Arc invest is down over 50 percent from its highs in 2021, leading many investors to sell the fund. Arc's flagship etf ark has gone from managing over 27 billion dollars at its peak to 12 billion dollars. Today the tides have turned, and now that prices have dropped substantially, investors are scared to even touch any of ark's etfs and many are shorting them. This is counterintuitive because lower prices usually equate to higher future expected returns.

The ceo of arkhan vest kathy wood, believes we're at a price point that is offering one of the biggest opportunities in the history of the entire stock market. A lot of investors like an arc invest through internet stocks in the dotcom bubble, but kathy believes that skeptics are completely missing the mark. Our current situation is similar to the dot-com bubble, but the rules are completely reversed. Internet stocks stored during the dot-com bubble, whereas value stocks crashed substantially in comparison after the dot-com bubble valley stocks rallied in relation to growth stocks.

The graph shown on the screen compares the returns of the nasdaq with berkshire hathaway from 1999-2004. The nasdaq crashed substantially while berkshire steadily increased in value kathy wood believes we're in a similar situation, but the rules are reversed. She sees 2022's innovative stocks as the value stocks during the dot-com bubble in 2022's valley stocks as the internet stocks in 1999.. That might sound crazy, but the performance spread between the two funds is actually quite similar over the past year.

Ark is down roughly 50, whereas berkshire hathaway is up over 30 percent. I think i mentioned on the last in the know that the ratio of new lows to new highs was as high as it's been since 1999 and in 1999 it was the value stocks that were hitting new lows, as everyone was racing into the internet in uh. In this last year, it has been our kinds of stocks that were hitting new lows as value stocks were hitting all-time highs and, as you know, the right thing to have done during the late 90s when that ratio behaved, that way was to move away from the New highs into the new lows - and i think the same is true today: price movements are intriguing to analyze, but what goes down does not necessarily have to rebound. That being said, the macroeconomic backdrop is setting the stage for a massive rally in arc.

Invest. Everyone knows that the federal reserve is going to raise interest rates as soon as march of this year. Most economists believe that a 25 basis, point rate hike or a 0.25 percent increase will occur in march, but some actually think that a further rate hike will occur. Traders are currently pricing in a 30 chance for a 50 basis, point rate hike or a 0.5 percent rate increase.

This is because the latest job report came in much higher than expected. Economists expected 150 000 new jobs in january 2022, but the us ended up adding 467 000 jobs. Instead, that is a substantial difference and is signaling that the economy is strong right now the unemployment rate has also remained quite low at four percent fed chair jerome powell. Recently explained how he believes there's a lot of leeway to raise rates, while the economy remains robust.

All of the economists and institutions are now attempting to one-up each other into predicting higher and higher rate hikes bank of america recently stated that it sees seven rate hikes coming in 2022. One rate take is typically 25 basis points or 0.25 percent, so 725 basis. Point rate hikes would be a 1.75 increase. That is a very bold take among banks and economists.

Bank of america cited the fed statement that it's behind the curve on raising rates as a sign of future pain to come. This is happening while the money growth is already starting to slow down m2 money, which includes cash checking deposits and easily convertible money has begun to decelerate on a monthly basis. The coming rate increase in march and the fear of future rate increases are starting to be priced in the rx valuations. If and when inflation cools down in response to these types of rate hikes growth, stocks will be in a fantastic position to rally.

The question is how many rate hikes will be necessary to combat inflation. Kathy believes that the fear of rate increases is exaggerated and that not many rate increases will be necessary to slow down inflation. Other economic factors that will soon cover are also at play and will influence the fed's actions. Many people after today's employment report are beginning to think that 50 basis points is the number that the fed will basically telegraph, that it means business and that it's going to head inflation off at the pass.

They may do that and if they do, however, we think the stars are aligning in such a way that they will get the message very quickly that they don't need to do much more. Another break on them is political year. The midterm elections the fed, does not like to get in the middle of midterm elections doesn't want to be accused of any political dynamic, so they might want to do the 50 basis points just to say. Okay, we're done for a while.

Now, what's interesting about the market's reaction to this possibility is that strategists out in our world are now trying to leapfrog each other saying, okay, i think it's at least three more tightenings after that or four i've even heard altogether seven. So the reaction you've seen in the equity market recently is fear. I think that the fed is going to go too far too fast, because, as i will go through in a minute, the economy is quite weak and uh. I think the fed could do it overdo it quite quickly.

If kathy is right about the fed not having to raise rates as much as people think, then ark will experience a serious valuation readjustments on the upside. If the fed raises rates by 50 basis points in march, that would be an incredible opportunity to purchase innovative stocks. This is because the future outlook would be positive for arc invest, as future rate increases may not be necessary. Going back to the previous dot com analogy that kathy mentioned value stocks have continued to increase month after month, even after the latest sell-off ford stock is still trading at a five-year.

High financials and energy stocks have also been rallying over the past year. The vanguard, financials index fund is up 28 in the past year and the vanguard energy fund is up 52 percent. Such increases are obviously not sustainable for slow growing stocks. This is a signal that there is a humongous bubble for value stocks built upon the fear of the dotcom bubble happening again.

