Shownotes Transcript
On the Tape.
iConnections is the world's largest capital introduction platform in the alternative investment industry. They bring the asset management community together through a membership platform that lets allocators and managers meet and connect both physically and virtually. Over 3,000 allocators and 600 managers are part of the iConnections community, overseeing nearly $48 trillion and $16 trillion in assets, respectively.
They are also the people behind the alternative investment industry's largest and most exciting in-person events. To find out more about iConnections events and members-only platform, visit iConnections.io. A warm welcome to the Risk Reversal Podcast, a special one, Dan, because we're joined by Tom Lee, Chief Investment Officer at Fundstrat Capital, and somebody that when he appears on CNBC...
That's when people turn up the volume and make sure they're watching. Or if they don't catch it live, they go back and listen to what Tom had to say, because I will tell you, as most people know, oh,
over the last couple of years, nobody's been more prescient and accurate in terms of the market than Tom Lee. So Tom, welcome. Thank you. Good to see you guys. Prescient, Tom. Well, you've known Guy and myself, I think, for many, many years. Yeah, more than a decade. Yeah. And when he says prescient, I think that you have been able to navigate markets. I remember you and I had dinner, I want to say it was right before the 16 election, and we had a group of people there and we were talking about just kind of what
the different outcomes might be and how it might affect markets and the economy in this order. And I don't know if you and I were talking, he nailed it to a T. No one wanted to believe what your outcome was or whatever. And so I remember during COVID, some of the things, everybody got really bared up in March.
You were not Barrett up in March. I think you take, you know, sometimes a 30,000 view of this stuff. You're very data driven. And that's our pitch for fun strat right there. But we're psyched to have you back. I think it's been over a year. June of last year was the last time you were on. Okay.
And people can go back and listen or watch or read the transcript. But again, most of the things that you said have come to fruition. So let's just talk at a very high level. And this is something that fascinates me. We might have brought it up last time. You're not perma-anything. You're perma-right, which is what you want to be perma. And that happens to be true.
But I think in today's world, you get labeled as Tom Lee's always bullish. What's fascinating though, in an industry that people want to be bullish and 99% of the people are rewarded by being bullish, you get a lot of blowback for that. Why do you think that is? You know, I think that's not super simple answer, but I think one part of it is,
Most people want to disagree with what they're hearing. So if they see this markets are up and people are happy, they don't want to hear from someone saying the market's going up for the right reasons. They'd rather hear, here's why everybody else is going to be wrong. And I think a second thing that I've heard said many times, and it's generally true, bearish people sound smarter. But because the bullish arguments are like time-consuming,
you know, faith in, you know, capitalism or whatever. So nebulous things that have historically worked, but it's more than just nebulous things that have historically worked. I mean, there's a method, there's a process to your work that is not just, you know, put your finger and you lick your finger, put it in the air and say the market's going higher. So I understand what you're saying. Okay, let's get into process then because there's a process behind this too. And I would submit that if something changed,
in terms of the backdrop, in terms of outlooks, in terms of the environment that we find ourselves in, you would change as well. Yes, that's right. I mean, if we were having a recession, that wouldn't be a bullish case, you know, or if a
there was an exogenous shock that was going to cause markets to reprice you can't be bullish on that unless it's at the extreme right so like you know in other words if people have turned something into a crisis that's just should just be a scare that's when opportunity emerges tom what was it though in late 22 into 23 i think the investment community was was basically convinced itself
that there was gonna be a recession in 2023. You were not of that mindset. You were totally in the minority about that. What was it then that you were seeing? And really, if you think about '23 and '24, this was an epic run, two years in a row, 25% plus gains for the S&P 500.
What separated you from the pack in that situation? Because I know we've talked about this, but I think it's interesting to reflect back now because a lot of folks thought that we might have a similar sort of year this year. And, you know, we're two months in. It just seems a bit rockier. So curious, like how you're thinking about that now that the R word's coming back into the, you know, into the mainstream a little bit. One of the reasons we weren't that cautious or expecting a recession is that a recession is,
is often two conditions, not just one. Most people thought, hey, the Fed tightens and Feds are responsible for all recessions because they say expansions are murdered by the Fed. But really that happens when the economy has exhausted incremental return on capital. And if we go back to the 2021, 2022 period,
Private investment spending as a percentage of GDP was still near recession levels. So capital spending wasn't exhaustive and consumers debt service ratios were still at recession lows.
So it was hard for us to argue that the Fed and its tightening, even though it inverted the curve, would be enough of a contractionary pulse to actually push us into a recession. Is there a concern or is it something that people like me talk about and are concerned but are concerned for the wrong reasons? The employment picture, which seemingly is fantastic with a 4% unemployment rate. There's some things under the surface that suggest maybe things are turning
Employment, how's your outlook there? I think the employment picture is going to get pretty messy this year. But for obvious reasons, availability workers might be diminishing because of deportations or fears of people getting deported, so there may be fewer people showing up for work. And then DOGE and the changes in how NGOs are being funded and the austerity from that.
is going to show up because many of these federal employees are still getting unemployment benefits, so they're not filing claims yet. But I think you're already seeing it in Washington, D.C., jobless claims are picking up and Zillow real estate listings are picking up. So I think that there is a spillover already happening. So it's possible that this year in the first half, the job market could be missing consensus by
50% for a while, and it'll get people scared. Inflation, getting better, clearly still a problem. By the time a lot of people listen to this, we'll know what PCE is. Thoughts on sort of the CPI, PPI, PCI, all the components of inflation that clearly...
populace is upset about for good reasons because you're paying more for things, should the market be equally upset? Well, inflation is a problem because prices aren't going to go back down and they're up 50% over the last couple of years. And so I think it's going to be harder and harder for consumers to tolerate more inflation. Even if it's still at 3%, it's still going to be unbearable.
