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Speaker 1: Kathy would joining us now CEO and CIO of ARC Invests,

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Speaker 1: and Kathy obviously CPI. You saw it cool across the

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Speaker 1: board in October, both on headline and on core, and

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Speaker 1: to say the least, the market reaction has been pretty swept.

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Speaker 1: Curious to hear your thoughts though, when you think about

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Speaker 1: what this means for the FED? Is it safe to

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Speaker 1: say that we've seen the last FED rate hike of

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Speaker 1: this cycle.

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Speaker 2: Well, first of all, I'll say I agree with almost

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Speaker 2: everything Ken Griffin just said, accept his comments about the FED.

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Speaker 2: For some time now, we've been saying that the FED

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Speaker 2: has overdone it and that the greater risk here is deflation. Yes,

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Speaker 2: the CPI did not surprise us at all, although there

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Speaker 2: were rumors that revisions would take it higher than many

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Speaker 2: people thought. And so we believe we're beginning to see

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Speaker 2: deflationary trends in many more sectors. Now. It started with commodities.

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Speaker 2: Now we're seeing airline prices coming down, auto prices coming down,

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Speaker 2: and we're seeing staples prices. They have been sticky, but

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Speaker 2: what's happened to staples volumes? They have gone down. That's

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Speaker 2: not how you run manufacturing plants. So we think that

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Speaker 2: they will be forced into cutting prices as well. You

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Speaker 2: heard home Depot today negative three point eight percent comp

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Speaker 2: store sales here in the United States, And if you

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Speaker 2: look at the SMP five hundred, I think a third

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Speaker 2: of all companies in the SMP five hundred are reporting

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Speaker 2: negative revenue growth. What we have characterized the last two

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Speaker 2: years as a rolling recession. Some measures of housing are

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Speaker 2: down forty percent. That's a recession. How autos fifteen million

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Speaker 2: units in the US, that's kind of punk, it's recession like.

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Speaker 2: And we're seeing these volume declines in staples. You've got

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Speaker 2: consumer's pulling back. So I think the Fed's overdone it.

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Speaker 2: I think we're going to see a lot more deflation

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Speaker 2: going forward. We are going to hit that two handle

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Speaker 2: and we will go below it and would not be

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Speaker 2: surprised to see CPI inflation negative at some point next year.

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Speaker 1: Well, Kathy, if that materializes, let's talk about how the

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Speaker 1: FED responds, because, as we've been talking about, you have

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Speaker 1: seen traders really pull forward their pricing for rate cuts

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Speaker 1: next year. Add to that, what do you think this

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Speaker 1: translates to in terms of magnitude of rate cuts that

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Speaker 1: the FED will have to deliver?

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Speaker 2: Well, if we're right and they've gone way too far,

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Speaker 2: they'll have to cut fairly significantly. I tweet it, although

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Speaker 2: I don't know if I use the word tweet anymore.

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Speaker 2: On X I put a chart which showed the ratio

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Speaker 2: of metals prices to gold prices and charted it against

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Speaker 2: long term interest rates. We've never seen this big of

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Speaker 2: a gap. The metals to gold price indicator is saying,

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Speaker 2: deflation is the risk, it's down near the low end

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Speaker 2: of a range, and the long term treasure yield is

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Speaker 2: way way above where it should be. In fact, this

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Speaker 2: metric would suggest if you just eyeballed the chart and

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Speaker 2: it's not perfect, two percent would be the right level

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Speaker 2: of rates. So I actually said that in my last

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Speaker 2: in the Know YouTube video. You know, two percent rates,

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Speaker 2: that was the reason, just looking at price signals that

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Speaker 2: the FED does not seem to be paying attention to.

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Speaker 3: I'm curious so kathy about that. I mean, based on that,

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Speaker 3: and I remember seeing that chart, and I've looked at

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Speaker 3: that same ratio, I mean, that would imply that basically

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Speaker 3: where we're at right now, you know, in the mid

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Speaker 3: to high fours close to five percent, that we need

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Speaker 3: to get back down somewhere around two percent here, and

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Speaker 3: I can't really see how that happens without either a

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Speaker 3: significant economic downturn or just what would just be an

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Speaker 3: unprecedented pivot by the FED.

