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The S&P continues to move up, uh with earnings growth, uh and gold perhaps moves down. Uh and here, very nice very nice turn, Bitcoin to gold. Uh Bitcoin going up, gold going down. We've talked about the correlation between Bitcoin and gold. Ironically, Bitcoin's known as digital gold for its store of value characteristics.
Uh but the correlation one to the other over over the study we did was back to 2019 when institutions were becoming more interested. The correlation between the two is 0.1. No correlation. Recently, it's been a negative correlation. Uh so, we do think the turn is in here for for Bitcoin. Did you catch that?
Cathie Wood just said the turn is in for Bitcoin. The chart she's pointing at is Bitcoin against gold. Bitcoin going up, gold going down. This is ARK Invest's weekly show In the Know, recorded on employment Friday. She walked through the charts from a letter she wrote in the last 10 days, and the outlook is bold.
Real GDP growth much stronger than expected. Inflation much lower than expected. And interest rates still moving up, driven far more by real growth than by inflation. Now, watch what that does to gold. She says gold peaked the day or the day after President Trump named Kevin Warsh, w o r s h, as Fed chair, and it's been falling since.
She expects the dollar to head back to all-time highs, and she thinks oil could drop into the $30 to $35 range. I'll be honest with you. Most of this is macro, and Bitcoin only gets about 45 seconds of her time. But if gold keeps falling, that matters for the Bitcoin to gold ratio. So, her gold call is worth your attention.
The first clip starts with the dollar, then gold, then oil, and then a number on AI costs that sounds almost made up. 99.99% per year. Let's get into it. Dollar going up, and as I said, we think it will return to all-time highs on this basis. Um the dollar going up is a powerful anti-inflationary force, especially because most commodities are priced in dollars.
Uh here's the gold price. So, you can say the dollar is up near all-time highs and and that's good uh because commodities are priced in dollars. But, if you're looking at gold, uh our monetary policy in the last, I would say, it looks like uh 15-20 years has been very bad. Uh the dollar has lost a lot of purchasing power relative to gold.
Now, uh you see in green there, we highlight what the dollar did during Volcker's term and Greenspan's term. Uh and we have a suspicion, even though they did not say so explicitly, that they were managing monetary policy using uh the gold price as one of their prime indicators. Uh and uh when it went down, uh it they gave them more room to ease.
When it went up, uh they were more in a tightening mode. Uh as you can see, um the the gold price started going up, uh went up to its prior high um under Greenspan, and then he left office. And you can see since then, very bad track record. Interestingly, uh the the gold price peaked the day or the day after
that uh that President Trump appointed uh Kevin Warsh to be Fed chairman. Uh and it has been down since then. And we would not be surprised to see it continue to decline uh as as he gets uh this um this monetary policy under some kind of disciplined control um using price indicators. Uh here you can see the the oil price.
And we think that the oil price has levitated over these last 20 25 years um partly because of monetary accommodation, which is the same reason the gold price went up. Um but if we're right, uh the combination of uh disciplined monetary policy using more of a price rule like the gold price, maybe not the gold price, but like the gold price, uh and the fact that uh innovation, technologically enabled innovation, is is going to really put a big dent in the global demand for oil.
57% of oil uh consumption is for transportation. And we believe transportation is moving away from uh gasoline-powered cars and engines elsewhere and diesel-powered uh trucks to electric. Uh and so we we do believe that uh that the oil demand has been in the process of peaking ever since this uh transition started.
And it it started in earnest in China uh and Europe. Uh US is uh following. Um but uh we do believe that the oil price could drop into the $30 to $35 range. Uh and the reason we say that is you can see during the various crisis crises, it's dropped to that range. In fact, during COVID it had well below that range.
And so now uh this won't be a crisis. It'll be a technological shift that's taking it back down. And that certainly will help inflation expectations. Here's another thing that is going to impact inflation mightily. You can see the two learning curves here. The one in blue is for genomic sequencing. And just to give you what we've pictured here.