But if I look at it from a market's lens, I know a lot of people are saying that there's a second wave of inflation underway or it's picking up and you're seeing it in the consumer surveys. But I think one, we don't know what the seasonality is. And I think the consumer surveys themselves are actually very flawed right now and they're picking up less the fact that egg prices are up and I think more political issues.
respondents. Like the UMich survey, there's a huge bifurcation between Democratic views on inflation versus Republican.
And the bond market itself is giving very conflicting messages about inflation. In fact, I would say if I looked at what the bond market's saying, I think it's saying there's no problem with inflation. In September, 10-year yields went down to 3.6%-ish. Fed cut rates for the first time in years. On the back of that, 10-year yields got up to 4.8%. Recently, pulled back to where we are now, we've gone up and down sort of in the interim.
You spoke to that, but what is that telling you, if anything? It shows you that it's a messy process right now because we've flipped. In that period of time, we flipped from a hawkish Fed to a dovish Fed to a Fed that's now on a hawkish pause, and we've flipped the administration from being one where maybe the
not necessarily clear what their policies are to one that might look like it's fear. People are fearful that it's austerity that's coming. And then I think that you have a lot of like disruption that's coming from like an AI trade that people felt pretty anchored on. But this year there have been things that maybe people questioned the trajectory. So all of that I think is why yields have been kind of moving around and the inflation picture isn't super clear because of some of the changes in regime. Um,
But I think that's the opportunity because, you know, eventually the market starts to price in a crisis and it may just be a growth scare. All right. Last one for me. Geopolitical. If you had priced in, if you had gone back in time three years now, Russia, Ukraine, and looked at that through the lens of, wow, this is a land war in Europe for the first time in, you know, 80 years or so ish.
That's going to be devastating obviously in terms of the markets it was not so does geopolitical risk even work into your Process or is it just something sort of backburner the world is always at war, right? I think there's only been like 10 years the last 300 where there's been no conflict anywhere But looking at Ukraine and then Israel Hamas both times it's really proven to be that
The wars were more protracted than many expected, but the financial consequences for the stock market have been really minimal. Muted. Yeah. And maybe that's still going to be the case. Does that surprise you? Like if you were to think about it just intuitively, logically, or is it just the market has figured out how to sort of navigate this stuff? I think it makes sense. You know, like if we...
All of us were not born during World War II. We know it was a world war and 5% of adult males in Europe were killed. In some countries, it was 25% for Germany. Even the US, it was 3%. Devastating numbers, right?
Then we realized in the 1940s, they were still inventing things and they were making movies and there were new products and there was a lot of music coming out. So the world still functioned during World War II and actually the stock market did pretty well.
So I guess it's always been the case. The role of passive investing, it was clearly underappreciated by people like me specifically in terms of the inflows we saw last year. I think it was north of a trillion dollars in the mutual funds and ETFs. Huge driving force. Do you think people underestimate sort of that driver behind the market and the continued driver that it's going to be just given as all the things we just talked about for the last 15 or 20 minutes?
Yeah, it might even become bigger over time because there's been a lot of saver capital accumulated over the last five years because of higher interest rates and just total return. Net worth in the US is like 150 trillion now. I mean, that's like five times GDP. And then the US might create a sovereign wealth fund. Let's say that's 7 trillion. That won't go into active products, right?
The allocation to equity is low from these sort of high net worth family allocators. So I think the role of passive could actually be growing.
all right let's talk about one area we did not cover and obviously we're going to get into policy um we are what five weeks into the new administration i think that it was pretty well telegraphed what trump was running on um and you know we have a little bit of a playbook from the first administration when you think about trade and tariffs this one feels a little different i feel like you know there's a lot of similarities um i think dialing it up a bit
bit more on our biggest trading partners here, our allies, you know, and then also obviously in Europe. How are you thinking about this? Because it sounds like you are fairly well convinced that there's a lot of uncertainty right now. I think you have a playbook on how to navigate it a little bit. We have an S&P that's what, down 2% or so from its all time highs. It seems like there's a lot of trepidation, though, about the economy, about the markets.
Is trade and tariffs, is this one of the biggest kind of headwinds, do you think, to the economy and the markets right now? It has a potential to become a headwind. I mean, the reality is that if policies are enacted that create such a severe shock because of tariffs, then we could have a recession, right? I mean, that's like a fact. Because I mean, if you put a 300% tariff or something, we don't really know how to titrate that number. And that's why investors are nervous.
But at the same time, the tariffs are accomplishing the administration's goals. Because if I was the White House and I know that I have some opposing risk from the Fed today, because the Fed's hawkishly paused, well, if the tariffs are causing confidence to fall and business activity is slow, then the Fed has to get off neutral.
