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Cathie Wood Castigates Fed. Says Powell ‘Playing With Fire’
On Saturday evening, someone told me they were headed to their first cocktail party in three years.
One of the lesser tragedies of the pandemic was the extent to which it curtailed people's capacity to get together and drink -- at bars, yes, but also at one another's homes. For the longest time, "mixing" between households was generally discouraged, as were mixers.
In response, I mentioned that the last official cocktail party I attended was in 2014. It was an event held to inaugurate a new as
In the longer term, I think she will be correct— but not before we go through a period of rising rates. Long term deflationary influences are not dead and gone.
Most money managers will require, and literally beg for, volatility- in order to beat SPY in the short term. Therefore, everyone is running to one side of the boat right now (“raise rates, now!”).
As soon as everyone is on that side of the boat, I expect to hear the call to “tilt dovish, now!”.
“mathematically, growth stocks that are expected to generate most of their cash flows in the distant future should experience more valuation contraction than their short duration peers for a given change in the discount rate.”
That’s obviously true ; but it also feels a bit stupid. A DCF is an intellectually indisputable model but, in real life, the error bars around projected cash flows and especially terminal value are so vast as to make a mockery of it, except for the most stable of stable names.
For something like AMZN, let alone ZM or SHOP, it’s a bad joke. Small variations in the Revenue growth rate will mathematically overwhelm small variations in the discount rate. The main difference is that the discount rate can be known while the revenue growth rate is a lot more subjective…
So – if Cathie is right that her companies end up transforming the world and selling billions upon billions in products and services (as AMZN, MSFT, GOOG, FB have done and keep on doing) then, in 5 years, these painful 2 quarters will be forgotten, mere blimp on the road to riches.
If she’s wrong, I’m not sure the Fed will matter either way.
(leaving asides any issue of liquidity/redemption etc. Initially, I thought being an ETF rather than a hedge fund was a ballsy innovation. Turns out it’s a deadly liability).
She should have made it a hedge fund. She’d have gotten notably richer and the regime would have been better (though still a loser for now).
Your comments on DCF values are pretty much dead on. For about 15 years one of my two side gigs was testifying as a financial expert in valuation cases and personal injury and wrongful death tort trials. No matter how often I did it, I was always uncomfortable having to stand up, put my hand on a Bible and swear to tell the truth about a DCF calculated value, knowing there is no “truth” in such calculations. There are accepted ways to do the problem, but no “truth” in the answers. Terminal values — fugedaboutit.
Re the Hedge Fund vs. ETF, I thought the idea was to gather AUM faster. And maybe to “open the road to riches to nobodies”. But yeah. Horrid miscalculation.
Very happy to hear your pov on terminal values! Thanks for the +1 🙂 And interesting side gig!
Emptynester and fredm421 make good points, with which I largely agree. Cycles have accelerated considerably over recent decades, and while I don’t anticipate another round-trip like the pandemic-induced deep-v, I’m already buying long duration treasuries and selling oil (maybe prematurely but I’ve always been better when early, than when late).
I would also point out that while Greengold’s general assertions may not be inaccurate, the decrease from 60 to 35 holdings does not, according to most portfolio theory, meaningfully reduce effective diversification. He seems not content to make only the reasonably valid arguments, but also throw whatever tar he can heat up at Cathie.
I’m not sure that the ARK funds are meant to be – and I certainly don’t regard them as – comprehensive whole-portfolio asset management for most individuals. Rather, I look at them as an alternative to doing all my own research for the hyper-growth and next-generation technologies that really do – and I expect will, perhaps even more so going forward – fuel our economy and most significant investment gains. As a long term investor I’m happy enough to have some of our assets return 10X or more over several years, but tolerate periodic drawdowns of 50% or more. Ark funds seem like a more liquid and diversified form of VC; and I think Cathie is much smarter than me so am pleased to have the opportunity to let her do some of the work in finding those opportunities.
[And while we share the same surname, Cathie’s no relation that I know of.]
Kevin
Good points, though, frankly, if you’re big enough, directly allocating to VCs is probably better than relying on ARK…
H
Great story. About 20 years ago I hired a finance prof from Wichita State for my department. About a year after he came we were sitting around one day and he told me a similar story. One day in the summer his dean called him and some colleagues and asked if they wanted to go to lunch with an interesting guy who had a new idea about retailing. They went to lunch (profs will always do free lunch) for a couple hours and listened to this interesting guy who talked about new ways to manage prices and sell lots of stuff …. My colleague said that after listening to this guy all these bright professors told him his idea was just doomed and told him why. Of course, the “guy” was Ray Walton when he had just opened his third Walmart. College professors; ya got to love ’em.
Re: playing with fire ( I almost typed fish)
I think there’s a correlation to be made here with instinctive gambling. On one hand we have someone like Powell with a matchbox and on the other hand some unimportant flash in the pan hedge queen with a matchstick, both ready to burn up stuff. They share the commonality of playing with other people’s money.
“Wood’s reliance on her instincts to construct the portfolio is a liability.”
I seem to recall everyone extolling Cathie’s virtues coming out of Covid. Have to believe that included Morningstar. What I’ve learned over 45 years of investing is that what’s most important is being part of the crowd until the lemmings start heading off the cliff. Crowd theory and gambling juices are what move markets. All investment assets should be treated as short duration these days.
Related to Powell castigation, is the wider Fed castigation and specifically, the Brainard castigation. She, is dollying up herself for a speech tomorrow to utter out what most likely will be a string of stupid words.
As with all the other guys at Fed, how could they have missed inflation readings a year ago and have been so far off the mark? In recent ranting and raving I’ve suggested the Fed has 900 monkeys at keyboards. A collective of monkeys is called a troop, in this case, the Fed Troop.
I hate myself for wondering if the Troop totally screwed up because of politics and pressure from either wall street or sleeping joe, but, how does one account for their collective stupidity?
The polarized insanity of the Trump era that morphed into pandemic surrealism might have laid groundwork for systemic corruption, but did the Fed Troop simply walk away from their jobs, as they embraced the warmth of transitory inflation? Was it wishful thinking that made them so blind or maybe the Troop was hired by an AI screen that was looking for naivety?
In hindsight maybe this is too easy to shoot at dead fish in a barrel stuffed with smoked fish, it’s easy to see the Fed was totally blind, but the most infuriating thing of all all, is allowing that same Troop to manage raising rates and all that QT mess they created!
“U.S. consumer prices increased in May (2021) at the fastest annual rate in nearly 13 years.
The Labor Department said Thursday that the consumer price index in May rose 5% year over year, hotter than the 4.7% increase that was anticipated. The reading was above last month’s 4.2% print. ”
September 27, 2021
Navigating Delta Headwinds on the Path to a Full Recovery
Governor Lael Brainard
“Inflation is currently elevated. This is creating challenges for consumers and businesses alike. But the high inflation readings from the spring and early summer were disproportionately driven by a few sectors experiencing specific supply bottlenecks. In May and June, new and used vehicle prices accounted for half of the outsized monthly increases in core consumer price index (CPI) inflation.”