Summary: Tariffs And Government Efficiency | ITK With Cathie Wood

Summary of "In The Know" with Cathie Wood originally posted Feb. 7, 2025. Watch the full episode below.

Unleashing Innovation: ARK Invest’s Insights on Fiscal Policy, Market Trends, and Big Ideas for 2025

At ARK Invest, we analyze transformative trends shaping the economy, technology, and financial markets. As 2025 unfolds, the pace of change is accelerating across multiple domains, from fiscal and monetary policy to groundbreaking innovations in artificial intelligence (AI), space, and automation. In this edition of “In the Know,” we examine the key forces shaping the economy and explore the profound impact of disruptive technologies.

A New Era of Fiscal Policy and Deregulation

With the new administration in place, the Department of Government Efficiency (DOGE) is already making waves. The voluntary buyout program saw an overwhelming response, with 60,000 federal employees opting in before a temporary halt. The Trump administration initially targeted a 10% reduction in the federal workforce, and the rapid uptake of this program underscores growing momentum for streamlined government operations.

Beyond workforce reductions, fiscal policy is shifting. The administration is leveraging tariffs as a negotiation tool, particularly in discussions with Canada and Mexico. Prior to the early 1900s,?tariffs were the primary source of U.S. government revenue, and there are early signs of a potential shift toward a flatter tax system. Lower income tax rates, coupled with a smarter allocation of resources, could create a more efficient economy—one where capital is allocated by individuals and businesses rather than bureaucratic decision-making.

Equity markets appear to be responding positively. Despite elevated interest rates, long-duration assets, particularly innovation-driven equities, have performed well through the recent policy proposals and tariff negotiations, suggesting confidence in policies that encourage long-term economic growth. With an aggressive first-term agenda and regulatory rollbacks in motion, the administration is racing to implement changes before the typical midterm political cycle sets in.

Monetary Policy and Market Indicators: A Shifting Landscape

Interest rates remain a focal point for markets, particularly in light of inflation concerns. While short-term rates remain elevated, long-term interest rates are stabilizing, signaling that markets anticipate deflationary forces taking hold. AI, automation, and technological advancements are inherently deflationary, driving efficiency and reducing costs across industries.

The yield curve, historically a strong recession indicator, is normalizing after an extended period of inversion. If deflationary forces persist—driven by productivity gains and declining costs in critical industries—long-term rates could decline further. At ARK, we continue to monitor these trends closely, particularly as AI-driven automation expands its footprint in the economy.

The Inflation and Growth Equation

While inflation has cooled from post-pandemic highs, consumer sentiment remains fragile. The velocity of money—a measure of how quickly money circulates in the economy—has started to roll over again. Historically, declining velocity has been a precursor to weaker inflationary pressures, suggesting that inflation concerns may be overstated.

Housing and auto sales data point to cautious consumer behavior. High mortgage rates have locked many homeowners into their existing loans, slowing housing market activity. Meanwhile, auto sales remain below historical averages, potentially reflecting shifting consumer preferences as ride-sharing, electric vehicles (EVs), and the anticipation of robotaxis reshape transportation trends.

Tariffs and rising commodity prices, particularly in energy and agriculture, are adding uncertainty to inflation expectations. However, AI, robotics, and energy storage innovations remain strong deflationary counterforces. We expect technological advancements to play a critical role in keeping inflation in check while simultaneously driving Gross Domestic Product (GDP) growth.

Bitcoin, Gold, and the New Financial Frontier

The relationship between bitcoin and gold continues to evolve, reflecting broader shifts in global financial markets. While gold has surged amid economic uncertainty, bitcoin remains a long-term store of value and a hedge against monetary instability. At ARK, we believe bitcoin’s role in institutional portfolios will continue to grow, further reinforcing its position as a distinct asset class.

The broader digital asset revolution extends beyond bitcoin. Blockchain technology is redefining financial services, property rights, and capital allocation. As regulatory clarity improves, the potential for digital assets to reshape traditional markets is significant.

Big Ideas 2025: The Acceleration of Innovation

Our “Big Ideas 2025” report outlines the technological forces shaping the future of economic growth. Historically, real GDP growth has followed step-function increases driven by major technology revolutions. The last major leap occurred in the early 1900s with the adoption of electricity, the telephone, and the internal combustion engine.

Today, five innovation platforms—robotics, energy storage, artificial intelligence, blockchain technology, and multiomic sequencing—are evolving simultaneously, creating an unprecedented opportunity for economic expansion. Our research suggests that global real GDP growth could accelerate to 7.3% annually, a figure that may still be conservative given the scope of disruption ahead.

We believe financial markets will reflect this transformation. The global equity market cap, currently at parity with GDP, is poised to expand significantly. We believe the highest value creation will occur within truly disruptive innovation sectors, far outpacing traditional industries. Our research indicates that companies at the forefront of these changes could experience exponential market capitalization growth, while legacy industries will face increasing disruption.

Looking Ahead

The convergence of deregulation, monetary shifts, and accelerating technological disruption is setting the stage for a period of profound economic transformation. At ARK Invest, we remain committed to identifying and analyzing these groundbreaking trends, helping investors navigate the opportunities ahead.

We encourage you to explore “Big Ideas 2025” and stay tuned for upcoming discussions where our analysts will dive deeper into each sector’s transformative potential.

Thank you for joining us, and we look forward to continuing this journey together in the months ahead.

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Important Information

The content of this material is for informational purposes only and is subject to change without notice. This material does not constitute, either explicitly or implicitly, any provision of services or products by ARK, and investors should determine for themselves whether a particular investment management service is suitable for their investment needs. All statements made regarding companies or securities are strictly beliefs and points of view held by ARK and are not endorsements by ARK of any company or security or recommendations by ARK to buy, sell or hold any security. Historical results are not indications of future results.

Certain of the statements contained in this material may be statements of future expectations and other forward-looking statements that are based on ARK's current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. The matters discussed in this material may also involve risks and uncertainties described from time to time in ARK's filings with the U.S. Securities and Exchange Commission. ARK assumes no obligation to update any forward-looking information contained in this material. Certain information was obtained from sources that ARK believes to be reliable; however, ARK does not guarantee the accuracy or completeness of any information obtained from any third party.

Bitcoin is a relatively new asset class, and the market for bitcoin is subject to rapid changes and uncertainty. Bitcoin is largely unregulated and bitcoin investments may be more susceptible to fraud and manipulation than more regulated investments. Bitcoin is subject to unique and substantial risks, including significant price volatility and lack of liquidity, and theft.

Bitcoin is subject to rapid price swings, including as a result of actions and statements by influencers and the media, changes in the supply of and demand for bitcoin, and other factors. There is no assurance that bitcoin will maintain its value over the long term.

ARK strongly encourages any investor considering an investment in bitcoin or any other digital asset to consult with a financial professional before investing. All statements made regarding bitcoin are strictly beliefs and points of view held by ARK and are not recommendations by ARK to buy, sell or hold bitcoin. Historical results are not indications of future results.

Yield Curve is a?graphical representation of the interest rates on debt for a range of maturities. It shows the yield an investor is expecting to earn if they lend their money for a given period of time. An inverted curve appears when long-term yields fall below short-term?yields. An inverted yield curve occurs due to the perception of long-term investors that interest rates will decline in the future.

Gross Domestic Product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period. Nominal GDP is a measure of economic output that uses current prices and does not adjust for inflation. Real GDP is an economic metric that is used to describe the economic output of a country within a specific year. It reflects the value of all goods and services produced while factoring inflation into its calculation.

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