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- [00:00]
Alex
Is AI really holding up the stock market and what happens if it fails or stalls? Let's talk about it with legendary strategist Tom Lee, the chief investment officer at Fundstrat Capital, who's here with us in studio today. Tom, great to see you. Thanks for coming down.
- [00:16]
Tom Lee
Great to see you, Alex.
- [00:17]
Alex
So I want to start just by testing this truism that people have been saying about AI and the stock market for a long time, which is that the only thing holding up the stock market is the AI trade. You're somebody who looks at this all the time. It's. Is that true?
- [00:31]
Tom Lee
It's true and it's not true. For instance, if you measure it by net income contribution, it's pretty broad based. The financials are growing earnings very strongly this year. Banks, Yep, banks, industrials are contributing a lot to earnings growth. Of course tech is, and tech is a big contributor. But not 100% of tech spend is AI. A lot of it is maintenance capex and expansion capex and the catch up for spending that's been deferred because of COVID et cetera.
- [01:04]
Alex
A lot of the capital expenditure that we're seeing because we see that big tech alone, the Magnificent Seven alone is going to spend something like $350 billion in capital expenditures this year. A lot of people say it's 350 billion in AI spend, but what you're saying now is it's a little more nuanced than that. Some of it's AI spend, but some of it is just keeping up what their operations are relying on.
- [01:26]
Tom Lee
Yeah, but as a narrative, AI makes sense that it's a US story because most of really there's only two places where AI innovation is taking place is the United States and China. In China we don't have that many direct investment plays there. If someone is looking for reasons to be overweight the US it is AI. But that's different in my opinion than AI is driving the stock market. It's driving the narrative, but it's not necessarily driving the market.
- [01:56]
Alex
How much of the stock market is driven by narrative? We're going to have some people here who are very familiar with investing and some who are more on the tech side just for the broader audience. Is the stock market a story driven thing or is it totally based off of the fundamentals and the numbers?
- [02:17]
Tom Lee
So let's say do approximate percentages. Let's just say that there's two ways to value markets. One is the underlying earnings and the second is the expectations of either how good the existing numbers are or how much they can grow. In other words, that's all. The narrative part is essentially valuation. To me, the adage in the stock market historically has been it takes a whole lot of EE to offset PE, meaning that earnings can move 5% or 10% versus what you thought. But the reason the stock might go up 50% is more because of narrative. I think that in a very simplistic sense, narrative drives stocks more than earnings do over the intermediate term. We can see it in stocks that essentially have turned shareholders into customers. Stocks like Tesla or Palantir defy people's fundamental understanding of earnings because the valuation of the stock relative to its earnings seems far greater than someone can explain. But that's because these have really compelling narratives.
- [03:38]
Alex
Right. With earnings, we're talking about profits.
- [03:41]
Tom Lee
Yeah, Alex, I might be forking here.
- [03:47]
Alex
Fork away.
- [03:48]
Tom Lee
I believe Tesla and Palantir and stocks like hims are proof that money is not how you measure the value of a stock. Because if money is determined as the earnings per share, the value of a company isn't just the amount of money that it represents. It really represents a customer's trust in the actual business model. That's where PEs can actually be much higher, even for a level set of earnings.
- [04:21]
Alex
I'm going to go now, now that we've had this discussion about what creates a value, I'm going to go back to my original question, which is, how much is AI responsible for where the stock market is? Because I asked you that question in the beginning and you began by saying, well, we're seeing earnings in banks and other places in the economy. But as far as the narrative goes, that's all artificial intelligence. And if we go back to 2022, we're in a place where we were seeing runaway inflation. I don't know if it was slowing growth, but people were talking about stagflation as if this was a thing that could persist. We had the Fed raising rates, making the economy with the intent of slowing the economy down, and then incomes. ChatGPT and what happened since then? I think the s and P500 is up, what, 50% since then. With that context, I want to ask you again, how much is AI responsible for where the stock market is today?
- [05:14]
Tom Lee
Yeah, again, I'm going to point out it's the narrative that's really what people talk about. But it's not even what's not necessarily driving share price gains. A few stocks have, of course, done very, very well in terms of share price gains. But the reason I'd say it's not necessarily. The thing driving the stock market is that there's other narratives that do drive multiple expansion. For instance, if we had this AI story, but we thought the Fed was going to continue to tighten and actually reduce monetary liquidity, then we wouldn't actually have a rising stock market. I don't know if AI could power through a Fed that would be trying to kill the economy, or if oil went to 300 because of some geopolitical event and was at a sustained level. And so we had a recession. I don't know if we could have a market doing well. And as strange as it sounds, I think it would be tough for the AI trade to work just because cost of money would be so high or you'd have a lot of companies getting super cautious, and then AI would be forking and developing somewhere else outside the US So the answer is narratives drive prices. But AI isn't the only story in the stock market.
- [06:53]
Alex
Okay, when you said yes and no, I think the answer that you're giving is actually no, that the AI story is a nice thing that's happening on top of a bunch of other positive things. For instance, the Fed becoming more dovish and making these moves to lower rates, earnings actually increasing across the broader economy, not just in big tech. And so then maybe artificial intelligence, this idea that this move moment could lead to real productivity gains, that just gives it an extra boost on top of the other things that are happening.
- [07:28]
Tom Lee
Yes, AI is part of the narrative, but there's a lot of the narrative for the markets. I do think one of the reasons, let's say that a lot of your viewers are bearish, and they're bearish, and they've been trying to expect the stock market to go down, or maybe they sold stocks in April. Then they're like, well, the only reason markets are going up is AI And I think they're already overvalued. They're missing that. There's a lot more to the narrative of the S and P that explains why stocks are doing well. That's why AI is important. But it's not the only story in the stock market.