But then everyone's playing a dangerous game because as you know, you don't want to get stall speed in the economy because the day the economy gets to stall speed, we open up the uncertainty of a recession because you know a shallow recession, I mean a recession is unknown once it starts. - You just said this hawkish pause by the Fed. Do you agree or disagree with it right now? Because you also made it sound like that some of the policy, at least some of the threats are kind of counteracting what the administration thinks.
the Fed chair Powell is kind of set up to do. And I'm just curious, do you think that he's kind of doing the right thing at the moment given the uncertainty and until he gets more clarity about inflation coming out? You mean about the Fed chair? Yeah, Fed chair Powell. Well, I'd say that I'm going to say I think the Feds in terms of guessing their thinking, I think they view tariffs as an inflation risk and that's governing their actions.
But it's evident now that tariff risk is actually deflationary because it's sapping consumer confidence and consumers don't actually have wallet share to pay for higher prices. So it's going to create a demand decline, which is recessionary. So I would guess that the Fed's thinking around this is going to evolve this year, that tariffs are probably...
deflationary and therefore the Fed doesn't have to be hawkishly paused. So with that said, the cut that's expected in July, would you move that up? I think they're only, and please correct me if I'm wrong, I think there are two more cuts priced in this year, the first one in July. So speak to that. I'm waving my magic wand, you're in the seat. It sounds like you'd be more inclined to cut more times. If I was guessing, and I'm not a Fed watcher,
But we do watch what the markets are pricing. The market's only pricing a 27% probability of a cut in May. And by the way, the bond market's also, if you look at distribution, pricing a 23% chance of a Fed hike. So there's still a very large cohort that is quite hawkish in the bond world. I would guess that as this tariff stuff causes confidence to fall down and doge, etc.,
that 23% chance of a hike goes to zero. But I also think the odds of a May cut should be higher than 27%. I understand that way of thinking. And it's fascinating to me because I haven't heard a lot of people talk that way, but it does make sense. I mean, the first logic suggests tariffs are inflationary, but what it does to consumer confidence is really what's important. So let's talk about consumer confidence because
We just saw a consumer confidence number, the worst we've seen in a couple of years. I don't know where that came out of because I would have thought there'd be this renewed optimism with this new administration and people have lived through a couple of years now of daunting inflation. You'd think there'd be a reacceleration. What do you attribute that to? I think consumers are happy when markets are going up and when gasoline's cheap and then
probably when grocery store bills aren't going up. So stock market hasn't gone up. It's kind of flat for the last six months and gasoline is not super cheap. And then, as you know, it's not like it's gotten cheaper to go to the grocery store. So I think that there might be an intangible, like those who voted for change,
politically, their confidence has gone up. But then for those who like the previous political party, they have no reason to be cheering. So it's kind of messy to expect consumer confidence to be good. But I think another thing to keep in mind is when economists talk about Canada and Mexico tariffs,
They're expecting Mexico and Canada to go into a recession. So it's kind of weird for someone to think that the US should have accelerated growth or inflation. It's probably more likely that it would push us closer to a recession. Okay, so this honeymoon period, it doesn't seem like it's going to last as long this time. Does that play into, well, does the market drive that or does that drive the market? It's sort of chicken and egg stuff now. It is, yeah. It's a...
Like, you know, the term people used to call it quagmire. You know what I mean? Like, it's a bit messy because you can't really expect the stock market to go up if there's tariff talks because then the administration...
would believe the markets aren't taking it seriously. So I think that White House would rather see the markets tumble or be under pressure from tariff talks. But at the same time, there is a put in place because the White House doesn't want a recession. So the more the markets start to act like it's fraying at the seams...
the more likely that this conversation actually occurs. Okay, another chicken egg. Does a recession cause a market sell-off or does a market sell-off cause a recession? I say that because we were just talking about consumer confidence. That is our economy. I mean, you know the numbers better than I do, but 70-something percent of the economy is driven by people feeling good about things and buying things. So,
When they get scared, and typically that scare comes in the fear of a stock market doing something that we haven't seen in a while, that's when they slow down. So my question to you is, what drives what in your opinion? I have a view. It doesn't matter what my view is. I'm curious as to yours. That's like the complexity of the economy, because I'll just give you a simple thing to think about. If we said, if the price of this falls, does it create a recession? Mm-hmm.
Bond, prices falling, probably say no. If gold crashes, we'd probably say no. If the price of cars crash, we'd say no. But if home prices crash, definitely a recession. If stock prices crash, I'd say it's very likely to cause a recession. The sources of a market-based recession on price would be from housing or stocks.
Yeah, let's go back to your point about the administration, because there was a note out, I think it was Axios earlier this week, saying that Trump 1.0 was very focused on the stock market. Do you remember how many times he would tweet at new all-time highs? He'd be like, you're welcome, America. Your 401k is doing great. And so a lot of folks thought that that was kind of like a bit of a report card on how they were executing their agenda on the economy. And the report was that Besant
is more focused on the 10-year yield, which to me seems a bit goofy, you know, because Trump's got his fixations and his fixation is,
is obviously the stock market too. So when you mentioned that, you know, under the trade tariff situation that maybe they want the stock market to tumble a little bit, I mean, right now we're down what 3% or so. If you got back towards the gap from November 5th, the S&P, I think it was right below 5,800 or so that gives you like a six, 7% pullback from the highs.
