June 24, 2022
  • June 24, 2022

Cathie Wood calls on the robots for a sleight of hand

By on May 24, 2022 0
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Boldness has worked for Cathie Wood as an investment style, even in the face of mounting economic storm clouds, but her recent social media remarks increase the excess. They smell of what magicians call misdirection.

In the latest example, she told her 1.4 million Twitter followers over the weekend that the economy was poised to accelerate at rates never seen before in the modern developed world, thanks to advances in artificial general intelligence, or machines that think like humans:

Who cares about the threat of a short-term contraction in gross domestic product as robots are poised to take over the economy and an unprecedented boom looms? The comments come as Wood, the founder of ARK Investment Management who has become a household name betting on ‘disruptive innovation’ during the pandemic boom, finds her flagship ARK Innovation ETF down 68% from its June 2021 summit. Instead of apologizing, she’s doubling down on her basic thesis, emboldened by investors who backed her up against all odds. Over the past month, ARKK was once again among the top 50 US ETFs by flow.

Her statement on GDP follows a debate she had on Twitter with Tesla CEO Elon Musk, during which they veered into misguided territory about passive investing and index funds. She said that “history will mark the accelerated shift to passive funds over the past 20 years as a massive misallocation of capital.” Wood’s effort to champion active feeders like her was as bold as it was completely wrong.

Of course, Wood’s economic predictions in his latest foray into Twitter are ridiculous. Investment managers and analysts make incorrect projections all the time, and there is a presumption that forward-looking statements are often just educated opinions about an unknowable future. But most commentators stick to a basic set of assumptions about what is known to be possible today. For Wood, investment commentary is sometimes indistinguishable from science fiction.

Consider the time horizon of his last prediction. Even if you accept that some form of artificial general intelligence is possible in less than a decade – as the forecasting aggregation platform Metaculus suggests in the data cited by Wood – it is fanciful to believe that such technology could really take over the economy in such a short time. As Mandeep Singh, Bloomberg Intelligence’s senior technology analyst, reminded me, adoption takes years.

Take the example of self-driving cars, one of the best-known use cases of AI: companies must overcome not only technological challenges, but also daunting regulatory hurdles. In the case of factories, companies would have to invest in migrating existing infrastructure, and they would need capital to do so, which becomes much more expensive. “There’s nothing there that suggests you’re going to have an acceleration of that magnitude,” Singh told me. “So no, I don’t think the numbers are exact or approximate.”

It’s understandable that an investment manager would want to try and move the goalposts when their portfolios are hammered, and this isn’t the only example of this over the past week. In a video on Ark’s website on Friday, she claimed that maybe everyone is so negative about stock markets because they don’t measure the US economy correctly:

Even our economic statistics are not set for what is about to happen. They were born from the industrial age and struggle to measure the digital age. They are missing a lot of things, and it takes them 5-10 years to catch up with reality, and in the meantime, they usually have all the tax information on income and profit. So what we think is happening is that they are – the GDP stats as they come out today show higher inflation than is actually the case and a growth of lower production than is the case. And so, confusing for the Fed, confusing for everyone, but not confusing for us because we’re just focused on disruptive innovation.

Inflation is therefore exaggerated, growth is underestimated and few people understand what is really happening, except for Wood. How does this change the narrative to avoid taking responsibility for losing people’s money?

This all sounds like a fund manager struggling to distract himself from the fact that his investing style may not be well suited to the challenges of here and now. Economic crises – including the worst inflation in 40 years – have a knack for shifting investors’ priorities from tomorrow’s big ideas to today’s cash flow. But for all the risks the economy poses to Wood’s business, the biggest threat is the exodus of investors she faces when her adherents realize she isn’t being upfront with them.

More other writers at Bloomberg Opinion:

• Cathie Wood and the Sound of a Changing Market: Marc Rubinstein

• Wood and Musk get index investing wrong: O’Brien and Kaissar

• Turn off the memes, this party is over like it’s 2000: John Authers

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Jonathan Levin has worked as a Bloomberg reporter in Latin America and the United States, covering finance, markets, and mergers and acquisitions. Most recently, he served as the company’s Miami office manager. He holds the CFA charter.

More stories like this are available at bloomberg.com/opinion