- [08:06]
Alex
Just as we sat down, you had mentioned that we've seen a black swan event every year since 2020. Covid, inflation, the list goes on.
- [08:18]
Tom Lee
Yeah, we had Covid, which was 2020. Then we had the bullwhip supply chain effect, which is that we shut an entire economy down, then reopened it, and all of a sudden people didn't have visibility through the entire chain. So there was a lot of double ordering. That bullwhip typically bankrupts and creates cyclical swings. But we didn't have that, which is amazing. Then, as you said in 2021-2022, the fastest surge in inflation almost ever. Right. This was almost exactly like the 70s then. The fastest rate hikes in history. Four of four of those events should have caused a lot of companies to fail or earnings to decline. S and P earnings grew that entire period. And then number five was Tariff Liberation Day. Because that was essentially like the Cuban Missile crisis of our generation. Right. Like the entire world was held hostage to a singular decision, and yet many people predicted recession. Remember, all the economists suddenly said 60% chance of recession.
- [09:28]
Alex
Right.
- [09:28]
Tom Lee
And then a lot of people said, well, set your clock. In 30 days, inflation's going to go through the roof or you're going to have good shortages. We're now well past 30 days and inflation's been tame. There hasn't been any shortages, and companies are raising earnings estimates. That's the fifth black swan. All of these before they happened, we would have said the S and P should go down, it should be a bear market. And none of these have actually led to a sustained bear market.
- [09:54]
Alex
By the way, it's interesting that all of them are supply chain related.
- [09:57]
Tom Lee
Yes.
- [09:58]
Alex
What does that say?
- [10:00]
Tom Lee
Well, something to keep in mind is the s and P500 is a lot more sensitive to the manufacturing economy. Even though we say the US is a services economy and most of what we do is services. Actually, most of how S and P makes money is actually, as you said, it's through the supply chain.
- [10:21]
Alex
But is it manufacturing in the US or is it there are companies that will effectively create the designs and then outsource the manufacturing to places like China.
- [10:33]
Tom Lee
Well, see, in that sense, it's actually still a manufacturing economy. Technology is a manufacturing economy because you have to turn things into silicon and then build data centers. So it actually is a supply chain.
- [10:51]
Alex
So it doesn't matter. It's a manufacturing economy, but it's a global manufacturing economy.
- [10:56]
Tom Lee
Yes, that's right. Manufacturing is definitely not constrained by geography.
- [11:00]
Alex
Right. Okay. And then that's why supply chain is so important. Because if you're so reliant on stuff moving back and forth, then if there's a hiccup in your supply chain or if you increase the cost of shipping from one country to another like you would with tariffs, then you get into trouble.
- [11:17]
Tom Lee
By the way, most people may not realize this, but money has to move through a supply chain.
- [11:22]
Alex
Talk more about that.
- [11:23]
Tom Lee
Well, let's say that you're a Bank in Asia and then you want to move money to the United States, you have to move it through an intermediary and then from there it gets moved to another intermediary. So there's a supply chain. In fact, if you're a global bank, take Barclays or JP Morgan and you have money in, let's say Japan and you want to move it to the us you have to use an external intermediary to move the money. Banks can't internally transfer the money because it violates OFAC or FinCEN. If a bank has money in Chicago, a branch in Chicago, and they want to move it to Texas, they have to move it externally through the supply chain back into the bank. Otherwise you'd think, oh, they just do an internal transfer because it's all accounting and money is imaginary in a sense anyways. It's just digital. But they can't, they actually have to move it externally first.
- [12:22]
Alex
Okay, I think we're going to probably put a pin in this and then come back to it when we're going to talk about Bitcoin later in the conversation. The reason why I brought up these Black Swan events is I want to run an idea by you that's come up in some of the discussion around artificial intelligence and tech. And this idea is that if AI progress stops or collapses, that could be a Black Swan event because you have the valuation of some very big companies being held up on the expectation that AI is going to work. Nvidia, Microsoft, well, not Apple, but Meta has definitely played their Alphabet is getting, I think probably, well, maybe mixed reviews on AI because it threatened search. But a large part of what people call the MAG7 has had a valuation bump because of AI. And then you think about the private funding. I mean, SoftBank is in the middle of, we think this 40 billion. They're going to deploy a trillion into AI, 40 billion into OpenAI. And a lot of this is based on this expectation that AI will do people's jobs and become the equivalent of human beings in many different disciplines. If that doesn't work out, then the bet, I don't want to say goes to zero, but doesn't work out. There are probably a lot better ways to put that money to work. Is it possible that an AI stall leads to another Black Swan event or is that overplaying the AI story?
- [14:01]
Tom Lee
I can picture some black swans driven by AI. AI could create a black swan if it's too successful because it's going to create PhD level workers at a cost that breaks all economic models. I mean what is the value of our work if something that is not us can do it better? And then if it's combined with like a robot, then it can complete all tasks and never tires, never needs vacation. It'll outperform every human and in that world. And of course if it gets sentient, then it really is a threat to like our modern civilization. Or it could even make the definition of money unimportant because robots don't care about money. Right? So that I think is like one black swan outcome is that it's terrible. But what's the percentage? Of course, you know, guys like Elon Musk and a lot of the books written about this, like the coming wave, put the odds low because humanity hopefully intervenes. The second way that you've described the setup is that the bubble bursts in AI. I think that's going to happen for sure. Wireless and Internet already give us the template because wireless was an exponential growth industry from 1990. The growth didn't slow until let's say 2015. It was one generation, 25 years of compounding growth of 40%. The wireless ecosystem from infrastructure, handsets, software, carriers, the towers all peaked 1/3 into the cycle relative to the S and P. So they all became market performers. They peaked all at the same time. Nothing will break away. But then 10 years into the cycle, two groups broke out of wireless and captured the value. The tower industry, which was like a 10 bagger relative to everything else, and Apple, which was late. Apple was only a second chapter wireless story. So to me the AI story is everything's going to peak at the same time probably 1/3 into the cycle. But then in that period of consolidation and shakeout, then one or two industries truly pull away and capture the value again.
