July 8, 2019|by Catherine Wood, ARK Invest CEO|Market InsightsTags:Yield Curve

Now that yield curves are inverting, investors seem to be bracing for bad news. In the last 100 years, inverted yield curves have foreshadowed recessions within roughly a year, as indicated by the below data points.

ARK Inverted Yield Curve Spread

Based on the 50 Years Ended 1929, We Believe the Yield Curve is Signaling a Deflationary Boom

For the first time in 100 years, we believe that innovation is picking up at a pace not seen since the turn of the nineteenth century, causing a confluence of abnormal economic signals that are stirring fear, uncertainty, and doubt. In our view, however, these signals could be harbingers of boom times ahead. The inverted yield curve appears to be causing more fear than any other economic statistic. That said, accelerating real growth in the US in the face of slower than expected growth in the rest of the world and lower than expected inflation and interest rates globally also are causing serious doubts about the sustainability of this expansion. Corporate tax reform and deregulation have played important roles, boosting growth and returns on invested capital in the US relative to those in the rest of the world, bolstering the dollar and, importantly, stimulating innovation. While conflicts with many of our major trading partners seem to be distorting the picture now, if our understanding of this Administration’s priorities is correct, the resolution will involve lower tariffs – in effect lower tax rates – globally, potentially paving the way for waves of innovation to gather momentum and sweep across the world.

While many equity and fixed income investors have been puzzled by the flattening yield curve, especially in the face of stronger than expected economic activity, we have gained confidence that the five innovation platforms upon which ARK Invest focuses its research are gaining traction and wreaking havoc with traditional economic and financial metrics.  The five innovation platforms are DNA sequencing, robotics, energy storage, artificial intelligence, and blockchain technology. Technologically enabled, each platform is characterized by declining cost curves, surges in productivity, and rapid real growth.  Not since the late nineteenth century have multiple innovation platforms evolved at the same time.

Roughly 150 years ago, the three innovation platforms that changed the way the world worked were the internal combustion engine, telephone, and electricity. During the 50 years ended 1929, unit growth and productivity surprised on the high side of expectations as inflation surprised on the low side, creating a “deflationary boom” and an inverted yield curve, as shown below. In fact, unlike the case in the last hundred years, positively sloped yield curves were rare and, in the absence of the Federal Reserve until 1913, the economy was much more susceptible to downturns than it is today, as depicted by the shaded areas below.  As detailed in an analysis of that time period by the National Bureau of Economic Research (NBER), short rates rose in response to rapid real growth, while long rates lagged in response to lower inflation, creating a virtuous cycle that stimulated equity markets.

ARK Inverted Yield Curve Short Term Gov Yield

Innovation platforms today are evolving at a rate faster than those in the late 1800’s. Perhaps contributing to some confusion in understanding their impact today, the government still reports statistics that evolved during the industrial age as gauges of economic momentum in the digital age. As a result, they probably are understating real growth and productivity, and overstating inflation. Combined with tax reform and deregulation in the US and China, the five platforms could unleash tsunamis of innovation that will change the way the world works, creating a deflationary boom rivaling that which led to the Roaring Twenties early in the twentieth century. In that environment, an inversion of the yield curve would be exceedingly good news for the equity markets.

 What Could Turbocharge or Derail the Deflationary Boom in the Short-Run?

If the Fed were to interpret the inverted yield curve as a call to cut short-term rates, it could turbocharge the deflationary boom.  The chart below1 is suggesting such a possibility.

Final Inverted Yield Curve 90 Day

This chart suggests that Fed policy is not tight. Before or during past crises, the Fed has ignored signals from the three-month Treasury Bill Rate and tightened too much or eased too late and too little, allowing the three-month Treasury Bill Rate to drop more than 20 basis points (bps) below the Fed Funds Rate. Today, the Fed seems to be following the economy in setting policy, not trying to get ahead of it or to cut it off. Indeed, the Treasury Bill Rate was nearly 20 basis points above the Fed Funds Rate, higher than it had been in nearly 25 crisis-prone years, until recently and could head back up if the Fed cuts the Fed Funds Rate this month.  In other words, the Fed is more likely to turbocharge than to derail the innovation boom that we see brewing.