It's a It's a It's Wright's law in action. And it says for every cumulative doubling in the number of whole human genome sequence cost decline by 40%. That's the learning curve for genomic sequencing. For AI inference, the learning curve that's in black is much more dramatic. It gives you a sense of how much more quickly innovation is happening today.
For Oh, and on this basis we're not even using Wright's law. I'll give you an annual number. The cost of AI inference, so what it costs for Chat GPT to answer your questions. And this is at a fixed performance level. The costs dropping 99.99% per year. And And And so any Any activity that involves AI is going to experience significant cost declines.
Now, Jevons paradox would uh have have us believe and we do believe that as the prices for AI come down, for AI inference come down the volume will explode and the revenue growth, think Open AI, Anthropic, think SpaceX AI, and Muse now. Those the volume growth associated with those kinds of price declines is going to be explosive, and that's why we've seen Open AI's revenue go from 20 billion at that's the annualized revenue run rate at the end of last year to 70 billion.
They just reported, which surpasses the 65 billion reported for July for Anthropic. So, I'm sure Anthropic is higher than 65 billion. So, they are back neck and neck again, probably. But, despite those price declines and that the revenue growth is is exploding. We've never seen anything like this. And that's kind of a microcosm that we expect for the economy as a whole.
We expect that Okay, pause there for a second because that was a lot. Let's pull the pieces together. Cathy says a stronger dollar pushes commodity prices down since most commodities are priced in dollars. She suspects Volcker and Greenspan managed policy with the gold price as one of their main indicators, and she thinks Fed chair Warsh Warsh will use price indicators, too.
She sees oil heading toward 30 to 35 dollars as transportation moves to electric, and she says AI inference costs at a fixed performance level are falling 99.99% per year while Open AI's annualized revenue run rate is now 70 billion dollars after sitting at 20 billion at the end of last year. Her logic is simple.
Cheaper AI means way more volume, and that volume is how Ark gets to 7 to 8% real GDP growth. The IMF forecast is around 3% and she thinks it's drifted closer to 2.5. She says that disagreement is what makes a market. One more thing from the part we skipped and it's for the crypto crowd. On Ark's chart of 15 technologies, she said she wasn't sure there were any lines between blockchain and AI when it was first drawn.
Now there are and she credits agentic payments and agentic commerce. Next up is the bond market. She goes through the yield curve, the $40 trillion in government debt and why she thinks the recent rise in rates is mostly real yields with inflation playing a smaller part. If you've been told that debt breaks everything, her answer is different.
You can disagree with her and honestly, I'd like to hear where. If this is useful, hit subscribe and turn on notifications and tell me in the comments. Do you buy the deflation call? Yes or no? Okay, the yield curve. We went into an inverted yield curve and we think we were in a rolling recession. Uh certainly that's what housing, manufacturing, small business, uh lower income consumers, they were all in recession, but the economy never fell into a recession, which is very interesting.
And um maybe taking us back to uh the Industrial Revolution when the yield curve was inverted more than 60% of the time on average by 100 basis points. So, we shall see. Um And then yes, uh just to get a little bit at that, uh many of you who have been paying attention or tuning into uh In the Know know that I have been very intrigued by this chart.
I know it's kind of geeky, but I am a geek when it comes to economic statistics and the yield curve in particular. I was struck that during COVID or we did not as the Fed and and the government generally, governments around the world both from a fiscal and monetary point of view uh did uh they they put the accelerator to the floor everyone at the same time and yet we could not get back to that 200 to 300 basis point of steepness in the yield curve and I was thinking, okay, what does that mean?
Uh I think what it means and I I and this last turn down from we didn't even get to 150 basis points like we did during COVID as the yield curve was steepening. Um we got to roughly 75 and now we're down into the 40s. Uh what does this mean? I do think it means that uh Treasury yields are stiffing s- sniffing out some deflationary undercurrents out there.
