In 2014, kathy wood founded her own investment, firm, called arkhan vest, which now manages a staggering 60 billion dollars in 2020, while the s p was up 17 and the nasdaq up a staggering 43 percent. Her ark innovation, etf, skyrocketed, 151 percent. Since inception, her flagship fund is up 225, while the s p only returned 146 in the nasdaq 212 percent. But recently it's no secret.

Her fund has run into problems over the last two years. Her fund returned 19, while the s p, 500 and nasa climbed 26 and 29 respectively. Has she lost her touch or does she see something traditional portfolio managers have missed. Kathy recently spoke about the current economic conditions, given the backdrop of the russia, ukraine, war and detailed.

Her economic outlook and investment thesis in this video we'll discuss her thoughts in some of her recent trades. Before discussing her economic views, we must discuss her investment thesis, which will help explain her recent performance as kathy wood puts it. Her flagship innovation fund invests in disruptive companies. These companies have technological innovations that could potentially change the way the world functions.

Think of it of choosing stocks that will become the next google, amazon or meta. Recent examples of this would be coinbase, snowflake and crowdstrike. However, these stocks can trade out expensive, valuations, innovative stocks, trade at a high price to earnings, multiple or pde ratio. The price to earnings ratio is often used as a comparative metric, but it can also be thought of as the number of years it takes for a stock to return the entire market cap.

For instance, if a stock has a pde ratio of 30 and earnings were constant, it would take 30 years for the company to earn the amounts of money invested. If you invested 100 in a company with a pde ratio of 5, the company would earn 100 for your equity after 5 years. Assuming all the variables are constant. Arcs analysts frequently compare pde ratios against companies in the same industry.

For example, you would not compare a utility company's pde to a retailer software company. This is because each industry has different tailwinds capital structures, consumer behaviors, etc. Google is a perfect example of kathy's philosophy. In 2005, google was an innovator and traded at a premium valuation it traded at a 50 times price to earnings ratio, while the nasdaq traded at 25 times earnings based on google's pde ratio in 2005.

You would think the nasdaq would have been the better value as the nasdaq was 50 cheaper, but that's definitely not the case. In fact, it actually took several years for google stock price to trade at roughly the same pde as the market. Kathy is patient and focused on the long term, and the price to earnings does not include the expected growth of their earnings. Kathy wood looks at the price, their earnings to growth rate or peg ratio.

To understand this, we need to compare two stocks stock - a is trading at 25 and has earnings of one dollar per share stock b trades at 25 and has one dollar of earnings as well, both trade at 25 times earnings or 25 pve. They would appear to be the same value, but they aren't if earnings growth rates are different. If stock a is expected to grow earnings at 10 per year and stock be at 50 per year, then analysts will have to make an adjustment to the pde ratio. This is done through the peg ratio by dividing the pde multiple by the growth rate, and in this case the 5 year expected annual growth rate is used.

In this case, company ace price to earnings to growth rate or peg is 2.5 x, while company b's is 0.5 x. This is one of the items that kathy wood looks at. She is not looking at just the current earnings multiples, but rather the peg ratio. Five years from today, turning back to our google example, it might look like investors in 2005 would have been better off owning the nasdaq, but this can't be further from the truth.

Since april 2005, google returns 2532, while the nasdaq returned 548 percent. In fact, google almost doubled the 13 annual return of the nasdaq. This also includes the recent coveted crisis in ukraine. Russian war investors should be looking for the next google and that's exactly what kathy wood is looking for.

She focuses on innovative technology, which means her stocks. Will have a high pde ratio? Her analysts make comparisons using the peg ratio to determine value. High pde ratios and growth rates can be volatile in relation to stock prices, but volatility is not always horrible because it also works on the upside as well. Here is a chart of kathy's top 5 holdings, tesla teledoc, roku, zoom and exact science, along with nasdaq graphed, with their peg ratios in this chart.

The ratios are normalized against the nasdaq, which means that the ratios are relative to nasdaq's peg ratio at zero, while the nasdaq's peg ratio is currently lower than four of cathy's top five holdings. Only teledoc and tesla have consistently traded well above the nasdaq's peg ratio, and here are kathy's next top 15 holdings in arkk. The key here is that only four stocks stand out as trading well above the nasdaq's peg ratio. The rest are still elevated but near the nasdaq's peg rate.