- [16:42]
Alex
What does that shakeout look like? Seems like it could be ugly.
- [16:45]
Tom Lee
Yeah, it's going to be. Well, we know that you have to create capital loss for investors like the Internet bubble bursting. When the Internet bubble burst, it only triggered a mild recession. That was in 99 because the loss was concentrated in tech mainly and some telecom. And it really hit some geographic regions. Very specifically. The reason we had a bigger recession after that was because of 9 11. But it really would have been a mild recession. That's why the GDP data was fine. And actually 90% of stocks were doing okay. In fact, small mid caps actually positively gained during that period of time because the Internet bubble bursting didn't take down the economy. I think if the AI bubble bursts, you're not winding the clock back to zero, but it may have Burst because it may be bursting because someone decides to do containment, like pull the brakes on this and saying, like we're too close to generative AI or we're too close to sentience.
- [17:52]
Alex
You mean artificial general intelligence?
- [17:54]
Tom Lee
Yes. Sorry.
- [17:55]
Alex
Do you think that this industry is even capable of pulling the brakes? I don't.
- [18:01]
Tom Lee
I think people are going to have to make some decision because you're right. I think AI safety, like if we look at employment and AI safety, I think it's 1 less than not even 1% of all jobs filled. If you look at the financial industry and say classify a job as safety, it's more than half of the jobs is safety. So the AI industry has to invest in safety. But you're right, there's zero incentive for safety right now because the financial industry.
- [18:32]
Alex
Doesn'T have an open source version of finance that's trying to build the same thing and give it away and it's keeping pace with their innovations.
- [18:41]
Tom Lee
If we did a simple thought exercise and said, if you want to train morality of AI using Internet, it's going to be the most unmoral entity ever because it sees that to gain and win has nothing to do with integrity. I mean, if you trained AI on the Bible, for instance, you would raise a highly ethical entity. So I think that's what we have to sort of fork as a society. How much sentience do we want something to have that actually has no moral guardrails? Right, right.
- [19:20]
Alex
So the other side of it is, like I mentioned, maybe the technology doesn't work as planned and doesn't get to this part and that I think it could mirror that same thing that you mentioned with wireless, where there were expectations of the technology that weren't going to come to fruition until a decade later. But when you start to see that when you're one third of the cycle, you peak, then how do we know that we're one third of the cycle in with AI?
- [19:46]
Tom Lee
I think I can give you some guidelines that I saw in the late 90s that maybe we can just say roughly use it again today. In 1997, I wrote this report called the Mobile Data Report, which was actually the first report that Salomon Brothers ever produced about how the wireless industry could actually replace computers. It's like mobile data, what you could be doing. We ended up companies like WorldCom use this report to do their wireless strategy. But we thought mobile data could be a $40 billion business by 20. I forget 15 years out, so 2010 or whatever, it turns out that mobile data turned out to be vastly bigger. But the stocks didn't do that. Well, actually the companies that captured mobile data was like Meta, which didn't even exist in the 90s. It was Omnisky, that was the company in the 90s and PalmPilot, but they ceased to exist. PalmPilot would have been the first iteration of an iPhone, I think today. Back then, what I noticed was people had to play with their models to justify valuations. Cost of money had to go to like 5% and then the terminal PE or what you call the terminal multiple was higher than the best stocks we're trading at today. So you had to re rate the entire industry to justify the valuations. You knew that someone was going to take a loss because these are unrealistically funded models. Nvidia is not crazy today because it's 30 times earnings, which is not a premium. Toyota traded at 40 times earnings for years in the 90s. Just making cars. Nvidia is not making a car. They're making a really difficult to replicate chip. I guess we're not there yet, but you'll know because everyone's having to fake their model to explain why they're still buying the stock.
- [21:59]
Alex
But let's talk about the private companies. I know it's private, so everything is different in the private market. But OpenAI is in the middle of this. We know they're at least getting $10 billion, maybe 20, maybe 30, maybe 40. They're losing. They lost 6 billion last year. They're probably going to lose money this year. They're not going to make money according to their projections till 2029. Now if they work and they reach AGI, great. If they don't, what happens?
- [22:25]
Tom Lee
Yeah, well, fortunately, let's say that OpenAI and the peer group collectively isn't multiple trillions, but it is nearly a trillion. Ultimately, when we get to the peak evaluation for all these things, it's not that different than what happened when the Internet bubble burst. Fiber industry really required consumed so much capital. I don't know if you follow the clecs back then, but they were digging up rail lines, digging up cities to lay fiber. And then people said after the Internet bubble burst, there's so much fiber, we're never going to use any of it. Like we have so much excess capacity. But after the bubble burst and fiber prices collapsed, a couple things happened. The second owner of a hotel made money. So the people who ended up owning these. And then because you lowered the price, there was a lot of innovation. It created travel companies. Expedia wouldn't exist without Netflix, couldn't exist without collapsing fiber prices, although Netflix actually never paid for carriage, but Internet streaming became profitable. I think that will happen with a lot of code that it may be rerated, as you said, because it's so open sourced. I'm not making a prediction, I'm just saying that that's possible.