Is that the sort of thing you think that's where the put comes in? If we fill in that whole gap, is there like a psychological sort of number there? I think that there's a lot of logic to what if Besson's focus is on yield, because we know that you live off what's priced off the yield. So mortgage rates would fall.
Cost of borrowing would fall. That helps a lot of Americans, you know? But it doesn't mean they want stocks to fall. Right? So I think that people are making that logic leap. I think that the administration...
doesn't want stocks to go up if there's tough tariff talks. But it doesn't mean that they want the stock market to be down 10% this year because we know all recession probability models, just exactly what you said, Guy, they go up because the largest predictor of a recession is the stock market. So if it's down 20%,
then all of a sudden, austerity has to go out the window. You have to do entitlements and the Fed has to unleash liquidity. And that's the exact opposite of what they're trying to accomplish. So I don't think they really want a down market. They just don't want the market to
not respect their message right now. Are there any sectors out there that to you are just flashing opportunity in terms of how they've underperformed? The first thing that comes to mind for me is energy, but there are other names as well. I mean, healthcare has been a bit of a laggard, ex-Eli Lilly. Anything out there sort of sticking out to you where you're about to say, you know what, there's opportunity here? Not in any particular order, but
To me, one of the sleeper winners from all of this is going to be the financials because they've underperformed the last 15 years. They really have not caught a break since the GFC and finally an environment that is better for the banks and AI is actually good for business. JP Morgan and all these banks show they made money through inverted curves, hyperinflation, tightest Fed ever, and now you have all this reversing.
Another group that I think makes sense is digital assets. I do think, so Bitcoin is down, but it's our clients, it's actually not a surprise to our clients because Mark Newton, our head of technical strategy, really pointed out the cycles in mid-January that he was targeting 62,000 for Bitcoin by the end of March. So we're actually on our way to 62, but that's not a bearish development. It's just a retracement.
And the third, of course, is small caps because once the tariff talks go away, the environment is favorable for American-focused companies, which would be small companies, and they'll benefit from lower rates and their multiples are lower. So I think it's still a big opportunity. But in the middle of tariff talks, none of these groups can really do that well. Well, when we come back, Dan's going to get a little granular with you and we can continue this conversation. So stick around, folks. ♪
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One area that we did not talk about yet on policy was the idea of deregulation and that we know there's a bunch of sectors that should benefit from that. You know, to me, I think this is a curious situation because there was an article, I think at some point in January, it was the worst month for deals. I love that expression, deals. You know what I mean? And again, we had not even had the inauguration yet, you know, and we hadn't even had policy in place.
But the idea was that you're going to have a lot of these industries that had been had yokes around their neck or whatever. And then you had big cap tech with all these DOJ and FTC investigations unable to make, you know, strategic M&A and the like. We have a huge backlog for the IPO calendar, that sort of thing.
How important is deregulation on all of those levels that we just talked about as you think about an economy that should be continuing to move along at 2.5% plus GDP? It's important because there is regulatory cost in the economy. It is a tax and friction on movement, but
I don't know how to titrate that, meaning I don't know if zero regulatory cost is good for the economy, because of course that is when fraud and bad practices come. I mean, even looking at the SEC, do we really want the SEC to have no enforcement, right? Because we know that people take advantage of that. So I think it's probably a case where less is better, but I don't know how much less. Yeah. And if we got through some point, I guess, in
Q2 mid part, and we're just not seeing NMNA. We're not seeing S1s being filed for IPOs. We're seeing, you know, a lot of this DOJ and FTC action against the large cap tech stocks that that hasn't gone away. There's been some kind of commentary around the fact that, you know, that some of the stuff that was started under Trump 1.0 and really picked up steam during the Biden administration as it related to mega cap tech is not going to go away, you know? And so I think about, you know,
I don't know, man. I think if that was one of the pillars of this pro-growth outlook, you start losing the pillars and then you say to yourself, what is the economy? How does it inflect? How does it start to re-accelerate? That's the one thing, Tom, I can't put my arms around. We're going to talk about generative AI. I think a lot of that CapEx, I think that's obviously been a big driver on a lot of economic activity, clearly in the stock market.
But X that, before we kind of drill down on that, what are the sorts of things, like is it tariffs going away? What is the sort of thing that kind of causes the economy to inflect higher? The economy is not that simple. So it's kind of hard when people realize we're talking about $30 trillion economy and like a 2% change is not several trillion dollars. It's a couple hundred million dollar change. So that's why...
data center thing or building a plant actually moves the needle on the $30 trillion economy because it adds to GDP growth. But the biggest lever probably to pull is the 10-year yield needs to fall. Because a 100 basis point move in the 10-year yield, dropping mortgage rates back into the fives would be a huge impulse. And stock market going up
creates wealth effect too. I mean, it does create inflation, but it does create wealth effect. The ISM manufacturing has been below 50 for 26 months. It finally turned above 50 this past January. That's the longest stretch since the ISM was ever created.
