Ark’s Cathie Wood says AI will bring about deflation within a year

One of the world’s most high-profile technology investors, Cathie Wood, has told a Sydney summit innovation is deflationary and AI will take the wind out of inflationary economies.

Cathie Wood describes Tesla as an AI play.

Artificial intelligence poses a big opportunity to quickly bring global inflation down and regulators need to be careful not to thwart “the greatest innovation of all time”, one of the world’s most high-profile technology investors said.

Ark chief executive Cathie Wood says AI will be adopted “in every area”, bringing with it productivity to industries around the world and leading to falling prices globally.

That will mean central bankers, who are raising interest rates because they see current inflation as “sticky”, are wrong.

“The market has been treating this inflation surge, as a ’70s like episode; that we are in a mess. It’s not going away,” Ms Wood told attendees at the Morgan Stanley Australia Summit in Sydney on Thursday.

“It’s going to take years to unwind. It’s sticky. And we have been looking at this and say ‘No, absolutely not’,” she said, arguing the inflationary pressures were a function of massive supply chain dislocations associated with a pandemic and a war.

“We’re going to see a much different monetary regimen going forward.

“Why? Innovation is inherently deflationary. We’ll go negative and then by this time next year we’re all going to be talking about deflation, and the Fed will have not only pivoted, it will be running in the opposite direction.”

Central banks globally have been tackling high inflation with interest rate rises in the past year. This week, both Australia’s and Canada’s central banks surprised investors by lifting their respective cash rates in attempts to bring it down.

The interest rates escalation has been a big hit to Ark’s flagship $US7bn Ark Innovation ETF, which almost rebled during the height of the Covid-19 pandemic amid hyper-low rates, before losing two thirds of its value as the much higher cost of money put pressure on unprofitable tech stocks.

ARK Investment Management chief executive Cathie Wood. Picture: Bloomberg

“This is one of the greatest innovations of all time,” she said. “When you increase the productivity of the planet – which it will – it will accelerate growth and lower inflation.”

She said the cost of AI learning was falling at about 70 per cent per year, part of which would inevitably lead to lower prices elsewhere.

“The bigger risk and opportunity out there is deflation,” which she said would be “a very positive thing,” particularly for her investments.

If deflation happened, it could also be “very harmful” to others, including mega-cap stocks.

“The enemy of value strategies is deflation,” she said, noting Google was already grappling with the disruption brought by OpenAI’s ChatGPT.

She disagreed with the AI scientists and tech executives, including Elon Musk, who last month warned the black box algorithms behind AI could one day lead to humanity’s extinction, but noted the technology meant big challenges for regulators and policymakers.

“All technology can be used for nefarious purposes. I think the warnings out there are appropriate and I think regulators should be very thoughtful,” she said.

Ms Wood said privacy laws in Europe that threaten companies with fines worth 4 per cent of their revenues could “kill” innovation. “That regulatory hurdle is going to impact other companies around the world who want to do business with Europe, or else they’ll stop doing business with Europe, which is not practical. That highlights the issue out there,” she said.

“I hope in the United States that our regulators are much more thoughtful than they have been in the blockchain space.”

The European Union is expected to release a draft code of conduct for generative AI in coming months. The US is also months away from introducing a comprehensive set of artificial intelligence regulations to Congress, setting guardrails for the industry.

“I think it will become a national (US) election issue next year,” Ms Wood said.

She said its largest holding – electric car manufacturer Tesla – was actually an AI play, as businesses developing AI expertise and harnessing expensive “proprietary data” would be the first to benefit from the technology.

Ms Wood disagrees with sections of the scientific community who predict black box algorithms behind AI could one day lead to humanity’s extinction

“Tesla, with its four or five million robots roaming around the world, is collecting more data every day, and has collected more miles of real-world driving data than all of the other auto companies and technology companies combined,” she said. “So it is our highest conviction name in the AI space.”

Ark’s flagship ETF has an 11.7 per cent holding on Tesla, and a 6.5 per cent position on cryptocurrency platform Coinbase Global, which alongside competitor Binance, is being sued by the US Securities and Exchange Commission which accuses them of operating unlawful exchanges.

Ms Wood described SEC chair Gary Gensler as a “menace to innovation in the United States” saying the regulator’s moves were “leaving our country behind in the world of blockchain technology”.

Other top-10 holdings include payments company Block, e-commerce company Shopify, and video conferencing company Zoom.

Ark famously exited its position in Nvidia – which produces the chips that power AI’s computing power – between November 2022 and January this year, missing out on a major rally that lifted the stock across the trillion-dollar mark this year.

Ms Wood, however, doubled down on that call, saying that at about 25 times its estimated revenues, the stock was “stretched” and the market was likely not factoring competition risks.

“Many people do not know that Tesla has developed its own AI chip and pulled in Nvidia out. And a lot of other companies will not need Nvidia,” Ms Wood said.

“The big players, the hyper-scalers, they are definitely going to develop their own more specialised AI chips. That’s a source of competition for Nvidia that most people are not thinking about.”

She expressed confidence in Mr Musk’s plan to turn Twitter into a “super app” pay wallet.

“Remember, Elon’s roots are in the payment space. And he is looking at Twitter as a super app and we believe him,” she said.

“We are looking for the digital wallet winners,” she said. “You know, the everything app, where you do not only financial services but all of your commerce – very, very valuable.”

“Who are the winners going to be? They are going to be very few. WhatsApp pay in China was that winner. Who is it in the United States? Is it Coinbase, Block, Robin Hood? Could it be Twitter?”

She said Tesla could even build a phone, given that it was in the business of making “the ultimate mobile device: a car”.