- [23:55]
Alex
So let's just talk briefly. One more thing. When we talk about this potential Black Swan event with AI and it's going to your first point of it becomes too successful. So you mentioned that, okay, if AI can do PhD level work, then basically people won't be able to make money working and society could fall apart. The story that the AI companies tell is that we'll have abundance and everybody will have exactly what they need. And you can have one person that will do whatever they want because they'll have these warehouses, data warehouses of geniuses behind them. So when you went to the Black Swan possibilities, you didn't take that side, you took almost the other position. Why is that?
- [24:41]
Tom Lee
Well, I think it's possible that it's exactly what you described, which is all of our needs are met without needing to work. So housing and food and, I don't know, a lot of recreational activities. It means the monetary system probably ceases to exist. I mean, because then, for instance, do you need to go to get an Ivy League education or do you need to be the best student in your class when your robot's always going to be smarter than the smartest human in the class? You know, like it's going to change what we define as achievement. Like why do we work hard? I mean, it is, some people might consider it nirvana because say the 10% of the people do aspirational, like they live their life aspirationally. When we grew up, not everybody wanted to be the best. But when you look at societal impact or in a company like at my former employer, which had 200,000 employees, the adage was always 20% did 80% of the work or really like 8% did 90% of the work. Right? Yeah, well, there's no incentive system for that anymore in a world of abundance. So I do think the consequences, money may stop mattering.
- [26:09]
Alex
And then if we're able to do whatever we want, then why wouldn't there be a situation where everybody gets everything they need? If money doesn't matter, sure.
- [26:18]
Tom Lee
But then stocks may not matter, you know, like, or what is a company anymore? Because it's not a group of highly skilled people and if it's a group of high skilled robots, well, Anyone can copy the code. So then there's no advantage for a company. I mean, it's actually probably like one of the. Some people might say that's a good. I think that would be kind of a very dangerous outcome.
- [26:48]
Alex
Okay. All right. I definitely want to talk about which AI companies are going to win and touch on a little bit about why the market has been so resilient and then maybe talk a little bit about Bitcoin. So let's do that right after this.
- [27:00]
Leah Smart
From LinkedIn News, I'm Leah Smart, host of Everyday Better, an award winning weekly podcast dedicated to personal development. Whether you're looking for ways to shift your mindset or seeking more fulfillment in your life, we've got you covered.
- [27:12]
Alex
You can build internal resources. That's what the study of psychology is about, building internal resources.
- [27:18]
Tom Lee
Turning towards is one of the most important elements of successful relationships, no matter what kind of relationship it is. The thing that underpins all of this productivity stuff is finding a way to make the journey itself enjoyable. The journey is the destination.
- [27:33]
Leah Smart
The beauty of uncertainty is infinite possibility.
- [27:37]
Alex
When you don't know what's next, you.
- [27:39]
Leah Smart
Don'T know what's next.
- [27:40]
Alex
And thus anything can be next.
- [27:43]
Leah Smart
Join me as we dive into captivating stories and research backed ideas that have empowered me and others to lead lives with more clarity and intention. Everyday Better. Making growth an everyday practice. Listen to Everyday better on the LinkedIn podcast network, Apple Podcasts or wherever you get your podcasts.
- [28:00]
Alex
And we're back here on Big Technology Podcast with the great Tom Lee, the Chief Investment Officer at fundstrat Capital, also the head of research at FS Insight. Tom, it's great to have you here. I've been looking forward to this for a while. Thanks. So I think that just to tell folks who you are, I see you on CNBC all the time. You're a CNBC contributor, as am I. And you have these amazing moments where you'll show up on Squawkbox and be like, The S&P 500 is going to go up what, like 1 or 2% tomorrow? And then it does. How do you know these things?
- [28:36]
Tom Lee
You know, it's a lot of it is evidence based because we do a lot of sensitivity analysis to try to understand where we are in market. So a lot of our statements that we make are high probability statements. But for that to actually happen is luck in a sense. Right? Because something that has an 80% chance of happening doesn't prevent this being one of those 20% days that it doesn't happen. So right because if something, let's say if something happens 90% of the time, and it's happened a million times, but the next three times it doesn't happen. So, like those three calls fail, statistically, it's still going to stay at 90% for accumulated history. So it is always risky to say something has a 90% chance of happening. But that's usually the reasons we make these kind of calls.
- [29:30]
Alex
And just quickly, at a very high level, when you're ready to say, okay, the S and P is going to jump and there's an 80% chance that's going to happen, what signals are you pulling from? Like you said, you're looking at the sensitivities and different evidence.
- [29:42]
Tom Lee
Yeah, well, a lot of times markets make big moves because of surprise. Today we're seeing it today with Tesla. But the reason there's a surprise is that in a general sense there's something that anchors the valuation of a company. Let's say it's earnings or this S and P. Let's say that what anchors it is the Fed's dovish. But then we worry about tariffs and recession. That's pulling down the market. You can always look for what will counter that argument of recession. For us this year was the high yield market. Because high yield spreads need to widen to 800, the spread over treasuries has to be 800 basis points. If the 10 year is at 4%, high yield would need to be at 12% to tell you that a recession is almost guaranteed. But high yield during the tariff turmoil only widened by 150 basis points or so, maybe 200, which is just a growth scare. If even the reason we stayed bullish into the April low was because high yield said the chance of recession is probably 10%, whereas the economists were saying it was 60. And we could tell by positioning in what stocks were selling off. The S and P, down 25% has priced in a 60 or 70% chance of a recession. That's how we can go on and say the market could make a full recovery. Because high yield is telling us there's not a recession and it's a better economist than economists.
