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Ark's Cathie Wood on short sellers, Reddit driven bond bubble

Yahoo Finance's Jen Rogers recaps her discussion with Ark Invest CEO & Founder, Cathie Wood.

Video Transcript

MYLES UDLAND: Well, in this era where ETFs are now the hot vehicles to put your money, the mutual fund is out. The ETF is in. We wonder who will the stars of this new financial innovation be. And certainly Cathie Wood over at Ark Invest has been crowned as the number one star of this early phase of the ETF revolution.

A couple of years ago, Cathie Wood came out and said Tesla would trade at $4,000 per share. This is right around the time that we had that Elon Musk funding secured for 20 tweet. It seemed like a crazy call at the time. And then the stock traded to $4,000 per share in just a couple of years.

Jen Rogers, you recently sat down with Cathie Wood, someone that you and I have talked to for a number of years. Initially, it was like who is this person who talks about CRISPR and gene editing and loves Elon Musk? And Kathie certainly is having a laugh now.

JEN ROGERS: I am Myles. I mean, that's actually how I started. I said I usually have to give a much longer intro about you. But now I don't need to give any intro about you.

I mean, by any measure, 2020 was just a banner year for her actively managed ETFs. Her inflows have been incredible. She has absolutely crushed the market.

Her face is now on t-shirts that you can get on Etsy. So I know what I'm getting you for Christmas. Of course, I had to talk to her about what is going on with the story that is captivating everybody that you've been talking about so much on this show. And that's what's happening with Reddit, GameStop, and Robinhood. And here's what she had to say.

CATHIE WOOD: Well, I find it very interesting. I've been looking at millennials in the workforce, or we've been looking. So it looks like a third of the workforce is millennials. And that's going to 75%.

I started in the business in the 80s when the baby boomers were coming of age. And there was a strategist, Stan [INAUDIBLE], Merrill Lynch. May he rest in peace. He drew expectations for demographics, baby boomers, as a share of the workforce. And what happened was he believed that that meant they'd be much more attracted to equities and that they would drive equities up.

Now, here we are. The millennials are going from 33% of the workforce now to 75%. There's a tremendous intergenerational wealth transfer-- the biggest we've ever seen in history.

So they're going to control a lot more than even the baby boomers did at the time. And I think it means positive that there are positive ramifications for both the equity markets and the crypto markets, both of which millennials have taken in which many have taken an interest. So the GameStop and the let's get the hedge funds, one of the interesting things about this is they're actually aiding and abetting.

And I don't think you've heard this anywhere else. They're aiding and abetting the bond bubble. What is happening?

What is happening? These companies that are left for dead by innovation, by the way, are selling. Some of their bonds are selling at $0.25 on the dollar.

They're dead as doornails in even bond investors' eyes. Once you drop below 75 on a bond, $0.75 to the dollar, the risk of bankruptcy looms large. So now some of these companies are refinancing. They're actually accessing the equity markets.

They're not refinancing their debt. Right now they will. They're accessing the equity markets. And their bond prices are skyrocketing.

They're tripling. I think this was-- I think it was AMC. Their bond price has just gone from $0.25 to $0.75. Now, if you ask me, a student of innovation, maybe there's a shot of survival here, and maybe more so now that they've been able to do an equity offer in which they could not have done two weeks ago, maybe. But I would not be putting my money there.

I want to be on the right side of change. That's what Ark is all about. Do I like a two-sided market? I disagree.

I agree with Elon Musk on almost everything, certainly in terms of technology. But on this point that short sellers are a negative for the market, I, who and Ark, who were terrorized during Tesla's plunge during 2019, if you have the courage of your conviction and our courage comes from research, back then what did we do during that plunge when many speculators were saying they're going to run out of money? Our simple question was, how can that be?

The markets have not shut down. And sure enough, they did an offering. Was it at a lower price than many of us would have liked? Sure, but it was small compared to the ones they've done recently. We bought all the way down. It was a gift for us to have those short range.

JEN ROGERS: Everything you're doing is based on research. And I think with these meme stocks, people are saying, well, what's the research? What are they doing this on? These companies-- you want to be on, as you said, the right side of innovation.

