentioned many times, the equities have seen outflows pretty consistently since 08, 09. There has been a flurry here and there that pretty consistently fixed income has seen inflows. Cash is part of fixed income. These last two weeks probably has has renewed the decline in equity outflows and the and yet at the same time, potentially a decline in fixed income, especially long duration fixed income funds. What do you do with that? We put it into cash. So that’s that’s very interesting. The cash is building on the sidelines and we do believe there is going to be an asset reallocation. You could see it towards stocks and bonds away from cash.

Speaker 1: Now, having your money in cash is, of course, a sign that you’re worried about a potential market crash because you’ve moved your money away from stocks and into cash. Surprisingly, today, there is more money and cash than there was back in 2008 before the massive financial crash that we all saw. This means one thing, it means investors are worried. But as you saw in the clip with sentiments is that we’re going to see a bit of a reversal away from cash and back into bonds and stocks in the future. She thinks this because she doesn’t believe that the market is in a bubble at all, especially those innovation type companies, the ones that her fund invest primarily owns. So she disagrees with a lot of other investors who are braced for a crash with cash.

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