← The Master Investor Podcast with Wilfred Frost
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- [00:00]
A
I think we are in a new bull market. I think there's a lot to be excited about. And 2035 sounds about right. That would be a 10 year bull run from here. Fed independence is really important because the Fed is the single most powerful entity in the world, right? Because what the Fed says triggers an instant response across all markets and CEOs and policymakers everywhere, and even government. So that being independent is critical. I think the most important thing I'd emphasize is that when you're investing, you should really think of it more as you're buying companies, not just buying the stock market. Because then you'll have a lot more conviction about what you own.
- [00:44]
B
Welcome to the Master Investor Podcast with me, Wilfred Frost, where we celebrate and learn from the success of the greatest investors, business leaders and politicians in the world, giving you, our listeners, the edge. There is nobody in markets who has predicted the last decade more accurately and publicly than my guest today, Fundstrat Global Advisors co founder and head of research, Tom lee. He was JP Morgan's chief global strategist until 2014, but branched out to found his own company, Fundstrat, that year in part to try and reach more retail investors, something we wholeheartedly support on this podcast. So since then he's repeatedly put himself in line for criticism with bold market calls that have at times led to short term criticism, but almost always long term praise. His calls have proven correct and in the last year he's also launched an ETF that's already crossed $2 billion in AUM and more recently become chairman of an Ethereum treasury company. That's triggered an extraordinary rally in the price of Ethereum. All topics that we're gonna get to tomorrow. It is great to see you, especially here in person and welcome to the Master Investor Podcast.
- [01:59]
A
Yeah, I'm glad to be here. I'm excited for your series.
- [02:02]
B
Well, it's really a treat to have you. And I mentioned their fundstrap, which you founded a decade or so ago. I imagine you've got all sorts of clients, but one of your aims for doing it and leaving JP Morgan was to try and broaden the type of people you reach.
- [02:17]
A
That's right. We wanted to democratize access to institutional quality research, but really make it understandable because I do think historically institutional research was full of jargon and really difficult to understand. And I don't think it was that friendly for a dentist or my father to pick up. So when we started Fundstrat, we thought it was important to make sure we use plain language, make it really Straightforward and then not confuse people with like three or four different views, but just sort of stick to a thesis or a theme and let investors then decide if they want to act on it.
- [02:52]
B
And we're going to put in the show notes by the way, how people can subscribe. And you're also super active on X, the handles undstrat and well worth following. So you've basically, if we really step back, been bullish since 2011 and as I've said repeatedly on the dips, told people to buy even at periods of great market stress. And you know, we've been chatting on CNBC through the years where I've thought, gosh, how's he doing it again? And you've ultimately proven to be right on all of that. What stepping back do you think you have seen over the course of the last 10 to 12 years or what have you put more weight to than your rivals that has allowed you to get so much of that correct?
- [03:34]
A
I mean, I think it's a couple things, Wilfred. I'd say I think when it starts with our evidence based work we put a lot of weight into understanding demographics and then the role history plays like in each context. But I think it is one of the un really misappreciated things that demographics really explains almost every bull market since 1890 actually. So if you followed every generation, the gaps between the generations are really where the bear markets exist and the bull market tops coincide with the peak of a generation. So 99 was a peak of, of the boomers, 74 was the peak of, I think it was called the silent, the generation before the silent generation. Gen x peaked in 2018 and millennials will peak in 2035. So those are like rough waypoints for when actual major tops take place. I think the second thing that we found is investors as they age become wealthier but then they become more skeptical. And so most of the wealth in America is held by older people, including institutional managers. Right. They're over age 40. But the world in disruption is caused by young people. So I think investors tend to think their own wisdom drives the economy and it's actually they need to put on the lens of a 20 year old. That's what we do at Fundstret. We survey constantly. So we think about what young people are doing and they drive ultimately the markets and economy. And the third thing is I think we don't lack recency bias. Like we turned bullish at JP Morgan on February 2009 and we identified upcoming low that would look like 29 or.
- [05:21]
B
74, which was the following month, right?