So has this exposed-- I mean, some people think it's exposed a systemic risk to free markets and other think it's the very definition of free markets.

CATHIE WOOD: Yes, well, I believe--

[INTERPOSING VOICES]

JEN ROGERS: --a fault.

CATHIE WOOD: Oh, yeah, yeah, no, truth will win out here. And the truth is history is not going to be on the side of those companies that didn't invest enough to move into the new world quickly enough and probably are not going to be a big force moving forward. So one of the things that I did find interesting. I didn't know that a stock could be, or that 140% of the float of a stock could be short. That was a surprise to me.

And so I think that hedge funds or whomever is shorting, it's not just hedge funds. There are all kinds of investors shorting out there. It's going to be interesting to see if they will stay or if they will move to such, what I believe was an outrageous position relative to the float out there. So in a way they might have seen this coming.

And I do know that the one firm that got in trouble was the, I guess, the Reddit folks who were focused on the listed put's of the-- now, what's unfortunate about that is they probably don't know much about OTC puts, over-the-counter puts. Those are opaque.

They can't see them. All this move will do is push all of that market over the counter, which is extremely profitable for banks. But it's more expensive for the end investors. So it's a little unfortunate.

I, as an investor, I always like to hear the other side of the argument. And that's the other unfortunate thing that's going on here. I think there are people now afraid to talk about why they're bearish on certain stocks.

If during our Tesla 2019 experience, if we didn't have the cacophony of investors, sell side, buy side, retail, institutionals putting down Tesla, we wouldn't have gotten the opportunities to buy it that we did. And we wouldn't have understood how much those investors did not understand what was going to move the stock. That helped us.

And if their voices are shut down, I think that will be doing a disservice to all investors because I want to know what are the arguments against this position? Clearly, we're missing something. But we weren't. We weren't when it came to Tesla.

JEN ROGERS: And Myles, you noted that big Tesla call that has proven so fruitful for Cathie Wood and for Ark in general. I think that it's also worth noting this idea of a bond bubble. So many people talking about the trading that we've been seeing popping up, a bubble in equities.

That's not what she's seeing at all here. And also, Myles, Cathie Wood is still learning stuff. She didn't even know about the float there. So it's good. I feel like I'm learning things along the way as well.

MYLES UDLAND: I think that that's really important for viewers out there who watch this episode. And I think there's a sense that hey, I can do this, too. I mean, we could do a whole another segment on the "Roaring Kitty" guy, who I think is so interesting.

He sits in his basement. And he live streams stock ideas. I mean, I think the way that Ark approaches their investment of ballparking the numbers, saying we roughly think this is the dynamic at play, they don't get bogged down. And well, if margins expand 15 basis points, then we really like the stock at $4 per share more.

I think that's a very practical and useful way to think about investing. Look, you and I can't do a full DCF analysis. But we can eyeball that certain things are getting more interesting. And that's basically what Cathie told us to do.

JEN ROGERS: And then she adds some discipline on top of it. And it is working for her. I mean, look at her inflows, just in January, they added about $8 billion. This conversation is going to continue throughout the day, Myles.

Coming up at 12:30, I'm talking with her about Tesla, and of course, your favorite Bitcoin. Later in the day, we're going to talk about Cathie Woods, what she does during the day, and a little bit more on what's happening with the market in terms of this frothiness. So stay tuned, exclusive all day on Yahoo Finance.

MYLES UDLAND: Did you tell her I'm sorry?

[INTERPOSING VOICES]

JEN ROGERS: I did not. I know you told me that.

MYLES UDLAND: [INAUDIBLE] Well, there's--

[INTERPOSING VOICES]

JEN ROGERS: No, because I think she's fine. I think she's fine. She's doing pretty well.

MYLES UDLAND: There was just one--

JEN ROGERS: She's pretty happy.

MYLES UDLAND: There was just one specific time Jared was there. I know you remember it where she was talking about the gene editing. And I just-- I had literally no idea what she was talking about. But look, bygones be bygones.