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Speaker 2: I think we're in a rolling recession and it will continue.

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Speaker 2: I think consumers are basically saying nomas when it comes

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Speaker 2: to pricing. We're seeing that in volume numbers, and so

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Speaker 2: if if companies can no longer get pricing, what's going

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Speaker 2: to happen. Their margins, which have held up, are going

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Speaker 2: to get crushed, and we do think that's the case. Now.

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Speaker 2: They've held on.

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Speaker 4: To employees who were very difficult to get during the

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Speaker 4: rebound from COVID, reluctant to let them go because it

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Speaker 4: was such a struggle to bring them on.

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Speaker 2: I think that's going to change. They're going to be

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Speaker 2: responding to margin pressures, and we do think you're going

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Speaker 2: to see more unemployment during the next three six nine

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Speaker 2: months in an election year, so it will really get

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Speaker 2: a lot of attention.

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Speaker 3: Well, I'm curious as to what this means for financial markets.

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Speaker 3: I mean, let's just kind of go with this that

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Speaker 3: this is the hypothetical that the FED remains behind the

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Speaker 3: curve they don't react enough, and the economic consequences are severe,

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Speaker 3: even if it's not a recession, but they are severe

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Speaker 3: enough that it significantly limits consumer spending and for that matter,

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Speaker 3: even business spending. How does that sort of factor in,

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Speaker 3: I guess to the growth story with a lot of

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Speaker 3: the stocks that I think so many people have embraced

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Speaker 3: this year based on this idea that there was a

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Speaker 3: longer term structural story in a lot of those names.

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Speaker 3: How does that change if at all?

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Speaker 2: Well, I mean, I don't know if you're referring to

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Speaker 2: our ilk of stock. We're very focused on innovation platforms

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Speaker 2: that are evolving today, and they're not immune from recession,

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Speaker 2: but they are recession resistant, and they actually gain more

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Speaker 2: traction during tough times because they're better, cheaper, faster, more productive,

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Speaker 2: more creative in terms of new products and services. So

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Speaker 2: they gain more traction in tough times and then come

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Speaker 2: out of a period like this flying. That has been

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Speaker 2: the history in terms of strategies like hours that I

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Speaker 2: think we've paid our dues twenty one and twenty two.

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Speaker 2: Twenty one, our strategies were down just at the idea

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Speaker 2: that interest rates might move up, and then in twenty

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Speaker 2: two they were crushed because interest rates moved up twenty

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Speaker 2: twofold more than they ever have in history over little

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Speaker 2: more than a year's time, and so we've paid our dues.

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Speaker 2: I think the beginning of this year the markets started

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Speaker 2: to say, okay, inflation's coming down. It peaked at nine,

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Speaker 2: we're coming down, and we were coming down. We had

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Speaker 2: a great year through July and a little bit of

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Speaker 2: a setback as inflation fears picked up again. But I

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Speaker 2: think today's report is very important in terms of look

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Speaker 2: through there and see the price declines. You'll see a

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Speaker 2: number of them, and this idea that deflation is spreading,

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Speaker 2: I think is going to gain more currency during the

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Speaker 2: next few months.

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Speaker 1: And Kathy, to that point, you take a look at

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Speaker 1: the Art Innovation ETF currently up about thirty three percent

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Speaker 1: or so year to date. I want to switch gears

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Speaker 1: here and talk about what everyone wants to hear about,

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Speaker 1: and that is a potential US spot bitcoin ETF. I

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Speaker 1: know that you can't say too much about an active filing,

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Speaker 1: but when you think about the process thus far and

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Speaker 1: you think about potential timelines here, do you think that

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Speaker 1: we're going to see spot bitcoin approval spot bitcoin ETF

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Speaker 1: approval in the US by year end or is that

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Speaker 1: a twenty twenty four possibility.

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Speaker 2: Well, we're looking at a change in the SEC's behavior

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Speaker 2: first and foremost. You know, when we put in our

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Speaker 2: first few filings, they were rejected really out of hand.

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Speaker 2: We got no questions, we had no interaction. That changed

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Speaker 2: this year and the SEC asked some really good questions.