was created. Even during the GFC, it was only below 50 for 16 months. So we know that confidence of purchasing managers is low and that means that people have probably been rationing capital. Yeah. All right. Here's another one. I mean, this could help the stock market because we know what happened in 2017 and 18 when we got those tax cuts. So we haven't even talked about tax cuts yet. You have this budget that looks like it's moving forward and that is
is maybe four and a half trillion dollars of tax cuts over the next 10 years when we had that in 17 i think it was to the tune of one and a half trillion you know what did corporations do for the next year and a half they bought back a trillion and a half dollars worth of stock right so is that something that you could see as being uh you know a tailwind to the stock market if we get this kind of tax cut i think that's something that really kind of powered gains in the markets back in 17
and back then, you know, the Fed was raising interest rates and really everything was going great until we had that growth scare in the back half of 2018. So how important are tax cuts, at least psychologically right now? But then as you think about as we get into 26 for the economy and for the markets, people want tax cuts. So when they get it, they're happy.
You know, I think these days, I think markets are going to question how it can be afforded. I mean, I think that's one of the problems with tax cuts now is that the consumer might like it, but it may have, it might backfire in the bond market. But it comes back to, you know, there has been,
caution on corporate expansion and you deplete capital stock, right? So the base of capital in the US, I'm guessing there, but it's probably like 50 trillion. If you depreciate over seven years, it's a couple of trillion dollars a year of capital stock depletion. So unless you're investing at that rate, so capex to depreciation, you actually have to rebuild capital. That's what I think that depletion happened because the Fed's been so tight.
Yeah, I mean, one of the other areas, and I'm glad you brought that up, I mean, the whole idea of reshoring, right? And so if the, you know, geopolitics is going to get ratcheted up, which it clearly is, at least with China right now, you know, the idea, and we learned this during COVID, you know, the kind of supply chain is a thing of national security. Then you think about all these export bans that we're having on chips, and you're talking about
where they're manufactured, like trying to make a move on Taiwan because they know that they make, you know, 85% of the high-end GPUs that they can't even get, right? That sort of thing. So that's inflationary, right? If we see a big move. Now, you tell me, we got Stargate, we got Apple saying a half a trillion dollars, we got all this sort of stuff. We've seen this before. These are, we didn't hear these announcements when Biden came in, you know what I mean? But we heard him in Trump 1.0, we're hearing him again now.
And when the rubber hit the road in 17, 18, 19, we just didn't see a lot of that kind of, you know, Foxconn was coming to Wisconsin. Remember, they dug a hole and then nothing happened. So I'm curious how much weight are you putting on some of these early announcements as it relates to reshoring? There's one thing if Congress passes a bill and it's like provision because, you know, everyone's going to spend it. It's another thing when companies make announcements. I used to cover stocks for 15 years. I remembered
people would be like tom look at all the layoffs announced and they'd be like 100 000 at att and then you realize it's like attrition they're not counting like part-time hires and so
You know, it's you never know the real number. Yeah. But by the way, I mean, in 2022, you know, a lot of folks were counting all the layoffs that were happening in Silicon Valley and the like. And then it'd be the best thing that happened for the stock market, if you think about it, because some of those stocks got hit so hard. Meta, for one, Meta was down 70 percent. I mean, think about Tesla was down 70 percent. NVIDIA was down 70 percent.
Netflix was down 70%. And so I just feel like, you know, until those companies started rationalizing costs, the stocks couldn't work. And once they did, but we're in a different situation now. And we can talk maybe a little bit about generative AI because the whole promise here is productivity.
productivity gains, right? Is that you can do kind of more with less. So we're gonna eventually see job cuts. And there's some companies who've been talking about this a little bit. So when you have this thesis and you've been covering, I know you covered tech, you know, going back 30 years, right? You know, you keep hearing this again and again, that,
you know, technology is this massive deflationary force. This technology is going to be the most deflationary force. So speak a little bit about that, how you're factoring in, you know, let's say you're this year and next year, how you think about the economy in general. First, you know, AI doesn't have a ceiling. Like, so you might hit super intelligence and then you'll hit super, super intelligence. And all of a sudden,
The worker, an AI worker is like, you know, a 200 IQ PhD student that is cheaper than, you know, hiring a part-time college student or whatever. And so AI is replacing labor. It's going to be productive, as you said. It can probably accelerate discovery. Yeah.
And then probably the fourth thing AI does is it really collapses geographic borders because communication is seamless now. And when people say AI, I saw Microsoft saying that the measure of AI success is GDP growth goes to 10%. That's more discoveries happen or language barriers collapse. But it's not worker replacement because that's contractionary. So I think that the most...