- [05:24]
A
Yeah, it happened. Yeah. So we were a month early. So we suffered a drawdown, we'll allow you that.
- [05:29]
B
One month error.
- [05:30]
A
Yeah. But what was interesting is that people were skeptical because that generation of investors just went through the dot com bust and now the gfc. So they were now equity skeptical. So they couldn't imagine anyone would want to own equities for the next decade. But that bias is the reason why stocks can positively surprise. And even most recently, I think there's a bias now of people having a pessimism about inflation and pandemics because we did suffer through five years of that. But that's causing people to now be skeptical of the world because that's in their bias. And so I think we're judgment free that way. People call us permeables, but it's really more we're judgment free.
- [06:15]
B
So in terms of where we are right now, I mean you said 2035 there on the demographics. Are we very early in a new bull market? But we've obviously had a extended bull market already.
- [06:27]
A
Yeah, I think that's what confuses folks because I would say generally we've been up since 2020, but we've had two 20% declines since. So in fact this has been a really disrupted recovery since the 2020 lows. And so I think we are in a new bull market because we just had another essentially wipeout that happened February to April this year. I do think that the bigger story arc is that there is a big surge in US prime age workforce. That's the millennials and Gen Z plus they're inheriting a lot of wealth over the next 20 years which is going to be transformed into more equity exposure, less credit. The third is that the US is at the center of a lot of the major structural changes taking place. AI and now blockchain. But those are going to really boost financial sector which could re rate to 40% of the S and P. And then of course health care could benefit. I think there's a lot to be excited about. 2035 sounds about right. That would be a 10 year bull run from here.
- [07:37]
B
That's really interesting on those sector picks which I want to get into in a second. But sticking on the broad market for a moment in terms of the risks that are out there. And we've had Jeremy Grantham on, we've had Ray Dalio on, so we've touched on some of these. But are you not concerned about. Let's talk about the main one of the week, Fed Interference, for example, or if anything, does that spur equities Potentially, yeah.
- [08:04]
A
I mean Wilford, Fed independence is really important because the Fed is the single most powerful entity in the world. Right. Because what the Fed says triggers an instant response across all markets and CEOs and policymakers everywhere and even government. So that being independent is critical. I think that we're going to ultimately find that the administration does see to what markets rationalization is. And I think the markets don't want to see an a non independent Fed. So I'm going to lean towards the idea that Fed Chair Powell serves his term. But even if it's just noise now, it is just someone comes across as more not happy with policy but they're not going to interfere.
- [08:55]
B
Similar, I guess that the markets forced the hand after the tariffs a little bit. What about the headline debt to GDP aspects that we talk about a lot of?
- [09:06]
A
Yeah, that's a problem. I mean if you don't put governors in how spending takes place, then governments keep expanding the pie and we don't want to crowd out private sector spending. So I think there is a lot of negative implications for a budget deficit and then of course the debt burden that comes with it. But there are a couple things I would just highlight as offsets. One is that the US has a really big balance sheet that's basically valued at zero. If you compare the US they own a lot of assets that other countries have already privatized, whether it's the postal system or the, you know, in the US case even how they're valuing their gold holdings, national parks, land, resource rights. I think I've seen informal calculations. This does come into the tens of trillions of dollars. So the US is a lot less indebted than it looks. And the second, of course is that if the dollar's dominance is set to grow in the next 20 years, then this is not a problem. So it really comes down to whether dollars are being more accepted over time.
- [10:17]
B
Well, that's something for us to discuss, particularly as we get onto the crypto stuff. But just to put those two last questions together, is there a level of longer end rates that maybe more of a trading call as a short term call that makes you bearish on the stock market?
