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I do think there's been a lot of uncertainty, geopolitical uncertainty especially. So it seems as though there is a barbell strategy going on here, which is equities to take advantage of lower interest rates and potentially the economic environment uh that that I just mentioned. Uh and then gold just as a hedge uh it seems to me and and the same has been true of crypto assets.
uh they are much more volatile than gold but they have also done well over time. Uh so I think I think this really is a barbell strategy. Kathy begins with what she sees as the brightest spot in today's environment policy changes. She highlights a wave of deregulation particularly around crypto and artificial intelligence.
For the first time, there are official government zars for both areas, which indicates growing recognition of their importance at the highest levels of policym. But beyond headlines about tariffs and trade tensions, Kathy points out something far more significant. A provision in a major policy bill OB3 that changes how companies account for investments in structure.
Well, uh, we think a lot of good things are happening from a policy backdrop and and therefore ultimately a macro backdrop. The deregulation that we're seeing is stunning. It started with crypto and AI. We have a crypto and AI ZAR now. Uh, and I think what many people uh have not paid enough attention to, mostly because tariffs have been getting all the headlines given how chaotic uh they seem.
But in OB3, so the one big beautiful bill, uh there was a tax policy measure that we're not sure uh has been integrated into many forecasts yet. Uh and it has to do with uh depreciation, moving uh from depreciation to full expensing of structures. That has never happened before. manufacturing structures uh for the next three years in the first year uh they go into service uh they will be able to expense fully in that year as well as equipment uh domestic R&D and software so music to innovations ears I would say I think we're going to have a boom in economic activity that first one the manufacturing structures is just for three years the other ones have been made permanent.
And so this takes our effective corporate tax rate in the United States, not statutory, that's still at 21, but the effective tax rate for the next three years at least, is going to be roughly 10%, one of the lowest in the world. So I think we're in for some very good times. We think we're moving from a rolling recession into a recovery and then into a productivity driven boom in activity.
Okay. So, you mentioned fiscal policy. I want to get your take on monetary policy as well because your fund feels like it's inversely correlated with rates. You get a big boost from lower rates with those tech holdings, those innovation companies. How far down do you see interest rates headed with an incoming Fed chair who will be probably much more aligned with President Trump's goal of lower borrowing costs?
Well, first of all, uh Katie, if I could um if I I think that was Katie or maybe it was Scarlet. It was Scarlet. Okay, Scarlet. Uh I apologize. So, uh if you look at our uh performance in 2017 and 18, so when interest rate fears were rising and then interest rates rose, our uh portfolio outperformed in both years significantly.
And 2018 was a down year. We were up. So I I just I know that COVID the boom bust around that time period got a lot of people thinking okay inversely correlated to interest rate. Historically that has not been the case. Uh so just wanted to make that comment. In terms of uh the Fed, uh we do think interest rates will continue to come down, but if we're right, uh in in 2026, at some point, it will be clear we're moving into a productivitydriven boom.
What does that mean? Productivity is one of the most potent anti-inflationary forces. This is uh this is regonomics. It's deja vu. And you'll see back then in the 20 years that ended in the tech and telecom bubble, real growth was very strong. And during those moments in time, inflation came down uh to surprisingly low levels.
And we think that's going to be true next year as well. In fact, we would not be surprised to see inflation well below 2% next year. Um Kathy, with that said, you know, I think a lot of people are slightly worried about inflation, but really just, you know, interested in a hedge. I showed in the flows that every week this this year, it seems like gold has been in the weekly flows in the leaders.
GLD in particular is on its way to a record year and even IAU is in the top seven. I mean, there's just so much gold buying along with this sort of rosy economic and stock market picture. Why do you think people are buying so much gold? What's your take on that? Well, I do think there's been a lot of uncertainty, geopolitical uncertainty especially.
So, it seems as though there is a barbell strategy going on here, which is equities to take advantage of lower interest rates and potentially the economic environment uh that that I just mentioned. Uh and then gold just as a hedge uh it seems to me and and the same has been true of crypto assets. uh they are much more volatile than gold but they have also done well over time.
Uh so I think I think this really is a barbell strategy. I do want to talk about crypto. You think about gold transitioning into crypto for a lot of people that's digital gold. When it comes to some of the investments that you're making, Bloomberg News has reported that you could be one of the backers behind Tether for example in a major funding round.
Is that correct? Is ARC backing tether? Uh we can have no comment on that. So uh uh so that's what I'll say there. I will say you'll see that we have uh we have backdats and and circle. So we're very well exposed to uh this crypto cycle. We think stable coins generally and of course tether and circle have 90% of the uh stable coin market.
Now we think that is a very important entree. The holders of stablecoin will have an entree into the defy ecosystem. So decentralized financial services uh that will now take place on public blockchains. So uh we think that's uh really the definition of the next generation internet. It's the layer of the internet that was not built early on because in the late 80s early 90s no one expected financial services to take place on the internet.