Conclusion

Given the context of the past 100 years, economists generally do not believe that “this time is different,” or that an inverted yield curve actually is good news. Yet, in the context of disruptive innovation, this time is not different. During the 50 years ended 1929, the yield curve was inverted nearly two-thirds of the time.2 The dawn of electricity, telephony, and the internal combustion engine stimulated real growth and productivity, the latter of which kept a lid on inflation. Through many booms and busts in an era of creative destruction without the Federal Reserve and with minimal government intervention, US real GDP growth averaged 3.7% and inflation 1.1%, while short rates averaged roughly 4.8% and long rates roughly 3.8%.3 The yield curve was inverted.

So, this time is not different, but investors do have to delve deeply into history to understand the impact of profound technological breakthroughs on economic activity, yield curves, and wealth creation. ARK aims to surface and capitalize on innovation platforms that will have to harness the public equity markets to scale exponentially during the next five to twenty years.

‘mARKet update’ | What We Discovered This Month

We invite you to join our 30-minute monthly webinar series presented by ARK’s Chief Investment Officer, Catherine D. Wood, and her teams of thematic analysts. The webinar offers a Q&A-based discussion on recent market developments, macro economics, and thematic investing in disruptive innovation.

To register for our next webinar, please click below:

Disruptive Innovation: Why Now?

May 30, 2019|by Brett Winton|Market InsightsWhite PaperTags:Disruptive Innovationthematic investingwhite paper

Through an extensive research process, we have identified five transformative disruptive innovation platforms that could change the way the world works and become the critical productivity signposts that future historians identify. We believe that historians will look back on this era as one of unprecedented technological foment. They will see critical inflections in artificial intelligence and DNA sequencing and editing; they will recognize this as the 10 year stretch when robotics proliferation became inevitable and when the battery became the fundamental unit of energy delivery; and they will identify in blockchain and cryptocurrencies the roots of the structure that would grow to upturn the entire business and financial landscape.

In our latest white paper, we revisit the impact of past transformative technologies in order to put today’s technological moment into context. Given the magnitude of the technological impulse we are anticipating, aggregate equity market capitalizations could appreciate at a more rapid rate than historically has been the case, as the exponential growth associated with innovation increases average returns. That said, the sagging returns from traditional businesses being disrupted or destroyed by transformative technologies could be a significant drag on portfolios exposed to broad-based benchmarks.

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According to our estimates, the five technologically enabled disruptive innovation platforms should generate more than $50 trillion in business value and wealth creation over the next 10-15 years. Today, they account for less than $6 trillion in global equity market capitalization, giving investors an opportunity to capitalize by almost 10-fold if they have positioned their portfolios on the right side of innovation.

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Given the opportunities and threats that each of these disruptive innovation platforms poses, we discuss each in more details in this report. To download the full white paper, please click below:

Download White Paper


ARK’s statements are not an endorsement of any company or a recommendation to buy, sell or hold any security. For a list of all purchases and sales made by ARK for client accounts during the past year that could be considered by the SEC as recommendations, click here. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list. For full disclosures, click here.

Is It Time to Go Back to the Moon, This Time to Stay? Follow Sam on Twitter @skorusARK   Jeff Bezos’s private space company, Blue Origin, held an exciting event Thursday night during which it made some announcements and took some swipes at SpaceX. The talk began with Bezos’s vision for O’Neill colonies, miles-long structures floating in space that are rotating to create artificial gravity. Bezos believes that humans have become “planet chauvinists” and that the long-term solution to overcrowding and scarce resources is to live in space.   Bezos understands that O’Neill colonies will take generations to evolve. He was able to create Amazon because shipping services, credit cards, the internet, and other infrastructure already were in place. In contrast, Blue Origin will have to build the infrastructure for space in two key steps: slashing the cost to reach space and then using materials.   Blue Origin’s plan to reduce rocket costs is embodied in the New Glenn Rocket which will be inexpensive, reliable, and timely. Bezos expects that the first stage rocket will be reused 25 times with minimal refurbishment and will be able to launch in weather conditions suitable more for planes than traditional rockets. It also should be able to land on a moving barge, avoiding delays associated with rough seas.    Bezos also announced a lunar lander that will be able to land 3.6-6.5 metric tons on the surface of the moon and could be instrumental in helping the US to achieve its goal of landing humans on the moon by 2024. In development for three years, it has been designed to be refueled by hydrogen extracted from ice on the moon.    The new space race is taking shape and generating significant excitement. We are familiar with Musk’s vision for a Mars colony and now we know that Bezos’s vision is for floating space. Both center on reusable rockets, but the similarities end there.    A full clip of Blue Origin’s presentation is available here.    

