Tom Lee: Decoding the AI Trade, Bitcoin Predictions & What an AI Black Swan Event Might Look Like

Channel: Alex Kantrowitz

Published at: 2025-06-25

YouTube video id: 71vCeQMfJ-8

Source: https://www.youtube.com/watch?v=71vCeQMfJ-8

Is AI really holding up the stock market
and what happens if it fails or stalls?
Let's talk about it with legendary
strategist Tom Lee, the chief investment
officer at Fundstrap Capital, who's here
with us in studio today. Tom, great to
see you. Thanks for coming down. Great
to see you, Alex. So, I want to start
just by testing this um truism that
people have been saying about AI and the
stock market for a long time, which is
that the only thing holding up the stock
market is the AI trade. you're somebody
who looks at this all the time. Is that
true? It's true and it's not true. Okay.
Because like for instance, if you
measure it by net income contribution,
um it's pretty broad-based. You know,
the financials are growing earnings very
strongly this year. So banks, yeah,
banks, industrials are contributing a
lot to earnings growth. Of course, tech
is. And tech is a big contributor, but
not 100% of tech spend is AI. A lot of
it is maintenance capex and expansion
capex and you know the catchup for
spending that's been deferred because of
covid etc. So a lot of the capital
expenditure that we're seeing right
because we see that big tech alone the
magnificent 7 alone is going to spend
something like $350 billion in capital
expenditures this year. A lot of people
say oh it's $350 billion in AI spend.
But what you're saying now is it's a
little more nuanced than that. Some of
it's AI spend, but some of it is just
keeping up what their operations are are
relying on. Yeah. I mean, but as a
narrative, AI makes sense that it's a US
story because most of really there
there's only two places where AI
innovation's taking place is the United
States and China. And in China, we don't
have that many direct investment plays
there. So, if someone is looking for
reasons to be overweight, the US, it is
AI. But that's different in my opinion
than AI is driving the stock market.
Okay. Like it's driving the narrative,
but it's not necessarily driving the
market. How much of the stock market is
driven by narrative? Because I we're
going to have some people here who are
very familiar with investing and some
who are more on the tech side. So just
for the broader audience, is the stock
market like a story driven thing or is
it totally based off of the fundamentals
and the numbers?
Um so if I let's say do approximate
percentages okay so let's just say that
there's two ways to value markets one is
the underlying earnings and the second
is the expectations
of either how good the existing numbers
are or how much they can grow. So in
other words, that's all the narrative
part is essentially valuation.
And to me,
um they the adage in the stock market
has historically has been it takes a
whole lot of E to offset PE.
Meaning meaning that earnings can move
5% or 10% versus what you thought, but
the reason the stock might go up 50% is
more because of narrative. So I think
that in like a very simplistic sense,
narrative
drives stocks more than earnings do over
the intermediate term. We can see it in
stocks that essentially have turned
shareholders into customers like stocks
like Tesla
or Palanteer define they defy people's
fundamental understanding of earnings
because the valuation of the stock
relative to its earnings seems far
greater than someone can explain. But
that's because these have really
compelling narratives. Right. And so
with earnings, we're talking about
profits. Yeah. And and Alex, uh I'm I
might be forking here, but fork away. I
believe Tesla and Palanteer and stocks
like him are proof that mon money is not
how you measure the value of a stock
because if money is is determined as the
earnings per share, the value of a
company isn't just the amount of money
that it it represents. it really
represents a customer's trust in that in
the actual business model. Okay. And so
that's where that's where pees can
actually be much higher even for a level
set of earnings. So I'm going to go now
now that we've had this um discussion
about what creates a value. I'm going to
go back to my original question which is
how much does AI uh how much is AI
responsible for where the stock market
is today? Because I asked you that
question in the beginning and you began
by saying, well, we're seeing earnings
in banks and other places in the
economy, but as far as the narrative
goes, that's all artificial
intelligence. And if we go back to 2022,
we're in a place where we were seeing uh
runaway inflation. I don't know if it
was slowing growth, but there people
were talking about stagflation as if
this was a thing that could persist. We
had the Fed raising rates, making the
economy, you know, with the intent of
slowing the economy down. And then in
comes Chat GPT. And what happened since
then? I think this S&P 500 is up what
50% since then. So with that context, I
want to ask you again, how much is AI
responsible for where the stock market
is today? Yeah. And again, I'm going to
point out it's the narrative like that's