- [10:32]
A
Yes. So we look at the general relationship between yields and PE or risk premium, you can call any metric and it's not a linear or even exponential relationship. It's actually dynamic below 2% when yields are below, and this is pretty true with most countries, PE tends to actually decline the lower the Yields go because it's more of a deflationary environment. But between 2 and 6%, higher yields are associated with rising PE. Because I think that, and I've seen academic work generally somewhat higher, elevated nominal growth and even nominal inflation. 3% is good for corporate earnings because companies can out earn that cost of capital. So PEs tend to rise. So between 2 and 6% you'll actually have rising realized PE. So as yields get to 6, I actually think PEs would go up. But then after 6%, of course, you start to really crowd up private sector's ability to out earn the cost of money. So the PE should fall. So I think, yeah, I'd say between 5 and 6%, you know, you have to start derating the stock market and.
- [11:47]
B
I guess the chances of that, you'd almost expect the Fed, regardless of who's in charge, to kind of step in to prevent that for other reasons.
- [11:56]
A
That's right, yeah. I mean the Fed on the one hand will be printing, will be yielding a lot of money on their balance sheet from 6% rates. I mean, if the longitude is 6%, but it's obviously a huge debt burden to the economy. So I think the Fed would use balance sheet expansion to probably manage rates if they had to.
- [12:20]
B
Let's talk about some of the particular calls underlying the surface that you have at the moment. Just give us an update. For those that don't know you launched an etf, the ticker is grny. It's called the Fundstrack Granny Shots etf. You launched this in November, November of last year.
- [12:38]
A
Yes.
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B
It's 2 billion AUM.
- [12:40]
A
It's 2.4 billion. Wow.
- [12:42]
B
Amazing. Amazing. Sudden growth. Give our listeners an outline of what's in the etf.
- [12:49]
A
Well, the Granny Shots etf and it's called Granny Shots. It's named after a way of shooting a free throw in basketball underhanded. And the idea is that an underhanded free throw has a higher probability of being a successful shot because it's the best physics move. But it doesn't look cool. Our research launched the Granny shots portfolio in 2019 as our best ideas list. The way it was constructed is we said that the S and P is essentially driven by a handful of companies tied to the most important themes. At that time, we identified the themes as AI, labor shortage, cybersecurity, monetary policy, tilting, ISM tilting, millennials, things that we know are actually logical. And we said in order for a stock to be included in that list, it had to be tied to two themes because we figured Two sales means that you can catch the wind from two different directions. And it worked really well for six consecutive years it outperformed the market so we decided to launch it as an ETF last November to make it available to the public.
- [14:05]
B
And what's the performance been since November? It's shortish term but well year to.
- [14:10]
A
Date Granny Shots is up around 18% so it's outperformed the S and P which is up around 9. Morningstar ranks it as top 2 percentile. So out of the 1490 large cap active equity funds were top 30.
- [14:28]
B
And I was looking at the website and the themes are there. It's really interesting to look at how it then filters down and some of the stocks are supported by three or four of your themes, not just two. And again we'll put some stuff in the show notes on this but I see the following stocks for example are in there. Google, Apple, Nvidia, Palantir, Microsoft. You could also just buy the S&P 500 or you could buy the Mag 7. So I guess how will you differentiate that as time goes on? Are you going to be very active in this?
- [14:58]
A
Well, it's rebalanced every three months. One thing to keep in mind is that it owns 30 stocks. It's really the 30 biggest drivers of the S and P. But it's equal weighted so it's not benefiting from just owning the Mag 7. In fact, year to date it's outperforming even the Momentum index, mtum, Granny Shots. It has a lot of financials in it and has some healthcare. So it's really a diversified fund but I think it should be viewed as we've identified the companies that are really driving S and P. So the other 470 aren't driving earnings for the S and P or the price appreciation.
- [15:41]
B
So let's get into a couple of those individual names and I really interested your bull case on JP Morgan and the banks in a second. But Palantir for example, what is the pushback? And I understand the themes and how the ETF works but as a standalone what is your pushback to? When people point to the valuation multiple which is obviously pretty extreme.
- [16:02]
A
Yes. Well it's confusing because if you have to say like what is Palantir in one sentence? It's hard to say like maybe one description is, you know, it's a consulting company and a software engineering company in one because they under, they look into a company or a government and they figure out how to improve their operations but then they can build the solution with the software. So it's like McKinsey plus the best software company. But then that doesn't really explain the synergy of what they do.