In other words, that the inflation expectations inside the long-term Treasury and we'll go into that in a second, but those inflation expectations are pretty tame and maybe getting tamer. Um now that's not what's quite shown with um uh inflation as implied by TIPS, but uh yet but we think that's where this is going.
Um So uh let's let's do just a quick run through some of the charts. I know I've uh used a lot of time with the letter or a summary of the letter, uh but we'll go through a few charts here. I'll skip through some, uh but here's the deficit. Uh we're at mid-5% uh Besant expects 3% by the end of this term, this the the presidential term.
We think he's right and that's because we think nominal GDP growth will be a lot lower than people expect. And this is how we started turning things around in the '80s as well under Reagan. And then when we got into the '90s um even more so with Clinton. So stay tuned. This is um This is what people fear.
So they're worried. We We see in the headlines we're at $40 trillion of government debt now. This is terrible. It's above our GDP. Um and what we say is we we agree. We think there's too much government spending because government spending is taxation, period. Either now or in the future or through inflation.
So we agree with that. But we don't think the consequences right now are as dire as many would think. Why is that? Well, uh if you look at debt to GDP, you're comparing a balance sheet statistic with an income statement statistic. So what people would say a stock versus a flow. Um and and and so that's one way to look at it.
But there's another way to look at it more like for like. Debt to equity, both of those are balance sheet items. And you can see on that basis uh we're near nearer to the low in the context of this history than we are to a high. In other words, the wealth generation in this economy and the growth uh are are um are taking the edge off of this statistic.
Again, I agree with the sentiment that government spending is too high. And of course, the recent government spending is um in large part about defense spending. So, national security, I am for that. Uh but uh I do think government uh spending generally needs to be brought under more control. Um here is uh another again long-term chart.
Um you know, I think the reason the bond market and equity, everybody's a little confused, uh is because we went through 40 years when nominal GDP growth decelerated mostly because of inflation and interest rates followed. And now we're on the other side of this. Um well, I think this is good news. I know it's not good news for bondholders who don't like seeing um
you know, their their principal whacked. Uh but uh I I do think it's more uh a testimony of what is going on in terms of accelerating growth. And I think uh these few charts will show you. This is the 5-year Treasury yield. And you can see the real yield. So, broken down between inflation and real, you can see the recent interest rate move is much more a function of real yields than it is a function of inflation.
Uh so, you can see I find it very interesting. I know fixed in- income investors uh pay attention to every basis point. And uh of course, we in the uh in in the equity market probably are just more focused on percentage points. So, 100 basis points. Uh but you'd think some days that that as as fixed income investors and reporters are talking about uh
inflation implied uh in the bond market that inflation was moving out of control. Uh we look at this and say, "Okay, looks like the bond market market expects this 5-year inflation rate uh to behave pretty well. Uh sure, it's above 2% um but it's kind of been steady state for the last uh for the last few years.
Uh we actually think it will break down uh once these um once the impact of technology uh is understood more and more by the markets, its impact on on inflation. So, here's where that leaves us. Cathie Wood's call is stronger real growth, lower inflation, and rates that keep climbing on real yields.
Her read on gold is that it peaked around the Warsh appointment and could keep falling. She expects the dollar back at all-time highs on the Fed's trade-weighted measure and oil in the 30 to $35 range. And on Bitcoin, she says the turn is in against gold. To be clear, she did not give a Bitcoin price target in this episode.
Here's what I'd watch. First, headline PCE, PCE. Inflation now 3.4% year-over-year, a long way from 2% while she says private measures show core still ticking down. Second, the 6-month diffusion index that she says Warsh is watching. If it keeps falling, her case gets stronger. Third, credit. She flagged credit default swaps on the big AI hyperscalers moving up with investment grade and high yield ticking up, too.
That's the data point I'd track if you're betting on the AI growth story. This is one forecast from one firm, and Arc could be wrong. Do your own work, and this isn't financial advice. If you got something out of this, subscribe, hit the bell, and drop your Bitcoin to gold take in the comments. See you in the next one.
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