Is AI Actually Saving The Stock Market? — With Tom Lee

30:30So 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. And just quickly, at a very high level. So when you're ready to say, okay, the S &P is going to jump and there's like 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. Yeah. Well, a lot of times markets make big moves because of surprise. So we have to like today, we're seeing it today with like Tesla. And but the reason there's a surprise is that in a general sense, there's something that anchors the valuation of a company.

31:09Let's say it's earnings or this S &P. Like, let's say that what anchors it is the Fed's dovish. But then we worry about tariffs and recession. So that's pulling down the market. You can always look for what will counter that argument of recession. And for us, this year, it was the high-yield market. Because high-yield spreads need to widen to like 800. The spread over treasuries has to be 800 basis points. So 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.

32:00So 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 and what stocks were selling off, the S &P down 25 % has priced in like a 60 % or 70 % chance of a recession. So that's how we can kind of 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. 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.

32:51And it kind of gets to like the broader market here. Like you mentioned, you were bullish in the April law, which means that when, just to explain 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. And I think you mentioned to me that you said that investors, this was previously, we've talked previously, and 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.

33:26And honestly, sometimes I can't either. Like 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 U.S. 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. So 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? And I think your belief is that it will continue to go up.

34:04Yes. So we do have a published history of our research. So our clients can 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. What's a waterfall decline? 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, you know, 10 ,000 feet. 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.

34:53Because 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. You know, 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 stimulus. 2025, no liquidity. Well, no, in 2020, the Fed did like, Fed did a lot of QE.

35:31Right. 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. Okay. So 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. And 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? That's a crazy say. Or they say you buy when the guns fire.

36:16You know what I mean? But that's true. So we were advising our clients that you sell the buildup, but you buy the invasion. 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 often? I think the simple thing is like 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. What if the war is really bad? Well, so here was our calculation, which I think maybe people agree. the u.s 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's I 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 necessary but this whatever we're gonna 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.

37:48But to 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. So we also had been pretty clear in our client communications that he was going to walk back tariffs. So how do you make that determination?

38:27Well, part of it is guess. Okay. Because I don't sit in the White House, and I don't know what's happening, but I do know that we could look at the prior first term. 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 it's been shown that it may not survive court challenges. So that's why we thought eventually there would have to be some dialing back.

39:21Just a quick aside since we've done a couple of forks. It is interesting that tariffs 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. Do you think Elon kind of – maybe this is a crazy idea, but do you think he kind of like jumped on the grenade in tariffs and like publicly 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 outside.

40:02Yeah. Look, you never know Washington because you know what? There's a lot of misdirection. Right. 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 like 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 like you know it probably would have been wrong and many did assume this is that trump is gonna stick with tariffs and that's it come on you know no matter what happens to the world economy it's kind of preposterous for people to have taken that stance it 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 if they have to get a full off-ramp tariffs 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 U.S.

41:19economy. And 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? Yeah. Well, I think Washington's used to a lot of this extend and continue to extend. Tic-tac ban extending into perpetuity. Look at the debt ceiling. 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.

42:02So there's no reason you lose leverage by extending it another 90 days. Are the U.S. and China too interlinked to get into a serious trade war? 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. But what about more broadly? And 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. What does that mean? Well, it'll be like a 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?

42:58I think at the end of the day, we're trying to use the wrong instrument to cure a disease. Well, it's like the thing that happened with Apple. U.S. tariff China. Apple moved production or really assembly to India because it was Foxconn doing the assembly there. Yeah. The parts they brought in from China. So what do you think the right – I mean 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. Yeah. Well, you know, I think people forgot like sort of like the conversation that was happening in the 2008, 9, 10 period when like Apple was opening manufacturing overseas.

43:46and you know Tim Cook or Steve Jobs you know said many times it's easier to open a plant in China than it is in Wisconsin you know 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 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.

44:33That's fascinating. Yeah, it makes sense. Right. 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. 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.

45:11And 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. So it's non-economic friction. And today, robots should literally make labor not the reason you can't do any production. Because, you know, China, I'm sure, you know, you know more than me, Alex, but like China's iPhone manufacturing advantages, they move huge populations of female workers to produce phones because they have the finger dexterity.

45:59But they can only like work for 90 days because they burn out from the intensity. But, you know, robots now have, you know, the same dexterity. So you don't, that's not the constraint, like to be building iPhones in China. 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. Yeah. 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.

46:43And 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. 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. Yeah. And of course, that means you can bring a lot back to the U.S. too. So my sense is that China is pretty far ahead on humanoid robots. Yeah. When you look around the world, do you have a sense as to where these might come from?

47:27Yeah. 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 So I think that's why arguably China's AI is way ahead of the U.S. because they've had better surveillance and therefore their robots will be more intuitive.

48:12But then, you know, 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 people are going to deal with. Yeah, I think I think provenance matters, you know, because it's provenance. is this like a sleeper spy? 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.