- [31:27]
Alex
Okay, so it's just looking at some data points and being like, all right, if this is what people are doing in the bond market, for instance, then therefore we think that even if the headlines are afraid or the research reports are pointing to doom, then these signals show us a different path. It gets to the broader market here, like you mentioned, you were bullish in the April low, which means that when Just because I explained for our non finance listeners when the market went down and we were in full bear market or correction territory, your belief was things were going to come back. And they have come back. I think you mentioned to me that you said that investors, we've talked previously, investors were frustrated with the bounce because they're looking at everything and they can't figure out why The S&P 500 is actually positive for the year. And honestly sometimes I can't either. We're talking again. This is Monday, June 23rd. The episode comes out Wednesday morning, the 25th. We're talking literally in the aftermath of the US bombing Iran and the S&P 500 is up on a Monday. But the things that you pointed out where the Fed is still hawkish, people think inflation is high, oil could go higher and you said stocks have moved without explanation. What gave you the confidence to believe that we weren't going to see a deeper dip with the market and predict that it's come back? I think your belief is that it will continue to go up.
- [32:57]
Tom Lee
Yes, we do have a published history of our research so our clients can check, fact check us. But as the market was falling after Tariff Liberation Day, it was falling in a waterfall decline. And so we wrote very early that there have been 12 similar waterfall declines.
- [33:19]
Alex
What's a waterfall decline?
- [33:21]
Tom Lee
It's a stock market that falls more than 10% within. I think we did it as a two week period. It's really rare to basically like literally cause a plane to drop 10,000ft. And almost every waterfall decline is a V shaped bounce unless there's a recession. So that's why we got so keyed up on this high yield market. Because if we fall but we don't have a recession, that just means everyone just panicked. They did a fire ready aim and so we argued you would have a V shaped recovery. And a V shaped recovery is a symmetric bounce back to the old highs. And of course everyone argued against it for logical reasons. They said tariffs, they're not going to be solved for a year. The Fed's not your friend. The Fed is going to. There's no liquidity coming like in 2020, so you can't have a bounce. There can't be any fiscal stuff.
- [34:19]
Alex
2025, no liquidity.
- [34:21]
Tom Lee
Well no, in 2020 the Fed did.
- [34:22]
Alex
Like, that's when they said it.
- [34:23]
Tom Lee
Fed did a lot of QE and they're like there's no QE coming. But we said that history says you have a V shaped bounce, especially if there's no Recession, that's what made this so hard for people to accept because the Fed was hawkish and we still had a V shaped bounce. I think that's the real lesson. The Fed liquidity is a myth. You don't need Fed liquidity for stocks to recover. I'd say that's really my takeaway from the bounce. Then for this week. There is an old adage that when it comes to war, you sell the buildup into war, but you buy the invasion. Right.
- [35:06]
Alex
That's a crazy saying.
- [35:07]
Tom Lee
Or they say you buy when the guns fire. You know what I mean? But that's true. So we were advising our clients that you sell the buildup, but you buy the invasions.
- [35:17]
Alex
Why do people buy the invasion? Is it because when the buildup happens, you imagine the worst case scenario and the war doesn't end up in the worst case scenario?
- [35:27]
Tom Lee
Often I think the simple thing is it's pulling off the band aid. So you're more worried about how painful it is. But when it comes off, nothing's changed.
- [35:35]
Alex
What if the war is really bad?
- [35:37]
Tom Lee
Well, so here was our calculation, which I think maybe people would agree the US Wouldn't take action if they thought it would daisy chain into a prolonged war because there's no appetite. And Trump clearly said he doesn't want to pull us into a war. So if they're taking action, they've either signaled ahead to Iran that this is a limited action or they know that whatever action they're taking is decisive and limited in scope. So that's why I could see why you would buy the invasion. Right. And it' sy mean, who knows? I mean, there's a lot of signs that maybe we did help indicate to Iran it's limited because, you know, Iran had the trucks and the US Was aware of all these trucks moving material, but they didn't stop it. So it was sort of like, look, we don't want to topple the regime necessarily, but this, whatever, we're going to blow this thing up. And I don't know, I'm not a political expert, I'm just saying I can understand why we're rallying today, but to.
- [36:41]
Alex
Do this job well, you have to be, you have to game plan a little bit for like, or you have to get into the minds of leaders. The Iran strike is one example. Another example, of course, is what you just said about tariffs, which is that I think this idea that we would, if we have this like very quick descent in stocks that typically they bounce back without a recession, well, that assumes that effectively that Trump was going to take his foot off the gas pedal on tariffs. Yes.
- [37:10]
Tom Lee
So we also had been pretty clear in our client communications that he was going to walk back tariffs.
- [37:17]
Alex
So how do you make that determination?
- [37:20]
Tom Lee
Well, part of it is guess.
- [37:22]
Alex
Okay.
- [37:24]
Tom Lee
Because I don't sit in the White House and I'm, you know, I don't know what's happening, but I do know that we could look at the prior first term. And, and I also had some belief that outside of Navarro and maybe one other, there wasn't broad based support to try to reshape the entire economy around tariffs, especially because tariffs weren't legal. And so we were actually early in flagging that this was an unprecedented use of tariffs, which meant, and as you know, subsequently has been shown that it may not survive court challenges. So that's why we thought eventually there would have to be some dialing back.
- [38:14]
Alex
Just a quick aside since we've done a couple of forks. It is interesting that terrorists was the first moment there was some daylight between Elon and the administration that continued to build when it came to the big beautiful bill.
- [38:27]
Tom Lee
Yeah.
- [38:27]
Alex
Do you think Elon kind of, maybe this is a crazy idea, but do you think he kind of like jumped on the grenade and tariffs and like publicly bashed him, bashed them to sort of start a rollback, even if it meant the end of his partnership with Trump because they were too important for Elon's business to continue? Like the rollback was too important for Elon's business because of his partnership with China and the supplies coming in from.