So finally finally uh 30 years later we're getting the layer of the internet that is going to enable. So Kathy you mentioned DATs. Uh ARCW has a big holding of Tom Le's Bitmine and Breera Holdings which is now Soulmate. I want to get your take on what you think of DATs versus ETFs. Why would DATS be a better way or a preferred way of investing as opposed to just in the coins themselves?
Yes. Well, one of the reasons uh we did not choose to invest in one of the Ether ETFs is at least as of now uh there will be they they will not be allowed to stake. Uh and we think staking uh for yield is a very important part of the Ether Ethereum story. um we were having a lot of trouble therefore getting access to ether uh in our portfolio.
So when uh Bitmine immersion came along uh we thought that would be a great opportunity after it sold off significantly following the burst. Uh we did take our position and uh same with Soulmate. uh we have a a lesser exposure to Salana but you know we now have exposure to the big three Bitcoin, Ether and Salana and we think all three are going to play an important role.
Kathy also comments on how digital asset treasuries DATs and ETFs fit into the competitive landscape. In her view, these are winner takemost markets. The companies or funds that move fastest and allocate assets most aggressively will capture the lion share of adoption. In the US, Micro Strategy has become the clear leader with its Bitcoin strategy.
While companies like Metaplanet in Japan are emerging in other geographies, another hot topic Cathy addresses is unusual trading activity around ARKs ETFs, particularly the ARK Innovation ETF. Leading up to certain IPOs, inflows into the fund balloon only to be redeemed soon after. Um, I would like to just come back to what Scarlet just asked because I I do wonder this.
Let's just go to the Bitcoin DATs, right? There's so many that have popped up since strategy and since the ETFs were launched. Why on earth would you buy a DAT over an ETF at 20 basis points? Well, uh I'm we have not uh bought a a Bitcoin DAT, so I I should be clear there. But Ether, yes. Salana, yes.
Uh staking, a big answer to that question. Um in terms of the the the Bitcoin ETFs, uh I think they are illustrating uh that or the Bitcoin uh treasuries, they are illustrating that at least in the treasury market for whatever reasons uh people choose to buy Micro Strategy, maybe it now is offering a yield curve with its debt strategy uh for Bitcoin.
So that's that's kind of interesting. Uh so but these are winner takemost uh uh opportunities. We think that uh the the companies that uh uh um uh allocate assets to these uh uh new instruments that the the the one that moves the fastest the most aggressively is probably going to win the lion share.
Maybe it's geographic. I know MetaPlanet in Japan has done well, but Micro Strategy is king of the hill obviously here in the United Kathy, I want to focus in on two of your funds, the ARC Innovation ETF and ARCF because there's been some really interesting trading over the past month or so, specifically around IPOs.
I look at ARK, for example, ahead of the CLA IPO. You saw your fund AUM balloon by 3.5 billion, a real surge in share creations which were then redeemed in the days that followed. It's been theorized that this is basically a way for whoever's behind the trade to get exposure to shares of the IPO uh in a sort of roundabout way.
And I know you've addressed this before, but does ARC know who is behind these huge trades? Uh no, we don't. uh uh but we do think a as you say Katie that uh they are solely that the the the surges are solely to get into whatever the IPO is. Now what happened is circle uh we were a cornerstone investor $50 million and you saw what happened to that stock uh saw no such activity around that that particular IPO.
However, it seemed to give I'm going to say market makers and others uh uh the idea that wait a minute, if ARC can get a big uh allocation to these IPOs, maybe we can benefit uh by anticipating which ones they will uh get and choose to participate in. Uh so they've been doing that. We're seeing that.
But uh it does take a bit of guesswork and we don't participate in every IPO. Uh so I don't think I I think uh that they'll probably um be a little more judicious in doing this uh going forward because I think some some of this trading has caught them out flatfooted. Yeah. Yeah, that's a good point there that it does take some guesswork.
You want to be right when you're moving this amount of money, but help me when it comes to the the structure of this and how much say ARC has when you see a big trade like this coming through. Is ARC in a position where it can reject the trade from the authorized participant? Uh no, we can't. We we just uh you know, one of the most wonderful things about ETFs as a portfolio manager is I don't have to worry about flows.
With mutual funds, the portfolio manager has to worry about flows. But the market around us uh facilitating ETFs, market makers, authorized participants um it it's fantastic. They handle all of the flows. They're using all kinds of instruments and we don't have to worry about it. So, you know, I I don't bother about it.
But does it bother you in general? Is it a problem for you that certain investors might be undertaking this strategy? No, it doesn't. It's this is what makes a market. Uh, and if they guess right, great. If they don't, well, then they have nothing. They've they've incurred some cost. She emphasizes that ARC has no control over these flows.
One of the advantages of the ETF structure is that authorized participants and market makers handle them. For ARK, the focus remains squarely on portfolio management while the market ecosystem manages liquidity and demand. Though some might see this trading activity as problematic, Kathy views it as part of what makes markets dynamic and efficient.
If traders guess correctly, they benefit. If not, they incur costs. Either way, ARC stays focused on its mission, backing innovation and capturing long-term value.
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