Uber’s Future Looks Troubling Follow Tasha on Twitter @tashaARK   After pricing at $44, the low end of the expected $44-$50 range, Uber closed on Friday at $41.57. Uber’s current $70 billion valuation seems difficult to justify.   To reach profitability, both Uber and Lyft probably will be forced either to raise prices or to increase the cut they take from their drivers. Uber’s contribution margin already has declined and this week, in its first earnings report since going public, Lyft did not disclose gross bookings, perhaps because growth in its core ride hailing business is slowing down, leaving its scooter business to bolster net revenue growth. According to ARK’s research, the scooter business is uneconomic and unsustainable as currently configured. Now we wonder if Uber will take the same route, reporting net revenue growth that has been boosted by scooters and Uber Eats and obfuscating the fact that its core riding hailing business is faltering.   Having faced a number of setbacks, Uber also is lagging in the longer term race to develop autonomous technology. Without the requisite technology stack, it probably will be forced into partnerships like the one it struck with Daimler, which does not seem to be very far advanced either. Even if such relationships were to be successful, ARK expects that Uber’s share of gross revenues would shrink from over 20% today to just 3-5% as it evolves toward nothing more than a lead generator for the autonomous platform provider.
Uber Cash Is Using Deposits as a Customer Retention Strategy Follow Max on Twitter @mfriedrichARK   One of the challenges Uber and other ride-hailing services are facing is high customer churn. As a result, they are sparing no effort to make their customer bases more sticky, offering anything from loyalty rewards to actual credit cardsIn the words of New York University (NYU) Professor Aswath Damodaran: “They are throwing everything at the wall and [hoping] it sticks”.   One of Uber’s efforts to retain customers is Uber Cash, a Digital Wallet the balance of which can be spent on Uber rides and Uber Eats. Users can top-up their Uber Cash balance by $25, $50 or $100 and get cash-back rewards. A $100 top-up costs consumers only $95, as Uber pays the $5 balance.   Uber Cash appears to be operating at a loss. As shown below, given payment processing fees and rewards, for $100 worth of rides, Uber pays $4 more for a customer who uses Uber Cash than one who does not. Uber pays higher fees per transaction for non-Uber Cash users. The reward payments of $0.5, $1.5 or $5, respectively, for Uber Cash users who top up with $25, $50 or $100 seem to make it unprofitable. Based on its underlying economics, Uber Cash’s customer retention strategy seems to be causing operating losses as the ride-hailing companies battle for rider loyalty.        