Keep in mind that the nasdaq also includes stocks that are not in the technology sector like starbucks ark case holdings appear to be underpriced relative to their peers over the next five years. Kathy wood believes the earnings of these disruptive firms will explode, while not all of her picks will be winners. Some might grow to be the next google or tesla. This volatility helps explain why kathy wood's ark etf has traded down the last two years compared to the nasdaq and snp kathy wood recently discussed why these stocks have suffered.

But is this a buying opportunity to understand this? We have to dive deep into the economy in kathy wood's case. The combination of high inflation in the russian ukraine war has driven down arcs valuations over the last two years. Speaking of high inflation, did you know: blue chip r is a fantastic way to hedge, a portfolio against excessive money printing. This might be surprising, but 61 of all millionaires and billionaires invest in art to diversify their portfolio.

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Algo traders are also selling high multiple stocks due to changes in the economy kathy mentioned specifically that algo traders were selling stocks based on cash burn rates and cash cushion levels. These metrics are proxies for how much cash the firm has available and how fast a company burns through that cash. Remember that, as rates increase, borrowing money becomes more costly. Over the last two years, rates have changed drastically.

In 2018, interest rates were near three percent, and now they are between 0.25 and 0.5 percent. All of these macroeconomic factors affect ark's holdings. This next chart compares a two-year treasury yield to the s p 500 in nasdaq notice that in the last two years rates went down because the economy was suffering. The federal reserve's actions helped push the economy into a v-shaped recovery and the market rebounded.

The real story is in the pde ratio and rates when adjusting the previous chart for pde ratios. We obtained this next chart here. You can clearly see the 2000 nasdaq bubble and, more recently, the stretched valuation since 2020, as raids climb. The market is due to pull back.

Cathy wood appears to be right. As of now, the combination of rising rates in the war has caused algo traders and short-term investors to punish innovative stocks which trade at high pde multiples, the higher the multiple, the greater the decline. Take a look at the chart of ark case price performance relative to interest rates, but what about the peg ratio? Kathy wood stocks might be underpriced on a 5-year peg basis, but investors are looking at the short term, not 5 years. Investors should be patient, but many are concerned about the economy.

Kathy would break down the economy into several basic pieces. Monetary policy, fiscal policy and economic activity. Monetary policy is what the federal reserve does with interest rates and the money supply in the economy. The federal reserve's goal is to keep people employed and interest rates stable around two to three percent.

That also means inflation should be around two to three percent investors today, are scared of the threat of inflation. Take a look at the commodity prices over the last year. These are scary. Price increases that act as a direct tax on the consumer.

Gas prices are reaching 5 and even over 6 dollars in some locations and oil has continued to climb to 110 dollars a barrel. Lumber prices have also been pushing housing costs. Higher too kathy believes inflation is not here to stay. This longer-term cpi chart puts a better perspective on inflation since the 1990s, inflation has been tamed compared to the 70s and 80s, and especially since the early 1900s to 1940s.

Today, inflation stands at 7.5 percent, which is the highest it's been since the early 1980s. The expectation is that inflation will likely reach 10 percent, but one has to question whether that will actually happen. Kathy is one of those people, and this is because, while costs are rising, inflation is dependent on several factors. One of these factors is how often money switches hands, also known as the velocity of money using m2, which is a measure of money in the economy.

The velocity of money was 1.1 times in the fourth quarter of 2021. The velocity has been decreasing significantly since the 2008 crisis. Kathy argues that during the 1970s and 80s, the velocity of money was high, and this contributed to higher inflation rates during those periods. In the 1960s, the velocity of money increased by 21 as many people purchased goods and services right away, people were afraid of prices increasing, so they bought goods as quickly as they could.

This became a self-fulfilling prophecy, as the high velocity meant that prices just kept rising higher and higher. This chart compares core cpi, which is the consumer price index without energy and food prices to the s p, 500 and m2 velocity. Since the third quarter of 1997 to 2021, velocity of money has significantly declined. As m2 velocity declined, the market began to take off and inflation became less of an issue.