Kathy pointed out ford's upwards movement and valuation as the exemplar for the value bubble. I was very interested after ford said that the demand for its f-150 lightning ev was so much stronger than than it expected its stock exploded. Now i want our auto manufacturers to be very successful in the ev space, but to see its stock jump to highs that it had not seen since 2000 is is a sense of what i just said. What that move said to me is: oh, my goodness, investors don't understand that 97 to 98 of its sales base is gas-powered cars, and we believe that the shift toward electric is accelerating here, oil prices being one reason, but also lower lower prices being another as battery Costs come down, so i found uh that very interesting in the context of um the juxtaposition of the night late 90s against today.

Interest rates are about to increase and most, if not all, believe that this will harm arc, invest in some shape or form. On the contrary, kathy actually believes that only big tech will be hit substantially by increasing interest rates. This is because she believes that smaller innovative companies can outgrow an increase in interest rates. Chamath palihapatiya, the ceo of social capital, actually mentioned this once as well.

He stated that he believes hyper growth. Companies would outgrow a marginal increase in interest rates and therefore continue to thrive. That type of outperformance makes sense in relation to big tech. If a company is growing at fifty percent per year, then a two percent increase in interest rates with lower valuations and reduce the power of compound interest, but it wouldn't be that impactful to the company's long-term success.

On the other hand, if a company is growing at fifteen percent per year, a two percent increase in interest rates would hurt that company significantly a company growing at fifty percent per year over ten years, discounted at 10 per year would grow its revenue by over 28 Times when discounted at 15, the company's revenue would only grow by 20 times. That's a considerable difference, but it's nothing compared to the impact of a company growing at 15 per year would have a simple hack to calculating how long it takes for a number to double. Is to use the rule of 72, the rule of 72 states that 72 divided by a growth rate, is equal to the number of years it takes for a number to double. If a company that's growing, its revenue at 15 per year is discounted by 10 percent.

Then the company will be growing by 5 per year. Therefore, we can take 72 divided by 5 and get 14.4 years. Fourteen point four years is the amount of time it takes for the company's revenue to double when discounted by ten percent. On the other hand, if a company growing its revenue at fifteen percent per year is discounted by twelve percent, then the company will be growing at three percent per year, which means that the company would take 24 years for its revenue to double the extra 9.6 years.

To double is awful for investors, which demonstrates the disproportionate impacts that increasing interest rates would have on larger tech companies. Kathy believes she found the signal pointing towards this outcome. There has been a divergence with the valuations of public and private companies, while the public market has been correcting in valuations. Private market valuations have increased.

This could be because private investors know that increasing interest rates won't have that significant of an impact on valuations. Now i have spoken to some really good value investors. You know who've been doing this all their lives and asked them. You know is if interest rates were to move into the two to three percent range, let's say as measured by the long-term treasury yield, which parts of the market given where we are now would be hit, and the answer that i found most interesting and that i I think we've just seen in facebook is: it would be the more mature growth companies that are facing some competition and not the the super growth companies that are just entering into their exponential growth trajectories.

So again, another argument for new new growth think amazon early 2000s. You know if you had put into a dividend: discount model, amazon's revenue, growth rate for the next 25 years at 20 to 30 percent, say 20 25, which is what happened? Nobody believed it was possible, then, given the the way that the cash flow dynamics would have been projected, you would have bought that stock all day, long as a value investor and of course the returns would have been phenomenal. We are, in that same place with truly emerging growth right now, and the private markets know it because private market valuations have only gone up over the last year. A paper gathering the data on this right now, but in the last year as true disruptive, innovation, strategies, depreciated, 50 or more private market, which is a round which focuses on disruptive innovation, private market valuations seems to have doubled.

There's really something wrong with that picture, and i think the private markets have it more right. There's more innovation, uh taking place today than there ever has been in history. Many retail investors invested in ark in 2021 and are now dumping the etf, but that's the exact opposite of what one should do. The example that i'm about to show you will perfectly demonstrate how ridiculous these emotional swings are.

Let's say that in 2021 you could purchase a limited edition iphone for one thousand dollars now in 2022. Let's say the price of that phone is only five hundred dollars. The obvious move would be to purchase the iphone right now instead of before, but that's not what investors are doing. The vast majority of retail investors bought the iphone for one thousand dollars and are now selling it for five hundred dollars, not much fundamentally changed with the companies in ark's holdings.

There's also another intriguing concept to understand. With downturns the price of the iphone went down by 50 percent, but if it were to return back to 1 000, then the price would increase by 100 percent. The returns on the way up are significantly greater than the negative returns on the way down. Benjamin graham, the author of the intelligent investor and the mentor of warren buffett once described sort of movements as emotional and counter-intuitive, graham hypothesized, that when the market which he called mr market is overly optimistic, investors should look to exit their positions when investors are pessimistic.

That's when investors should purchase stocks that isn't a simple formula and further analysis is necessary, but it's a concept that is noteworthy for all investors, regardless of how experienced they're well informed. You are, that being said, it's possible that kathy is wrong, but in the case that she is right, investors in ark will make boatloads full of money soon. Let me know if you think arch invest is going to rebound considerably in the next year. If you enjoyed this video, please hit the like button and subscribe and i'll see you in the next one.

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