48:56I think it's being underappreciated how that is in some ways a symbolic revolt against automation and big tech. And if you, 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. It's going to be very, if this happens, it'll be the most difficult tech rollout we've ever seen. Yeah, because you're exactly right.

49:35There'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 reemployed and they're idle, why wouldn't they be angry? Yeah, it's the history of the world. That's what happens. 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, you know, attack. Yeah. You know, where robotaxis park.

50:13You know, who knows? It's you're right. We've already seen it in some ways with the Tesla. So that's kind of totally unrelated. So 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. So 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. So 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%.

50:58And 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 like the Magnificent Seven sort of split off into the AI winners and AI losers? 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. Okay. One name you probably didn't mention but should be considered an AI winner is Netflix. Oh. Because – well, one, because, of course, Netflix is probably using a lot of AI as a – not necessarily a producer of AI, but, you know, it benefits from it.

51:44But it more reminds me of Domino's Pizza. So like, you know, the theme of the last 20 years has been there's been a labor shortage around the world. And that's why like wages are higher. So you think staffing stocks should have done better. But like stocks like Robert Half have underperformed the S &P. So like if labor was a theme and you buy Robert Half, you 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. Interesting.

52:21Yeah. 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 an AI. But Apple might do what they did in 2007. They weren't cutting edge and making the first mobile phone, but they, 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. Now, I want to state for the record that this is not an investment advice podcast, informational purposes only.

53:06Yes. 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 Granny Shots ETF that allows investors to play on some of these themes. Yes, that's right. Talk a little bit about that. So Granny Shots, ticker GRNY. Why is it called Granny Shots? Is it a shot so easy that a granny could make it? 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.

53:43And that's why your completion percentage is higher. Rick Berry was 90 % for three 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. So meaning it's better to identify the things driving the market and own the strongest stocks. For instance, the Gen Z, the Gen X trade, which I'm a Gen X, was just internet. Buy internet as a theme rather than try to buy like a drug stock or something, you know, at, you know, PE of 10. So we constructed the seven themes that are the most important to the market.

54:29And then we find the strongest stocks in each. But a granny shot has to be a stock linked to two themes. So essentially, it's a 35 stock list. I look at it as these are the 35 most important stocks in the S &P. Forget the other 465. And since inception, granny shots has outperformed. The S &P year to date at granny shots is up 9%. Morningstar ranking, it ranks as top three percentile. Since the April low, it's a one percentile stop, beating 99 % of funds. So I think it's really proof that our approach to thematic investing, which is what Fundstrat does, and 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.

55:23And AI is only one of seven themes. So it's just why when we talk about is AI driving the market, I can point to many other things that have really been driving performance. 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.

56:03And I'd love to hear your thoughts on that. But to me, I think that Bitcoin running up to its 101 ,000 per Bitcoin right now is pretty remarkable. and 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 like things fall off after, you know, one third of the way through the cycle, but something ends up coming through. So 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.

56:41I'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 want to happen has happened. It's not being traded by mainstream financial institutions. So why does it have an opportunity to go up from here? 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 wrote 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.

57:35So 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 in 2022. And, you know, 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, right? 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.

58:19Like 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. So stablecoins might be the Web3 app that's really recreating financial services because, one, a stablecoin works better than a regular dollar. You don't have to send it through middlemen to transfer it. Yeah, that's right. Now if you want to move billions and trillions, you just use the stablecoin market. and it's proving to be more profitable for a bank.

58:59Circle, like I won't comment it's valuation, but as a net income or Tether is a better example because it's not public. How do you trust those Tether people? Like you don't really know what's going on. Well, that's where, see, this is where blockchain comes in. 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. So what's a better bank, right? What's a better financial services model is building it on the blockchain.

59:37So 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 stable coins. And financial services, companies are getting it now. Even Walmart, Amazon want a stable coin because it's actually quite profitable to have one. That you are changing the financial system through crypto. So Bitcoin's not at the top. Yeah. So if you, again, model this out in utility, because remember, stable coins is only a$250 billion market today. So you realize that stablecoins collectively are the 12th largest holder of U.S.

1:00:24treasuries. They own twice as much as Germany, for instance. So the U.S. government does in fact want stablecoins to proliferate because it's a guaranteed long – stablecoins never have declining assets of U.S. treasury markets. And dollar dominance, its 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 U.S.

1:01:14And therefore, Bitcoin will continue to go up? Yeah, because Bitcoin secures the entire blockchain. 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 Fundstrap community, which I'm really excited about. Yeah, that's coming up. Yes, that's going to be this Wednesday on the 25th, so the day this airs. Alex, I'm really excited about it. I can't wait to do it. I'm definitely excited. We should talk about the killer robots when we're on there.

1:01:46And 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. Great. Thanks. 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.