Binance’s Security Breach Sparks Controversy on the Possibility of a Bitcoin ‘Reorg’ Follow Yassine on Twitter @yassineARK   Cryptocurrency exchange Binance reported a security breach that resulted in the theft of 7000 bitcoin (BTC), or $45 million.   Binance disclosed that it would reimburse holders for the stolen funds with its user-funded emergency insurance fund. In the meantime, it has frozen all user deposits and withdrawals until a full investigation of the breach is complete. According to The Block, this hack brings the total amount of bitcoin stolen from cryptocurrency exchanges to $1.35 billion.   Binance’s security breach has stirred controversy around whether it could have or should have coordinated a chain reorganization to recoup the funds. Jeremy Rubin, one of Bitcoin Core’s contributors, was the first to bring up the possibility in this tweet.   A blockchain reorganization occurs when an alternative chain accumulates more proof of work from miners than the original one. If so, transactions on the previous chain are invalidated as miners switch over to the ‘longest’ chain.   In the scenario proposed, Binance would reveal the private keys of the hacked coins, sign a Bitcoin transaction conflicting with the hack, and redistribute the stolen BTC to miners in the conflicting transaction. If the incentive to conduct a blockchain reorg is high enough, miners would construct an alternative chain, invalidating the stolen funds.   Under Bitcoin’s design rules, nothing should stop Binance from attempting to incentivize miners to carry out a reorganization on Bitcoin. Whether a reorg would have been feasible to coordinate at scale in a timely manner is highly unlikely, as was realized by Binance’s CEO, who quickly ended the pursuit.      

Roku Seems to be Winning the Smart TV War Follow James on Twitter @jwangARK   One in three smart TVs sold in the US run on Roku’s operating system (OS), making the Roku OS the #1 OS for smart TVs. OS wars are notoriously hard to win. Remarkably, at only $9 billion in market cap, little Roku has bested both Google and Amazon in the fight for control of smart TVs.   Like many success stories, Roku started off in hardware but diversified to software and content. Few TV vendors have the software chops to create a modern connected TV OS. By focusing purely on Roku OS and practically giving it away, Roku has attracted TV manufacturers and increased its installed base. Today, it has more than 29 million active accounts streaming 3.5 hours of content per day on average, making it one of the most engaging platforms in the US.   The $70 billion US TV ad market represents a huge opportunity for Roku. Despite their best efforts, Google and Facebook have yet to attract anything more than marginal TV ad dollars. YouTube ads are considered low-end inventory while Facebook does not have enough long form videos to serve advertising. Roku provides ad formats reminiscent of traditional TV while targeting and measuring with the latest digital tools. A secular shift in TV consumption from cable to over the top (OTT) could position Roku as one of the winners in the future of TV advertising.
The First Use of CRISPR to Target Cancer Directly May Enter US Clinics Follow Manisha on Twitter @msamyARK   CRISPR genome-editing promises to cure genetic diseases and cancer while accelerating the pace of therapeutic discovery. While several CRISPR-based investigational drugs are treating cancer in human trials, all of the trials have been using CRISPR as a tool to create therapeutic products instead of using it as a drug. Now, however, the first investigational drug application (IND) using CRISPR to target cancer directly probably will be filed this year and probably will recruit patients in 2020.   The Gene Editing Institute at Christiana Care Health System, a nonprofit medical system headquartered in Delaware, plans to combat chemotherapy resistance in k-ras positive non-small cell lung (NSCL) cancer patients by deploying CRISPR against the NFR2 gene. The NFR2 gene prevents chemotherapy from penetrating tumors. Eviscerating it could help patients respond to chemotherapy.   In pre-clinical studies, the Gene Editing Institute demonstrated that the elimination of NFR2 slowed the proliferation of cancerous cells and prolonged life. If the IND is accepted by the Federal Drug Administration (FDA), the Institute plans to enroll 6-10 metastatic NSCL chemo-resistant cancer patients and delete their NFR2 genes, using CRISPR, to convert the patients into positive responders.   In the future, CRISPR could treat and cure cancer.

April mARKet Update Webinar

April 10, 2019|by ARK Invest|Market InsightsWebinarTags:autonomous vehicleseconomicsmarket reviewsharing economyvc

April mARKet update Spotlight: revisiting the “Deflationary Boom”, the Autonomous Driving Space, Pinterest, and more.