- [16:36]
B
And that's by the way, I've interviewed Alex Kopp and studied Palantir. That was the best explanation I've ever had. Yeah, very helpful.
- [16:43]
A
Yeah. And then I think people put low multiples because it's like the way people put said Apple's a handset company so they put a 10 multiple on it forever. Or they said Tesla is an Automaker and put a 10 multiple. Someone will say it's a consulting company or SaaS and they try to suppress the multiple. But there's a synergy. But I've talked to some real companies and I don't want to name their product, but they said this completely changed the profile of their business, including their profit margin profile. So in other words, Palantir, I explained it literally took a company that had a commodity that they had to hedge and it had like 40 or 50 touch points. You know, it was being shipped in warehouses and actually started in a country because it was harvested and shipped. And they said they just fed all their invoices into the Palantir system, like literally like just cabinets full. And suddenly Palantir was like, okay, this is what you need to do. And they started to make money on their hedging. It became one of their most profitable operations. And then their supply chain started to generate a ton of profit. Now if Palantir was a private equity company, they should have reaped billions of dollars from just that. But all they did was said like use our software. So like if you think about it, they can, they're basically like a private equity company you can just hire to re engineer your business. I think it's really pretty magical.
- [18:08]
B
What's the bull case for JP Morgan or some of the other banks in a world which you could look at and think they're going to be disrupted.
- [18:17]
A
Yeah, I think they're disrupting themselves in a way because. Well, here's something to keep in mind. First of all, I know Peter lynch famously said the reason he got out of Japan in the 90s was he looked at the top largest companies in Japan and they were all financials. And so he said to himself, like, okay, wait, if it's all just financials, there's something wrong with that economy and he sold Japan. But I think JP Morgan and Goldman are really different because number one in the post GFC period, they were highly regulated, almost forced to not make money. And they under those conditions generated really good shareholder return earnings growth. So they became essentially nimble under a huge regulatory burden. And then in the last few years we essentially shot up the economy with like inflation fed hikes, things that should obliterate banks. You know, caused housing to screech to a halt, that should really hurt banks and they produced good earnings. So they've been battle tested but we still treat financials through a 50 year story arc of their returns and price to book governs the valuation. But now they're, they've got two big tailwinds in front of them. One is AI, which is really going to be a tool for them to better understand credit relationships and customer relationships and even customer attachment and of course ways to more profitably lend and participate in markets. And the second is blockchain, which could radically reduce their cost. I know that and I can share that. During COVID one bank told me and I do, you know, interact with a lot of companies because you know, we get asked to present to the board that during COVID they had every employee had to do vpn. So they, and they essentially have surveillance because they know who's logging in and what keystrokes they're doing. 80% of their employees did nothing during COVID So they still made good profits, but they know that 80% of their employees did nothing. So the banks know they can re engineer their entire operations around AI and blockchain. JP Morgan could have more profits, but the biggest cost in their business is employees. So that means if you shed employees then it's shareholder return that benefits.
- [20:41]
B
So Jamie Dimon just built too big a tower in the heart of New York.
- [20:45]
A
Well, it might be filled with robots, right?
- [20:48]
B
It looks fantastic.
- [20:49]
A
Robots with blue suits.
- [20:50]
B
I just walked past it yesterday and it is when I left here it was a shell and it's amazing to see it. Obviously Norman Foster design looks pretty cool back to the broader markets because you mentioned earlier the critics who have tried to throw mud and you've been right for 12 years, sometimes use the label perma. Bear slightly different question on that. But I wonder, and it's certainly the entire time we've known each other being bullish has worked. And I give you 100% credit for that. But do you think your style, your personal style and emotion is clearly relevant when it comes to markets? Do you think you'll be able to call the end of the bull market? Do you think your style is better suited to bullish momentum or not?