Kathy believes this will keep longer term inflation in check and prevent the federal reserve from raising rates too quickly. Additionally, she stated that consumer sentiment or the expectations consumers have to buy new goods like cars beds and tvs, has declined significantly as seen here. Consumer sentiment has climbed since the 2008 great financial crisis until dropping recently, the latest downturn could contribute to keeping wages and prices from rising to all-time highs. The cpi, without food and energy, is shown here but scaled to 10 times.

Consumer sentiment tends to impact inflation figures, and the current sentiment indicates that the recent inflation might be short-lived. Kathy also mentioned the higher energy consumption as a percentage of gdp as another taxing item on the consumer to limit inflation and consumer goods. Government spending is also another reason why inflation will be short-lived. The current administration has been focused on reducing government expenditures in 2008.

The government spent money to maintain solvency in the banking system, a more drastic version of that took place in 2020, although it's starting to cool down on a year-over-year basis, fiscal spending increased 18 in q4 of 2021, like the period following the 2008 recession. Fiscal spending will certainly continue to decline on a year-over-year basis. The 2020 jump was from over seven trillion dollars in additional spending that the fed is working on removing from the economy that government spending resistance alone will help stop inflation. Other factors that kathy discussed are unemployment figures, wage growth and labor force participation, as seen in this chart, labor force participation recently increased, but non-farm payrolls declined more people are working, but at a lower overall wage in the 1960s and 70s non-farm payroll continued to increase until Fed share, paul volcker, started raising rates to slow inflation.

At the same time, labor participation declined as jobs became hard to find. This is the opposite of what is happening today. Jobs are easy to find and wages are going down in one of our more recent videos. We discussed the supply chain stress in the economy.

Kathy also watches the inventory levels of retailers to get a handle on inflation. Businesses are seeing their inventory start to return lately. Recently, goldman sachs reduced his supply chain stress index from 10 to nine and, more recently to seven this chart shows a percent change in inventories from the prior quarter. If consumer demand were increasing, inventories would not be building as we see here.

So where does this put interest rates at if kathy is right? This means that the market is wrong about inflation, and the federal reserve will not raise rates as abruptly as expected. Kathy stated that she believes the fed might do an additional rate hike from the recent one and be done according to bloomberg. The rest of the market anticipates numerous rate hikes and expects rates to increase to 1.78 from current levels. If kathy is right about rates and inflation, her stocks will likely rebound significantly as rates remain low.

Inflation is under control and multiples start to expand again. The downturn seen in the latter half of 2021 and early 2022 was a drop of 50 in just a few short months. Long-Term investors are looking beyond the short-term volatility for long-term returns. Kathy's thesis is also confirmed by private equity funding rounds, while innovation stocks have taken a tumble.

Private early innovation investors have seen valuations increase over the last two years, especially since the last few months, out of the 379 cbc and higher rounds of capital. Raising the valuations increased from 2.2 x to 2.8 x between november 2021 and february 2022. Series c is a form of older capital raising in the private market. There was some lagging effect in this chart, but in december 2021, in january 2022, valuations in the private equity space stayed strong, while the equity markets declined.

So what does this mean for ark and kathy wood? Her recent performance has been at the hands of short-term traders, difficult market conditions in a war. Inflation is not likely to get out of control because of the factors we talked about earlier. The fed will not likely have to raise rates as drastically, which will provide an uplift to equities. If you believe in kathy's economic outlook, you should look to invest in the long term.

Kathy's more recent ark trades include selling shares of selectus palantir aqua, bounty trimble, evil. Gene open door, landing club lockheed martin, intuitive surgical, twitter, etsy and insight. Some of her more recent purchases include burning rock 908 devices, joby aviation velo3d, adaptive, biotech codexes, one life, healthcare, stratasys, two, simple holdings, square, draftkings and shopify. Let me know what you think about arkan vest down below.

Do you think this is a great buying opportunity, or is it simply a bull trap? If you enjoyed this video, please hit the like button and subscribe and i'll see you in the next one.