ARK Invest on Macro Markets, Esports Awards, & all things DAOs & Crypto Regulation - CONF CALL WEDS December 8th
Bits of Signum 12.06.21
We are taking an important moment away from “rainbows and unicorns” (aka new business models in gaming and crypto), as last week was a rocky one for high growth stocks. This brutal pullback continued through the weekend for many digital assets. We have clearly been in a ‘risk off’ market backdrop. We were able to catch up with Cathie Wood of ARK Invest after her regular Employment report on the In the Know show on Friday. This one is especially worth a listen given the market is in a macro-driven moment, with fears of inflation, alongside tax loss selling and leverage unwinds as potential negative drivers.
As we have discussed in the past, Cathie’s experience as an investor spans decades of cycles and is rooted in her experience as an Economist, first with Art Laffer who became her lifelong mentor. Cathie believes that the current period of inflation is transitory. It is curious that the bond market rallied (i.e., interest rates *down*) which is the opposite of one might expect in an inflationary period. She wonders if the bond market might be telling us that the stock market is wrong, as it did in 2006-2007, ahead of the credit crisis. It could also mean that we could be facing recession fears sometime next year.
An additional point Cathie made in our discussion was that University of Michigan Consumer Sentiment reading is lower than it was at the worst point during the COVID crisis, and that the savings rate is below 8%, or lower than it was pre-COVID. These are significant indicators, in addition to mixed indicators such as weaker Black Friday through Cyber Monday sales, along with inventory spikes at Nordstrom and Gap. Could the consumer be facing higher priced food, energy and rent at the same time that they have burned through their stimulus savings?
At the ARK brainstorm this week, we discussed very interesting shifts in the labor force that aren’t being picked up in the numbers. For example, many young people are getting pulled into exciting entrepreneurial ventures in crypto – on this point, it wouldn’t be surprising to see Jack Dorsey announce a new crypto venture after his Twitter departure. We are in the very early days of massive changes in the economy due to innovation and it is worth remembering that innovation is deflationary, and that ultimately, it is these disruptive companies which will bring us out of any pullback in the economy.
ARK invests in long-term disruptive innovation, and the team builds models which look out five years, in stark contrast to many equity investors who spend more of their analytical energy on the current quarter or year. Because of this, ARK is able to build a deep understanding of the long-term potential of its company investments, which gives the team conviction during short-term periods of high volatility. This is especially important given macro shifts in the market typically hit high growth stocks (along with crypto) the hardest. One additional comment by us: Cathie did not mention this but our sense is that traditional equities investors have piled into shorting ARKK’s innovation strategy holdings based on their underperformance and some vocal investors in the press. Similar to the Game Stop situation, investors seem to follow each other from one short bet to the next. Negativity could continue but at this level, we would bet that we are getting close to max pile on. The only thing that is certain is that these short sellers are forced buyers when they have to cover; many will be watching the stocks in ARKK as they could be setting up for a significant short squeeze.
Back to rainbows and unicorns (aka new business models in gaming and crypto) we spent an incredible few days in Arlington, Texas at our first in-person Esports Awards and we would love to discuss. We want to give a huge shout out to Michael Ashford and the rest of the team who put together an amazing show, even with half of them trapped in the UK due to a COVID scare! We learned a lot from the entrepreneurs, advertisers, and influencers who attended and we see a lot of upside with respect to crypto and social tokens as a new revenue stream. Esports is a bottoms up, influencer/celebrity media business which depends on individuals to come together with very large groups of people and drive real community - this is exactly in line with crypto ethos.
Crypto Regulation
Last week, we were honored to join a panel to present to the SEC Investment Advisory Committee and SEC Chairman Gary Gensler on Investor Protection in Crypto. The panel was publicly available and we have received a few requests for a replay. Here is an excerpt and stay tuned if we might be able to get the full recording from the SEC. Coming up next week, on Wednesday, December 8th, we will be hosted by Charles Myers, Chairman and Founder of our sister company, Signum Global Advisors, to discuss regulation in the crypto space. We will be covering how we think about crypto in the regulatory context (with our lens as a FINRA registered broker dealer with 20 years of securities experience), investor protection measures, and US regulators possible next steps.
Please let us know if you would like join us on Wednesday, December 8th at 11:30 AM EST and we will send you a dialin.
Many thanks and have a great week!
Angela Dalton & the SGC Team