tangible use case now is actually labor replacement because companies can show ROI on that. But do you think that's happening right now? Because again, we're recording this on Thursday. Last night, NVIDIA reported, I listened to the call, I read through the transcript, you know, they keep talking about total cost of ownership and ROI, and they're trying to tell a story for their customers how this is like a good thing. And you know, what you just mentioned about, you know,
on the employment front and what can do their workers. I mean, I'm taking the over, Tom, on this. You know what I mean? I just think like every time I turn on my phone or I open my computer or I put on CNBC or whatever, I'm hearing AI, AI, AI. And you hear a company like Microsoft has a strong vested interest that everybody believes this too is talking about 10% GDP growth. Who are their customers? The fortune gazillion. You know what I mean? Like they need everybody to buy into this, right? If you think about it. So
I'm wondering if things like if we're reaching a little bit of a fever pitch on the expectations of what comes from this technology. I don't know. I mean, I would just say that because you and I both were in financial services, look at how a low level AI technology in the 2000s, which was trading like automated trading, wiped out
Maybe even in an 18-month period, the entire business of trading. You know, like J.P. Morgan had an entire floor of traders of different products, and it really went down. Well, it happened all at once, but it was a decade in the making, right? Like, isn't that fair to say? Because there's also trust issues there. There's also, you know, compliance. There's a whole host of things. Yeah, but it's already...
Already visible. Like I, I think that this is the year that like call center cities will shrink massively. You know what I mean? Um, that's not going to affect the U S but that's going to just wipe out entire regions outside the U S and.
We already know like in the creative space, it's already had a big effect. So I think it's already eating jobs that you didn't think it would be eating. And it's eating in some ways, very high paying jobs. So coders, right? And like you just mentioned in the creative space, but then on the other side of it,
And like your point is, is like call centers in the Philippines servicing us customers, right? That may make it a bit cheaper for like, let's say JP Morgan or city bank. You know what I mean? But not that much cheaper. That's why they're over there in the Philippines. Yeah. I mean, I don't know if you heard like this stuff from Klarna. Yeah. The resolution times collapsed. Uh, I mean, here, here's the fact, cause we're a small business, you know, technology cost is a really high. It's, it's only been going up. Um,
It's probably gone up every year, probably since whatever, 1990. So it's for the first time that the technology intensity of a business can go up, but their tech spend could go down because, you know, they're, but, but a lot of it's labor, you know, it's hiring someone to manage the website or to write the app, you know, just writing an app.
for a small business is quite, it's an expensive endeavor. It's gotten a lot cheaper. Right. All right. So I listen, I'm, and I'm not trying to be really skeptical of this stuff. I probably, I spent a lot of time reading about this technology and where it's going to be adopted and in which industries are likely to kind of do it first and that sort of thing. So I,
I get it. Let's bring it back to the stock market for a second here. So if Microsoft was one of the early beneficiaries after ChatGPT because of the investment in OpenAI and then basically the idea that they're going to integrate their technology across their product and services, start selling co-pilots, you know, that sort of thing, they didn't really get a lot of uptake.
right like so the stock was one of the early beneficiaries because there was very few pure plays now nvidia was you know the ultimate pure play google had fits and starts because their models just weren't great remember bard and then the first releases of gemini you know amazon aws was meant to be a big beneficiary but they were just investing in anthropic and not building their own llm meta clearly a beneficiary because they
switched a bunch of that spend from Metaverse over there and they were actually getting, you know, good utilization and all that stuff, right? So there's only been a handful of really good plays. So NVIDIA last night is interesting because they report this number that is 5% above, you know, the sales. So this is coming after they were having like
you know, 100% beats, right? Like a couple of years ago. And that's one of the reasons why the stock became a $3 trillion plus market cap company. So now we get to a point where a lot of their customers are going to have to see TCO and ROI, right? So we've had this massive CapEx build over the last couple of years, hundreds of billions. We just heard from the major hyperscalers in metaverse and meta that they're going to be spending another 300 billion. The numbers are going up, Stargate and Apple and this or whatever.
So my point is here, what is the next leg of this trade? Because if I'm looking at this mag seven, they're all down in the year. We're in this digestion phase. We're going to have to start hearing from companies in Q2 and Q3 that they are getting those exact productivity gains that we're just talking about. Or from a stock market perspective, it's going to take a dip here. Does that make sense to you? We never know what's really priced until we can look in the rearview mirror. Right.
we did a study for our clients that looked at AI, but through the lens of substitution. So like, let's say that AI, the easiest use case is replacement of workers. And so we're talking about modeling this as how many jobs are you replacing? And that really lends itself to looking at the wireless industry. Because in the 90s, wireless was really about supplanting landline. And wireless went from
you know, 50 million users in 1994 to 20 years later, almost 8 billion. Okay. So it was a hyper growth industry that the growth was already by 1994, 10 years of hyper growth, but then it still grew another 20 years. The wireless stocks, the entire ecosystem from the handsets to the service providers, to the chips,
They all peaked eight years into the cycle. They became market performers even though the industry grew parabolically for much longer. I think that there is going to be the moment where the AI related stocks no longer outperform because it's either priced in or so much capital and competitions float in that no one's making money. It's profitless prosperity.
I don't know when that moment's coming. But is it going to happen? I mean, yes. But you can make the argument versus the 90s that a lot of these cycles have been accelerated, right? So if it took eight years for that to happen, I mean, we could say now we're in the third year of this massive CapEx build-out. And at some point, it doesn't seem like, and even from what NVIDIA had to say last night, it just doesn't seem like there's too many supply constraints anymore. I think it's fair to say like,
You know the top is in when they don't go up on good news and they go down on bad news. Yeah. Yeah. And I guess the point that I would also make is at some point this year, I feel like there's going to be some data points that suggest there was an overbuild in the near term. Right. And again, this goes back to ROI, right? If their customers aren't seeing it and then we have a kind of sluggish sort of economy, they're just not going to be paying up for this sort of stuff right now. Like that.