- [21:43]
A
That's a great question. I can say that in 99 when I was a technology analyst and covering wireless. And that was living history of a bubble that really was a lifetime bubble. I think if people weren't in that period, it was five years where literally if someone said buy the stock, it could go up 20% in a week, you know, and then it would still keep going up. I mean, that was really a different era than anything we've seen today. But in 99, it was clear to me that we were in a bubble. And I was only in my 20s, but I was at an investment bank and they kept telling me, Tom, there's this $5 billion IPO and we need to be the book runner on this deal, so you need to tell them, going to recommend this stock. And I said, there's no way. I can't. I mean, this business model makes no sense. And so I was not popular with the investment bank, but I passed on so many deals that wanted to do multi billion dollar IPOs. That would have been hundreds of millions of dollars of fees for the bank and I would have made tens of millions of dollars because at that time they were paying you for your IPOs. So I, with my own reputation at stake, I avoided the implosion. As you know, when that telecom Internet bubble burst, many people's reputations got destroyed. Mine actually rose. I became. I was still famous as a wireless analyst, but then I got promoted to be a strategist because I avoided all of that carnage. So if someone's asking me, would I know what a top looks like? By the way, I also had a very famous short, a sell rating on a stock during that era that almost destroyed my career because the company was so angry at my not recommending them that they even complained to the sec. And my company at the time, it was written up in the Journal. So someone can look it up.
- [23:47]
B
I'm going to. Maybe we won't add it in the show notes, but I'm going to look it up.
- [23:50]
A
I don't want to name the company because. But they were. So apparently the CFO said he'd wake up angry and yelling about me because I wasn't recommending a stock. So there's enormous pressure and I still kept a sell rating. So I, I know what a top looks like now. I think one of the things that helps us at Funstrat is we have Mark Newton, who is a technician who does really good cycle work and he calls.
- [24:16]
B
What's his handle on Twitter again? Because he's great to follow.
- [24:18]
A
Yeah. Arcnewton cmt.
- [24:21]
B
Yeah, it's Great.
- [24:21]
A
Like country music technician, I guess, because he does like country music. But he, you know, he was dead on in 2021. He said that we were nearing a top. I kind of didn't understand how dire his warning was because, you know, we had the 2022 drawdown. And I said, mark, listen, next time you gotta, like, just really turn off my screen when he's telling me this, because I didn't appreciate the level of warning he had.
- [24:47]
B
Well, it's great to hear you go through those details and if you guys turn again, everyone will be listening. I picked this up. You said this on, I think, the Compound and Friends podcast last week. Whenever the VIX has been above 60 and closes below 30, 100% of the time, that's been the bottom. That's what you said, right?
- [25:08]
A
Yeah.
- [25:08]
B
And that's true 100% of the time.
- [25:09]
A
Yeah. We never found an instance that it didn't work.
- [25:12]
B
So my question is, is there a reverse of that? Do you have a statistic that would point to the top like that or something to look out for?
- [25:20]
A
It's a great question. Like, this is where I think our work kind of helps, is that a lot of people say, like, oh, this measurement never seems to work at all. But what we do is we slice it into ribbons and we say, well, at the extremes is one side or the other signal. So that Vicks is a great example that at the level, at the extreme reading, and then flipping back is actually really good signal. It doesn't work the other way. Meaning, like, if the VIX is suppressed and then it rises, it doesn't signal. I mean, short term, it could signal de risking, but it doesn't signal a major top.
- [25:58]
B
What do you watch out for then? I mean, if the demographics and the current thesis is 2035, what would be a flashing warning sign?
- [26:08]
A
Well, if we're looking for a major top, the top is going to have two sources of the negative catalyst. The first is a policy shock. So at the top, the Fed could pull the rug. That's. Sorry, not the right term. The Fed could end liquidity and that would create a pullback. I mean, even a bear market. I mean, like if we saw it in 2022, the Fed had to basically put a heart attack on the economy and the stock market fell. So if the Fed decided that the economy was overheated, there is no bull market beyond that point. But we would both mutually see the warning signs because the Fed isn't operating in the dark and they're seeing the same data. A similar Shock would come from a commodity. Like if oil spiked to 300, well, the level has to be. It's a burden of households. So I think it's like now, well, maybe with inflation, it's probably $400 oil. You have to get really high oil. But the second source of a negative catalyst is excess speculation. And that was 99. Because in 99, I was being so much money was available, people were demanding that you get on board with a view.