- [38:54]
Tom Lee
Yeah, yeah, look, that could. You never know Washington, because you know what, there's a lot of misdirection.
- [39:02]
Alex
Right.
- [39:03]
Tom Lee
And so that's very plausible. What I would say is, I would say it's clear that the White House was enchanted with the idea of using tariffs. But they as much as they war gamed it and they thought how everything would react, all these other countries react and how the constituents react. At the end of the day, they no doubt had a off ramp too. And as opposition built, they chose to take the off ramp. It probably would have been wrong. And many did assume this is that Trump is going to stick with tariffs and that's it. Come on. No matter what happens to the world economy, it's kind of preposterous for people to have taken that stance. It would have made more sense to people to be up in their up in arms, but realize that he's going to have to have an off ramp. And you know, the ultimate off ramp is scapegoating somebody. And I think the ultimate scapegoat would probably be Navarro if they have to get a full off ramp of tariffs.
- [40:04]
Alex
So what's your view on what's going to happen with tariffs from here? Because there are some deals, but there are still some big tariffs that are being applied to the US economy. And we're in the middle. I think we're in the middle of one of our 90 day pauses. It's hard to keep track these days. So maybe things could go back on.
- [40:21]
Tom Lee
Yeah, well, I think Washington's used to a lot of this. Extend and continue to extend TikTok ban extending into perpetuity. You know what I mean? It's the history of Washington and even in finance there's the term pretend and extend. I mean if there's some event and you want to delay it, you just keep extending and pretending. So you're right. I would say no one should be up in arms if we have an extended pretend. So the threat of tariffs remains because at the end of the day he can do a different channel to actually implement tariffs. So there's no reason you lose leverage by extending it another 90 days.
- [41:02]
Alex
Are the US and China too interlinked to get into a serious trade war?
- [41:08]
Tom Lee
I would say there probably is a cold reality that if someone's trying to use tariffs to prevent China from making progress on AI, it's not going to work.
- [41:19]
Alex
But what about more broadly?
- [41:22]
Tom Lee
If anyone tries to use tariffs to harm China from gaining economic power, we know it can't work because its supply chains can move.
- [41:32]
Alex
What does that mean?
- [41:33]
Tom Lee
Well, it's. It'll be like whack a mole. If we're trying to tariff China, but then they move manufacturing to another country. Do we try to prevent that country from having economic access and close their borders? You know, I think at the end of the day, it' swe're trying to use the wrong instrument to cure a disease.
- [42:00]
Alex
Well, it's like the thing that happened with Apple. US Tariff China. Apple moved production, or really assembly to India because it was Foxconn doing the assembly there, the parts they brought in from China. So what do you think the right. I mean, look, what do you think the right move would be for the United States if they're trying to tackle some of the. I think, what is it? The power, the manufacturing that they're losing?
- [42:24]
Tom Lee
Yeah, well, you know, I think people forgot like, sort of like the conversation that was happening in the 2008, 9, 10 period when Apple was opening manufacturing overseas and Tim Cook or Steve Jobs said many times it's easier to open a plant in China than it is in Wisconsin because the EPA has so much power to prevent you from doing things. And there's so many regulatory hoops to jump through that it wasn't just the labor arbitrage. It was literally the ability to actually just build a plant. It's very difficult in America. So I think tariffs don't offset the regulatory burden that many companies face doing anything here. So really the best answer is make it easy for American companies to build. And that means reduce friction. Tariffs might be adding a lot of friction to the process.
- [43:26]
Alex
That's fascinating. Yeah, it makes sense. I mean, I think there's a balance. You want to take care of the environment. I don't think China has as big of a dedication to that as the U.S. does. But oftentimes you can put power in the hands of these bureaucracies and it gets abused.
- [43:41]
Tom Lee
Yeah. And so one of my friends was a private sector EPA lawyer and he passed away. But during that period of time I had several lunches with him and he says, tom, what people don't understand is the EPA can literally prevent any merger from happening because they can raise an environmental concern that has nothing to do with the actual business. And so you had basically enormous power wielded by folks who didn't necessarily care about letting technology stay in America. And it wasn't necessarily that it's polluting. It may be because the guy's close to someone who runs a garment factory, doesn't want the garment to go out of business. It's non economic friction. Today. Robots should literally make labor. Not the reason you can't do any production, because China. I'm sure you know more than me, Alex, but China's iPhone manufacturing advantage is they. They move huge populations of female workers to produce phones because they have the finger dexterity, but they can only work for 90 days because they burn out from the intensity. But robots now have the same dexterity. So that's not the constraint to be building iPhones in China.
- [45:07]
Alex
Yeah. I think when we talked about Black Swan of AI becoming PhD level, to me, I would say the even more near term labor concern is that robots are getting real good.
- [45:18]
Tom Lee
Yeah.
- [45:18]
Alex
And we are living in, I think probably the last few years where an Amazon warehouse will have a human picking an item out of something that comes to you via robot and then putting it in a bucket and then taking it out of that bucket and putting a label on and shipping it. We're going to hit a point where that's going to be completely automated by robots, whether it's humanoid or a human like hand that does that.
- [45:45]
Tom Lee
That's right. And remember, a robot gets paid the same salary in every country. It is a completely what I would call a fungible commodity. Right. It's not, there's no pay differences. So whoever can make a robot that does this is now exporting a global labor force.
- [46:07]
Alex
Yeah.
- [46:08]
Tom Lee
And of course that means you can bring a lot back to the US too.
- [46:10]
Alex
So my sense is that China is pretty far ahead on humanoid robots. When you look around the world, do you have a sense as to where these might come from?