Link:
https://ark-invest.com/research/april-19-market-update

This week UC Berkeley released a paper suggesting it could produce a two armed collaborative robot for just $5,000, a dramatic drop from the $25,000 price point of Baxter, the cobot that Rethink Robotics introduced in 2012. If Berkeley is able to scale its robot successfully, then the cost of industrial robots has been dropping at an annual rate of 20% per year. ARK’s previous forecast was that industrial robot costs would decline to roughly $11,000 by 2025, boosting their sales at a 31% compound annual growth rate from 380,000 units in 2017 to 3.4 million units. UC Berkeley’s work suggests that ARK may need to be more aggressive in modeling the cost trajectory of industrial robots.   Among the potential reasons for the accelerated decline in industrial robot costs are 3D printing and artificial intelligence (AI), the latter perhaps more important. Prototyping with 3D printing and AI has enabled design iterations at a rapid pace, but AI’s impact on motion control probably has been more responsible for the dramatic decline in costs. Most robots are “over manufactured” for their actual use cases, for good reason: traditional programming is inflexible, placing more constraints on and adding more requirements to the manufacturing process.  Incorporating AI into motion control, manufacturers can build robots with fewer sensors and unnecessary capabilities (like weight lifting), optimizing their functionality.   This cost decline is comparable to that in computing during the shift from mainframes to PCs, which led to the democratization of computing. Few people are anticipating the unit growth in and proliferation of robots likely to take place during the next five to ten years.

We invite you to join our 30-minute monthly webinar series presented by ARK’s Chief Investment Officer, Catherine D. Wood, and her teams of thematic analysts. The webinar offers a Q&A-based discussion on recent market developments, macro economics, and thematic investing in disruptive innovation.