- [27:29]
B
You don't sense that at the moment.
- [27:31]
A
No, there's not. Because there's so many skeptics on our clients. When we meet. When we have 400 hedge fund clients meeting after meeting, and this is interesting, someone else always says, tom, everything you're saying is fine, but I don't believe you because you're always just bullish. And so they're immediately skeptical of everything we just said. We could lay out everything for 30 minutes and they'll say, but you're always just bullish. And they don't believe me. So there's skepticism at these levels. That's not a top margin. Debt is something we can measure. It really needs to have a meaningful leap above the prior high to signal top. And we're not there yet either.
- [28:10]
B
Just want to remind our listeners all things crypto we're going to discuss separately. It'll drop in a day or so with Tom. Tom. To wrap up the main conversation as a flag beforehand, we always end the same three questions on this podcast. The first being, what's the best investment you've ever made? Or perhaps for you, it's the best investment call. Maybe you've already touched on it.
- [28:33]
A
Was it 2009 the best investment call I ever made? It's hard to say the best investment ever made is my family, of course.
- [28:46]
B
But always welcome that answer.
- [28:49]
A
Yeah, but in terms of the best investment I think that we've made is, I'll say, based on the feedback we get, is really people saying that we kept them in the game. So, like, when I run into people and they're saying, tom, you. And they're not subscribers, there may be someone who follows on Twitter. They're like, tom, you kept me from selling everything in April, or you kept me from selling everything in 2020. And I think that that is something they're grateful for, because, as you know, once you sell something because it's a painful decline, you're so reluctant to get back in. So just keeping people invested has been big because a lot of people said, now we've heard people say that their retirement Plans have been moved five years forward or they've been able to retire because the market has really helped them save money.
- [29:39]
B
And I've walked around, I mean, admittedly Wall street and New York City, but with you, and you really do get stopped everywhere. People listening in the UK wouldn't quite believe that he's like a superstar on the streets. What about the worst call?
- [29:57]
A
Oh, well, yeah, I would say my worst call was 2022, because Mark Newton, who I was just getting to know, had actually told me, tom, I think we're going to be down at least 10% or no, 10% or more. And I think at that time I said, okay, well, we'll be down 10% in the first half. But it turns out Mark had detected, because markets tend to detect problems in the economy, Mark basically flagged that there was going to be this structural problem, which was the inflation that was going to rip through the market. And so it was really, he was saying 10, but maybe it was biased to the downside. And I think if I really appreciated his message, we wouldn't have. We would have played 2022 differently.
- [30:43]
B
Well, again, we're going to put both Tom and Mark's Twitter handles in the show notes, as well as a link to subscribe in full to Fundstratch to wrap up this first main episode. Tom, again, we ask this of everyone. What is your overriding piece of investment advice for our listeners?
- [31:02]
A
I think the most important thing I'd emphasize is that when you're investing, you should really think of it more as you're buying companies, not just buying the stock market, because then you'll have a lot more conviction about what you own. I think when people really understand Tesla or Palantir, and then they don't worry about tariffs and inflation because they'll know these are really smart companies. So I think if the more they believe it as a series of companies they own, the more likely they're going to hold on to their stocks.
- [31:34]
B
I've never heard that before and I love it. Tom, for this first part of the conversation, thank you so much. It's been a pleasure. Great to catch up, particularly in person. And as we mentioned, coming in the next day or so, we'll be dropping the next part of my conversation with Tom on all things crypto. Remember, nothing you've heard on the Master Investor Podcast should be considered direct financial advice. There's more in the show notes on that. The Master Investor Podcast is produced by Paradine Productions and Master Investor Podcast Ltd. In association with Birdlime Media. If you've enjoyed the show, please do subscribe and leave us a five star review. Coming up in the next day or so will be an extended part of my conversation with Tom on all things crypto. Tom for part one, thanks so much.
- [32:20]
A
Thank you.