- [46:20]
Tom Lee
Yeah, it's going to only be three, maybe four countries. It's China, usa, Japan and Germany. Now I would say over time there is going to be concern about the ethical safety of a robot. And that's why I think a western developed robot will be more widely adopted than a non US one, you know, because you never know if there's like a hidden like switch that turns it into murderer, you know, or one that turns it into spy, you know, a hidden chip, hidden code. So I think that's why arguably China's AI is way ahead of the US because they've had better surveillance and therefore their robots will be more intuitive. But then can you trust a million of these robots in America? You know, like, yeah, go ahead. I'm just like, I'm just, I'm not trying to be a conspiracy theorist. I'm just saying these are real issues.
- [47:19]
Alex
People are going to have to deal with.
- [47:20]
Tom Lee
Yeah. I think provenance matters, you know, because it's provenance. Is this like a sleeper spy?
- [47:29]
Alex
So this is my sort of crackpot theory of the case. But I think that we are underestimating when we talk about humanoids, how violent human beings will get against them. We just saw in LA there were this burning of the waymos. You can look at that at a bunch of different ways. I think it's being under appreciated how that is in some ways a symbolic revolt against automation and big tech. And if, let's say, okay, just putting this in a story context. You work in a factory, a humanoid robot comes in and takes your job. The next day you see a humanoid, let's say delivery robot walking down the street. You can't provide to your family anymore. You know, that thing has cameras on it. You don't care. You're tipping it over. At the very least. Yeah, there's going to be very, it's going to be, if this happens, it'll be the most difficult tech rollout we've ever seen.
- [48:25]
Tom Lee
Yeah, because you're exactly right. There's going to be a distributional consequence of a robot. So until we get to that world where someone says there's abundance, there's first displacement and yeah, if people are displaced and they can't be re employed and they're idle, why wouldn't they be angry? You know, so I. Yeah, it's the.
- [48:47]
Alex
History of the world.
- [48:48]
Tom Lee
That's what happens. Yeah, it could be organized sedition, like people could be trying to blow up robot factories or sabotage robot robots have to charge. There's probably going to be real estate where robots go to get charged. So that's maybe where people attack where robo taxis park, who knows? You're right.
- [49:10]
Alex
We've already seen it in some ways with the Teslas. Well, that's kind of totally unrelated. Let's look into your crystal ball for a moment and talk a little bit about what's going to happen in the near term with the AI wave. It is interesting. I've heard recently that there's a real dispersion in terms of where the gains are coming from in the Magnificent Seven in this AI moment. If you look at the companies that are up, you have Nvidia up 7% year to date, Meta up 13% year to date. Microsoft up 15% year to date, the companies that are down, Amazon down 5%, Google down 15%, Tesla down 15% and then Apple down 17%. And if you're trying to assess like, well, I mean, obviously it's not all AI related, but the ones that are up definitely have the better AI story. So do you think that we're going to see the Magnificent Seven sort of split off into the AI winners and AI losers?
- [50:07]
Tom Lee
There's definitely going to be winners and losers. Some of the loser categories will turn into winners, some of the winners will turn into losers. Because we were deceived because something forked. One name you probably didn't mention but should be considered an AI winner is Netflix. Well, one, because of course Netflix is probably using a lot of AI as a. Not necessarily a producer of AI, but it benefits from it. But it more reminds me of Domino's Pizza. The theme of the last 20 years has been there's been a labor shortage around the world and that's why wages are higher. You'd think staffing stocks should have done better, but stocks like Robert Haft have underperformed the S and P. If labor was a theme and you buy Robert Haffey lost money, but if you bought Domino's Pizza, you bought one of the five best performing stocks over the last decade. So it was better to feed the worker than to supply the worker. Netflix is more like a Domino's Pizza story.
- [51:13]
Alex
Interesting.
- [51:15]
Tom Lee
But Apple, for instance, is interesting because, I know, maybe it's derating because they think, well, they're not in front of robots and they're not in front of robo taxis and they're not leading in AI. But Apple might do what they did in 2007. They weren't cutting edge on making the first mobile phone, but in 2007, after the bubble burst, introduced the iPhone. And so maybe they'll wait for AI valuations to come down or the innovation curve to slow and then Apple gets the best and takes the lead. So I don't know.
- [51:53]
Alex
Now, I want to state for the record that this is not an investment advice podcast. Informational purposes only. So take what you're hearing and view it in that lens. But you've put together a very interesting ETF. It's called the GrannyShots ETF that allows investors to play on some of these themes.
- [52:09]
Tom Lee
Yes, that's right.
- [52:11]
Alex
Talk a little about that.
- [52:13]
Tom Lee
So, Granny Shots Ticker G, R, N, Y.
- [52:16]
Alex
Why is it called Granny shots? Is it a shot so easy that a granny could make it?
- [52:19]
Tom Lee
Or in a way, yes. It's named after the way of shooting a free throw. Unconventionally underhanded, popularized by Rick Barry, NBA hall of Famer. But the idea of a granny shot is that doing a granny shot is the correct physics way to throw a basketball. And that's why your completion percentage is higher. Rick Barry was 90% for free throws. So we decided that when we looked at how market performance was over the last actually, several generations, thematic investing explained performance better than macro and stock picking, meaning it's better to identify the things driving the market and own the strongest stocks. For instance, the Gen X trade, which I'm a Gen X, was just Internet. Buy Internet as a theme rather than try to buy a drug stock or something. At PE of 10, we constructed the seven themes that are the most important to the market. And then we find the strongest stocks in each. But a granny shot has to be a stock linked to two themes. Essentially, it's a 35 stock list. I look at it as these are the 35 most important stocks in the S and P. Forget the other 465. And since inception, Granny Shots has outperformed the S and P. Year to date at Granny shots is up 9%. Morningstar ranking. It ranks as top 3 percentile since the April low, it's a 1 percentile stop beating 99% of funds. So I think it's really proof that our approach to thematic investing, which is what fundstrat does. Granny Shots was originally a research portfolio for six years before we launched. It shows that if you know the most important themes anchoring ideas, you can outperform. And AI is only one of seven themes, which is why when we talk about is AI driving the market, I can point to many other things that have really been driving performance.