We share regular “stock commentaries” with investors and innovation enthusiasts on stocks that have experienced significant up or downturns in the market over the course of one week (up or down more than 15% in one day). We hope you enjoy today’s commentary.   Grayscale Bitcoin Investment Trust (GBTC) Grayscale Bitcoin Investment Trust (GBTC), a trust tracking bitcoin’s market price, was up 15.5% on Tuesday after the bitcoin price appreciated back to $5,000, breaking above its 200-day moving average for the first time in 2019. As measured by daily returns, the price increased at the most rapid rate since December 2017. While analysts have been unable to reach consensus on the reason for the recent appreciation in price, several theories have emerged: a single 100 million BTC order algorithmically managed across three venues, an April Fool’s prank, or simply 15 months of bear market trending with signs of a reversal. ARK believes that bitcoin is one of the most compelling alternative assets of the 21st century.  Our conviction has increased during the last 15 months of a bear market. As a decentralized system for global money, bitcoin has the potential to become the most reliable way to store and transfer value, capitalizing on a multi-trillion dollar market opportunity.   Iovance Biotherapeutics (IOVA) Iovance Biotherapeutics (IOVA) closed up 20.4% on Wednesday upon announcing clinical trial design updates for two pipeline programs. Iovance is among the leading immunotherapy companies focused on tumor-infiltrating lymphocyte (TIL) therapy for the treatment and potential cures for various solid tumor indications. The company announced updates to its clinical programs with TIL therapy in the treatment of cervical cancer and non-small cell lung cancer (NSCLC). The protocol for innovaTIL-04 (C-145-04), the Phase 2 study in cervical cancer, was amended to increase the sample size to 59 and to modify the primary endpoint of Objective Response Rate (ORR) to be determined by a Blinded Independent Review Committee (BIRC). Iovance made changes in anticipation of a meeting with the Food and Drug Administration (FDA) planned for later this year to discuss the registration pathway for LN-145 in cervical cancer. Additionally, the company closed its IOV-LUN-201 study in non-small cell lung cancer (NSCLC) and instead plans to add an arm to the global IOV-COM-202 study for PD-1 naïve NSCLC patients. By increasing the sample size for the cervical cancer study, the company might be expecting to bypass phase 3 studies and is powering the Phase 2 trial for registration activities. Changes in the NSCLC trial moves the therapy towards earlier lines of treatment. These broad changes to clinical trials probably indicate Iovance’s conviction in its pipeline programs.   Evogene (EVGN) Shares of Evogene (EVGN), an Israeli biotechnology company, closed up 30% on Wednesday based on news that it had formed a subsidiary, Canonic Ltd., to develop next-generation medical cannabis products. The subsidiary initially will focus on creating novel cannabis varieties by optimizing crop yield, stability, and metabolite composition through the utilization of Evogene’s Computational Predictive Biology (CPB) platform. Canonic is the latest addition to Evogene’s growing portfolio of companies that are addressing inefficiencies within agriculture, biofuels, and human therapeutics.   AquaBounty Technologies (AQB) AquaBounty Technologies (AQB), a company focused on improving the productivity and sustainability of commercial aquaculture, traded up 15.9% on Thursday after the Environment and Climate Change Canada (ECCC) approved the Company’s Rollo Bay production facility for the commercial manufacturing and AquAdvanatage Salmon. AQB traded back down 18%, however, after announcing a secondary offering valued at $5.75 million on Friday. The announcement by ECCC, which reached the same conclusion as the U.S. Food and Drug Administration (FDA) after assessing AquaBounty’s Indian land-based production facility, is the fifth positive assessment of environmental safety after similar findings in Argentina, Brazil, and China.  Aquabounty will begin stocking the Rollo Bay production facility immediately with the first harvest of AquaBounty Salmon expected in the fourth quarter of 2020. Net proceeds from the secondary offering will fund the capital costs of the first salmon batches at the company’s Rollo Bay and Indiana farm sites. We believe global aquaculture revenue will grow by 40% per year between 2017 and 2025.   Pluristem Therapeutics (PSTI) Pluristem Therapeutics (PSTI), a leading regenerative medicine company developing novel placenta-based cell therapy products, traded down 32.8% on Thursday after announcing the pricing of its public offering. The $20 million deal will support R&D efforts associated with its various clinical trials.  Pluristem has reported robust clinical trial data in multiple indications for its patented PLX cell product candidates and is conducting late stage clinical trials. PLX cell product candidates should be able to release a range of therapeutic proteins in response to inflammation, ischemia, muscle trauma, hematological disorders and radiation damage. Pluristem has proprietary three-dimensional expansion technology that can be administered to patients off-the-shelf, without tissue matching. It also has strong collaborations with various groups including the Defense Advanced Research Projects Agency (DARPA) and the National Aeronautics and Space Administration (NASA).   Syros Pharmaceuticals (SYRS) Syros Pharmaceuticals (SYRS) closed down 23.3% today after announcing the pricing of a secondary equity offering. While much of traditional targeted drug discovery has focused on inhibiting or changing the function of abnormal genes and proteins, many more diseases could be addressed by controlling the expression of both abnormal and normal genes, specifically turning them on, off, up or down. Syros’ unique ability to regulate regions of the genome allows it to home in on which genes, cells, and patients to treat. In the past few months, it has expanded its oncology portfolio considerably and has been gearing up for pivotal trials for its lead indication, acute myeloid leukemia.   For more research visit ark-invest.com/research.   ARK Invest wishes you a happy Friday!   – – –  ARK’s statements are not an endorsement of any company or a recommendation to buy, sell or hold any security. Investors should determine for themselves whether a particular security or product is suitable for their investment needs or should seek such professional advice for their particular situation. For a list of all purchases and sales made by ARK for client accounts during the past year that could be considered by the SEC as recommendations, click here. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list. For full disclosures, click here.

Follow Sam on Twitter @skorusARK

For the first time since it sold Boston Dynamics to Softbank in June of 2017, Google resurfaced in the robotics space with a blog that focused on software as opposed to hardware. Specifically, it has trained TossingBot with deep learning to pick up various items and throw them into designated bins at near human levels of accuracy. With the exception of some physics-related inputs, human programmers have been notably absent from the process.

TossingBot can pick and place 500 items per hour, twice the record rate of past robots. For context, humans pick and place 400 items an hour with fewer mistakes, at least for now. In our view, TossingBot is proof of concept that deep learning will play an important role in the robotics industry.

We invite you to join our 30-minute monthly webinar series presented by ARK’s Chief Investment Officer, Catherine D. Wood, and her teams of thematic analysts. The webinar offers a Q&A-based discussion on recent market developments, macro economics, and thematic investing in disruptive innovation.

For the link, click here.