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Speaker 2: We know that the SEC, certainly on the research staff,

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Speaker 2: is highly sophisticated in terms of understanding what could go

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Speaker 2: right and what could go wrong. The questions were great.

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Speaker 2: We answered those questions. So that was a change in behavior,

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Speaker 2: and we believe other firms had the same experience. That

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Speaker 2: was a change and our deadline and where the first

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Speaker 2: in line, I would say, is January tenth. At that point,

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Speaker 2: this is the final deadline. Either they approve or they

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Speaker 2: deny what we think could happen. And I'll give one

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Speaker 2: caveat in a moment is that by that time they

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Speaker 2: will prove, but not just one, it will be a

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Speaker 2: number of us because they don't want to pick winners.

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Speaker 2: So the caveat here is the gray scale is out there,

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Speaker 2: and there was some thought that the SEC would allow

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Speaker 2: Greyscale to convert from a grant or trust bitcoin to

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Speaker 2: an ETF. Now, I don't know if that was Greyscale's

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Speaker 2: thought or conventional wisdom. There are rumblings that that might

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Speaker 2: not be the case. Greyscale is public in saying that

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Speaker 2: it will sue the SEC again if it is denied,

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Speaker 2: So I don't know if that would hold the timeline up.

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Speaker 2: But if that were not to happen, I think we're

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Speaker 2: getting close.

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Speaker 1: And so Kathy, just to make sure I'm understanding that.

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Speaker 1: So if Greyscale were to come out and sue the

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Speaker 1: SEC again, that could actually maybe delay the process before

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Speaker 1: that January tenth potential final deadline.

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Speaker 2: It may or it may not. You know, the SEC

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Speaker 2: may feel it is standing its ground and this is

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Speaker 2: These are the processes and procedures and Grayscale needs to

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Speaker 2: hew to them and just keep going. Or it may not.

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Speaker 2: You know, it is an uncertainty out there, and just

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Speaker 2: to anyone's guess.

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Speaker 1: And Kathy, talking about the ETF industry. In September, the

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Speaker 1: news came about that ARC was buying Rise ETFs. Now

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Speaker 1: that is a European based ETF business, and I've been

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Speaker 1: wanting to ask you this basically since I wrote up

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Speaker 1: that story. Why buy another asset manager to establish a

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Speaker 1: European presence versus just going out and launching ARC ETFs organically.

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Speaker 1: Well a couple of things. First of all, the reason

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Speaker 1: we did it was twenty five percent of our subscriber base.

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Speaker 1: Now we give our research away, but twenty five percent

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Speaker 1: of the readers are from Europe.

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Speaker 2: We can see that. And the number one question, probably

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Speaker 2: for the last five or six years is why can't

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Speaker 2: we Why can't you issue a use it's ETF in Europe?

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Speaker 2: And so we started studying that as a strategic option,

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Speaker 2: and we realized Europe is a very complicated market. There

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Speaker 2: is no way an American company, even a well known

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Speaker 2: brand in our space, can go into Europe and understand

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Speaker 2: all the cultural nuances, all of the regulatory nuances, especially

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Speaker 2: because sustainability in Europe is so important, and they have

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Speaker 2: Article nine Article eight their categories, and many companies that

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Speaker 2: declared themselves Article nine, so you know they were at

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Speaker 2: the top of the heap in terms of sustainability. They

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Speaker 2: seventy percent of them had to downgrade to Article eight.

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Speaker 2: So there are regulatory nuances. This company rise now our

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Speaker 2: Europe same DNA as ARC very thematic in their focus,

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Speaker 2: very futures oriented. They selfish index their funds, so these

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Speaker 2: are index strategies, but they know their stocks unlike another

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Speaker 2: index manager. Very often they won't know what's in the portfolio,

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Speaker 2: or if they do know, they won't know the management teams.

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Speaker 2: This one is different and very similar DNA and did

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Speaker 2: very well through the sustainability downgrades. Not one of their

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Speaker 2: funds was downgraded in that way.

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Speaker 1: All right, Kathy, always enjoy speaking to you, really appreciate

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Speaker 1: your time today. That is Kathy would, of course the CEO,

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Speaker 1: co founder, CIO of ARC invest