- [54:26]
Alex
Okay, now, before we leave, we have to talk a little bit about crypto. So you and I were both at this investment forum that Stephanie Link from Hightower put together. It was a great event, and there were a few things that you said that stuck with me, and we've talked about a bunch of them today. But one thing that you mentioned is you advised everybody to buy some bitcoin and that bitcoin has a lot of Runway left. I have said on the show for a while that I was skeptical of this web3 idea that you can build on top of the blockchain. And I'd love to hear your thoughts on that. But to me, I think that bitcoin running up to it's at 101,000 per bitcoin right now is pretty remarkable. The fact that it has surged even as a lot of the Web3 hype has collapsed. Maybe it follows that path that you were talking about as to things fall off after one third of the way through the cycle, but something ends up coming through. I wonder if bitcoin is like that in your mind, whether it is a thing that comes out and then, sorry, this is a long question, but let me just give you my thought on why we might be towards the top of bitcoin. And I'd love to hear your argument against it, which is that we basically have a president in the White House that is as pro crypto as you could ever get who's launched his own coin. We could talk about that another time. But basically the question is everything that bitcoin maximalists have want to happen has happened. It's now being traded by mainstream financial institutions. So why does it have opportunity to go up from here?
- [56:03]
Tom Lee
I think bitcoin's utility is going to go up exponentially in the next 10 years. So one of the reasons bitcoin has risen to 100,000 is just simple network value. When we first read about Bitcoin in 2017 and Bitcoin was under 1,000, we had said it could get to 25,000 by 2022 because it's a network value asset. So we just said if you model number of wallets and activity per wallet, which explained 90% of the move of Bitcoin from 2009 to 2017, you would get to 25,000, 2022 and you can get to the six figures later. And that's true. It's still like 87% explained by those two variables. But Bitcoin is now about to become a lot more useful for two reasons. One is it's becoming less regulatory burdened. The White House is really creating it as a strategic reserve asset and companies are putting it on their balance sheet because it's the way people used to have real estate owned in retail. That wasn't a thing. But then people realized it was valuable to own the real estate. Like some retailers are more valuable because they own the building. That's what bitcoin is your working capital is. But banks are also quite interested in bitcoin because of stablecoins. Stablecoins might be the Web3 app that's really recreating financial services. Because one, a stablecoin works better than a regular dollar.
- [57:41]
Alex
You don't have to send it through middlemen to transfer.
- [57:43]
Tom Lee
That's right. Now if you want to move billions and trillions, you just use the stablecoin market. It's proving to be more profitable for a bank circle. I won't comment its valuation, but as a net income or tether is a better example because how do you trust those tether people?
- [57:59]
Alex
You don't really know what's going on.
- [58:01]
Tom Lee
Well, that's where. See, this is where blockchain comes in. That blockchain has proven you don't need to know the counterparty. You just have to trust the code. And so tether from a net income basis makes more money than most financial institutions. I think it would be the third most profitable financial institution in the world. Wow. So what's a better bank? Right. What's a better financial services model is building it on the blockchain. So I think stablecoins is the killer app. That's proving because bitcoin anchors everything. Because you don't need a stablecoin unless you had bitcoin. So bitcoin and building financial services on top of stablecoins and financial services companies are getting it now. Even Walmart, Amazon want a stablecoin because it's actually quite profitable to have one. That you are changing the financial system through crypto.
- [58:59]
Alex
So bitcoin's not at the top.
- [59:01]
Tom Lee
Yeah. So if you Again, model this out and utility, because remember, stablecoins is only a $250 billion market today. So you realize that stablecoins collectively are the 12th largest holder of U.S. treasuries. They own twice as much as Germany, for instance. The US Government does, in fact, want stablecoins to proliferate because it's a guaranteed long. Stablecoins never have declining assets of US treasury markets and dollar dominance. Dollar dominance is only 27% in GDP terms, it's 88% in traditional financial market trading, 80%. It's 100% of the quoted pair in crypto, Dollar dominance is stronger in crypto. Stablecoin usage is only 20% in the U.S. almost 60% of stablecoins trading takes place in Hong Kong, China and Japan. So you can see that it's creating more demand for dollars outside the US.
- [60:07]
Alex
And then, therefore, bitcoin will continue to go up.
- [60:10]
Tom Lee
Yeah. Because bitcoin secures the entire blockchain.
- [60:13]
Alex
Okay, Tom, we got to do this again. I think we could spend a whole hour talking about bitcoin, but I'm so glad you came down here today and spoke with me in person. We're going to do a couple of webinars for your fundstrack community, which I'm really excited about.
- [60:26]
Tom Lee
That's coming up.
- [60:27]
Alex
Yes, that's going to be this actually Wednesday on the 25th, so the day this airs.
- [60:32]
Tom Lee
Alex, I'm really excited about it. I can't wait to do it.
- [60:36]
Alex
I'm definitely excited. We should talk about the killer robots when we're on there. Thanks again for this really insightful conversation about AI, the stock market, crypto and tariffs, all the things. So I definitely leave today much more, I think, illuminated on where things are going than I was before. So thanks again, Tom.
- [60:53]
Tom Lee
Great. Thanks.
- [60:54]
Alex
All right, everybody, thank you for listening. We'll be back on Friday with Ranjan Roy to break down the news. Until then, we'll see you next time on Big Technology Podcast.