That day is going to come. I just, I don't know if it's this year, but it could be this year, but I don't know. I mean, I'm not, I'm probably not in a camp where I have any certainty on that. So can I ask you what you think would be different about from 21 to the lows in 22? And we just mentioned those four stocks that lost, you know, 70% of their value. There was a, you know, you know, dozens of stocks in the NASDAQ 100 that had been cut in half.
And I think about what's going on here. You could say it was real capital that's been behind this. It's real technology. You could take a longer term view and I'm with you. I believe all of those things. We're going to hit super intelligence and then super, super intelligence is going to be this like something that we've never seen before. I get it. I'm going to take the over on it. But why couldn't we see some of these companies that have been at the forefront of this trend? Why couldn't we see them get cut in half over the next year or two if there is a lack of demand and overcapacity build?
Well, I mean, I don't think anyone can rule it out, but I probably would just say I'm not sure I'm on the same page as you that we've reached overcapacity. But if there is overcapacity, which is going to happen, we're going to definitely overinvest capital in this space, then the stocks are no longer going to make you money. But if someone says, name a date that that happens...
I just say, I don't know. I mean, if someone, if everyone tells me it's this year, then I'll tell you it's definitely not this year. Right. So let me take it another step. If there is overcapacity, that means the cost of compute is going to come down. And that means the adoption might go up. If inference costs are going down, right, then you're going to see a lot of
Other industries really figuring out how to use this technology, right? Because they're taking hard looks at it right now. So what sectors would you think would most benefit with the cost of compute coming down who could really obviously benefit from a whole host of reasons of having, you know, like inference processes that are really aid their businesses?
Well, I mean, I think people definitely oversimplify that belief, whatever Jevons paradox, because like take Bloomberg, if you made it free, would everyone adopt it? Like 99% of the world be like, wait, I don't even know how to use this thing. Right. Yeah. I mean, or, you know, if you made like, you know, a nuclear car engine free, you know, would suddenly every automaker use it? Like, so it's, it
It can't be just cost. That's the gating factor. It's like...
you don't want in the, in the tech world. And when I used in the nineties, we used to call it, you don't want to be bleeding edge. You know, you, if the technology is ahead of the consumer, it's just going to hit a wall. Yep. Well, you can make the argument like Amazon was that right. And in the year 2000, I mean, people weren't really comfortable putting their credit cards at Amazon or eBay and that sort of thing. And now, you know, I mean, Amazon is a $2 trillion market cap company that owns, you know, North American. So there's a,
a tricky alchemy that people oversimplify like when it comes to technology adoption because it's not just cost that right because like all these social media companies their products are free but a
the 10th free one doesn't grow even though it's free. - Right, so when you think about this, 'cause I know you have a lot of institutional clients, but you also have a lot of retail clients through your Fundstrat product, like how are you expressing ways to play this, let's call it near term 2025 in the stock market, okay, generative AI, and then how do you think about it longer term? Because again, if we use your example, the wireless, some of the names that have been winners right now, longer term,
are not exactly gonna be those winners. - Yeah, that's right. And just for everyone to really finish the point, more or less the only thing that really proved, there's only two types of industries that proved to have value 25 years later or outperformed the S&P. Tower stocks and then Apple. And Apple disrupted the entire ecosystem in 2007. So, you know, someone is playing AI today
It's not a mistake to bet on the leading companies for now. And so that means, you know, Nvidia and, you know, other tech names around that. So I think the market is getting all that right. And they're getting the power right and the need for things to support the expansion of data centers. But what they have to be mindful of is the correlation of all that is 1.0. Like they're all going to stop working at the same time.
but i don't know when that date is right i guess you know i'd be more inclined to think about you know sectors industries that will benefit from this technology you know going forward and i obviously we think of you know um banks and insurance and and you know our in
research in the pharma space and biotech and stuff like that. But it's going to be really hard to pick winners right now, I guess, you know. Let's talk a little bit about crypto. This is something that you've been on for a very long time, I think probably a decade. And sounds about right? Yeah, not quite a decade, but a long time. You and I talked about a long time. Yeah, we did. And, you know, I think this is another example where people
You know, there's been peaks and there's been valleys, but it's been lower left, upper right for the most part. Right. And again, I know you guys do a bunch of technical work, a lot of quantitative work. What is your work telling you right now? If we think back over the last year in Bitcoin in particular, right, we had the approval of the ETFs. We had a big ramp and those things. Then we saw it go sideways vertically.
for, I want to say seven, eight months until the election. And then it goes from basically 65,000 up to 105,000. And now it's back here. It broke below that 90,000 level and maybe it's like 84,000 or something like that. So it's kind of in the midpoint of that range that we've been in over the last four months or so. I know you don't think about it that granularly.
right? But you probably get questions a lot about the near term. Give us your 411 on Bitcoin right now. The best strategy for our clients that we've recommended is you just want to be a long-term holder, you know, but most people don't approach crypto that way. Most are trading it and want instant return. The work by our technical strategist, Mark Newton, you know, so he thinks Solana, Ethereum and Bitcoin all have downside. He
He has been bearish since mid-January. So I think it's been correct. And his downside target for Bitcoin is $62,000 by the end of March. But to me, is $62,000 a reason to turn bearish on Bitcoin? I mean, if you're trading it, yeah. But Bitcoin was $1,000, well, $100 10 years ago. So $60,000 is still a fantastic return. And I think Bitcoin's usefulness is still improving.
I don't think it moves. It's still a risk on assets. So I don't expect it to do well if the market is being hit by tariffs. It's not immune to that kind of turbulence. But is the trust around Bitcoin going to grow over the next five years? Yes. And is it going to be increasingly viewed as
a store of value like gold? Yes, I think increasingly. And then is there room for a lot more people to own it? Yes. So I'm not really bearish on it, but I think in the near term, it's hard to say it should go up right now. Yeah, you do a lot of correlation work and this is purely anecdotal on my part. It seems very correlated to the NASDAQ 100 right now. Is that fair to say?
Yeah, it makes sense. It's a risk on asset. Yeah. Let's just kind of take some stock of the whole conversation a little bit because you've been very bullish for a while and you've been right. Does two months cause you were kind of basically, let's say the S&P is unchanged. The NASDAQ is down a few percent. We're two months into the year. There's a lot of uncertainty about we talked about immigration tax.
tariff, geopolitics, the list goes on and on. Things are likely to cool out a little bit at some point on that front. We get some of that uncertainty out of the way. How are you thinking, just if you want to put it in a nutshell, the economy this year, it sounds like you think rates should go lower. You think inflation is probably not going up much higher. And then generally, how are you thinking about the stock market? I mean, the market is trying to price in a lot of these uncertainties right now.
And so it's understandable that we're churning, but investors don't want to become too bearish because the market sentiment, and it's already measurable, like the AAII survey, which is what we've used for the last 14 years, I think it's the best retail sentiment survey, is at the same bearish levels it was in the fall of 2022. So retail sentiment, and that's probably because there's been a ton of margin calls last couple weeks.
is at the levels that were at the depths of that recent bear market. So the investors view this as a crisis when it's really a growth scare. So to me, I think there's a good chance we're making our lows for the first half, like this week. And- Like down five, 6%, you mean? Yeah, it could be. Yeah. I mean, you know, the only thing is I-
I'm not that optimistic about the job picture for the near term, so maybe that's one last leg. But the reality is that a lot of bad news has gotten priced in. And the flip side of this is that the closer we get to stall speed, the more the Fed has to get off neutral. And I think the White House will have to back off talk of
things that could be hurting the economy do you think we're going to get a 10 pullback in the s p this year because we did have one july highs to the august lows and things kind of accelerated into that august low and it felt a little panicky and again since then we haven't had too much panic i think that move in december after the fed meeting that felt really bad um but we were not making you know it didn't take long to make new high well i think like last that july to august was
Essentially, I would say Fed-driven. That makes sense because it felt like either the Fed made a policy error or the Fed turned hawkish. Either way, we had a big drawdown. Will that happen this year? Yeah, I think it'll happen. If I'm guessing, it's more in the second half. I think this is just a flesh wound right now.
not the source of a drawdown. - Okay, so flesh wound, like how much upside do you think if we get a lot of those headwinds kinda out of the way, a lot of those uncertainties we just talked about, let's say we get the base case on that kind of pro-growth agenda that a lot of folks were excited about. - Well, let me just be clear why I don't think it's 10%. 'Cause let's say that some policy's implemented that would cause the US stock market to go down 10.
I'll guarantee you the rest of the world's down 30. Right. So will Europe and Canada, Mexico dig in and like, oh, we'll just power through this. No, they're going to capitulate. So the reality is that this brinksmanship is,
Probably means the other side caves in. That's why I don't think we're. But it probably takes longer than expected because I think we keep throwing these threats out, but we don't actually put any like requests for concessions out, right? Like there really aren't that many right now. I mean, it just seems like it's a bit of a tit for tat. And I think the other side is just kind of sitting there and they're taking the volleys right now because they don't really know what they want.
I'm yeah, I'm not an administrator, so I don't know what kind of back channel talk there is. I'm sure there is. So I don't. Right. I don't have an answer. Well, listen, I'm probably with you. I expect some sort of deal, you know, the art of the deal, that sort of thing.
All right. Well, we covered a lot of ground here, Tom. I really appreciate you coming by. You know, again, I think this is a really interesting time for the markets. I know it keeps you very busy. I know that you guys have a lot of clients who probably give you guys some very good insights also. And it's always good to get a sense because I know that you guys have a huge list of retail clients.
clients too who read your stuff every day and so it's always probably interesting to hear um what they're thinking yeah we have a lot of touch points yeah you do um where can everyone find your stuff there tom they can find us on twitter at fun at fund strat f-u-n-d-s-t-r-i-t they can find our research service at
fsinsight.com or they can look at our ETF Granny Shots, which is ticker GRNY. All right. Well, there it is. Tom Lee, Fundstrat. Thanks so much for being on. I hope you'll come back soon. Thanks, Dan.