really what people talk about, but it's
not even what's
not necessarily driving share price
gains. I mean, a few stocks have, of
course, done very very well in terms of
share price gains, but the reason I I'd
say it's not necessarily
the thing driving the stock market is
that there's other narratives that do
drive multiple expansion. So for
instance, if we had this AI story,
but we thought the Fed was going to
continue to tighten and actually reduce
monetary
liquidity,
then we wouldn't actually have a rising
stock market. I don't know if AI could
power through a Fed that would be trying
to kill the economy or if oil went to
300
because of some geopolitical event and
was at a sustained level and so we had a
recession. I don't know if we could have
um
a market doing well and I don't as as
strange as it sounds I think it would be
tough for the AI trade to work just
because cost of money would be so high
or you know you'd have a lot of
companies getting super cautious and
then AI would be forking and and
developing somewhere else outside the
US. So
the answer is
narratives drive prices, but AI isn't
the only
sort of story in the stock market. Okay.
So is if I'm reading it right, what
we're seeing is that AI has been a So
I'm sorry I'm trying to parse a little
bit about what you're saying, but um
when you said yes and no, I think the
answer that you're giving is actually
no. that the AI story is a nice thing
that's happening on top of a bunch of
other positive things. For instance, the
Fed becoming more dovish and making
these moves to lower rates, earnings
actually increasing across the broader
economy, not just in big tech. And so
then maybe artificial intelligence, this
idea that this moment could lead to like
real productivity gains, that just gives
it like an extra boost on top of the
other things that are happening. Yes.
Yeah. I mean, AA is part of the
narrative, but there's a lot of the
narrative for the markets. And I do
think one of the reasons like let's say
that a lot of your viewers are bearish
and they're bearish and they've been
trying to expect the stock market to go
up go down or maybe they sold stocks in
April and then they're like, well, the
only reason markets are going up is AI
and I think they're already overvalued.
they're missing that there's a lot more
to sort of the narrative of the S&P that
explains why stocks are doing well. So
that's why AI is important, but it's not
the only story in the stock market. So
just as we sat down, you had mentioned
that we've seen a black swan event every
year since 2020. Uh I guess COVID, um
inflation, the list goes on. Yeah, we
had um COVID which was 2020. Then we had
the bullwhip supply chain effect which
is that we shut an entire economy down
then reopened it and all of a sudden
people didn't have visibility through
the entire chain. So there was a lot of
double ordering. That bullhip typically
bank bankrupts and creates cyclical
swings but we didn't have that which is
amazing. Then we, as you said, we in
2021 to 2022, the fastest surge in
inflation almost ever, right? This was
almost exactly like the 70s. Then the
fastest rate hikes in history.
Four of four of those events should have
caused a lot of companies to fail or
earnings to decline. S&P earnings grew
that entire period. And then number five
was tariff liberation day because that
was essentially like the Cuban missile
crisis of our generation, right? Like
the entire world was held hostage to a
singular decision
and yet
many people predicted recession, right?
Remember all the economists suddenly
said 60% chance of recession, right? And
then a lot of people said, "Well, set
your clock. In 30 days, inflation's
going to go through the roof or you're
going to have good shortages." And you
know, we're now well past 30 days and
inflation's been tame. There hasn't been
any shortages and companies are raising
earnings estimates. So that's the fifth
black swan. I mean, all of these before
they happened, we would have said the
S&P should go down. It should be a bare
market and none of these have actually
led to a sustained bare market. And by
the way, it's interesting that all of
them are supply chain related. Yes. What
does that say?
Well, you know, it's we part something
to keep in mind is the S&P 500
is a lot more sensitive to the
manufacturing economy. So even though
like we say the US is a services economy
and most of what we do is like services
actually most of how S&P makes money is
actually as you said it's through the
supply chain. But is it manufacturing in
the US or is it the there are companies
that will effectively create the designs
and then outsource the manufacturing to
places like China? Well, see in that
sense it's actually still a
manufacturing economy. Like technology
is a manufacturing economy because you
have to make you have to turn things
into silicon and then build data
centers,
you know. So it's a it it actually is a
supply chain. So it doesn't matter. It's
a manufacturing economy, but it's a
global manufacturing economy. Yes,
that's right. Manufacturing is
definitely not constrained by geography.
Right. Okay. And then that's why supply
chain is so important because if you're
so reliant on stuff moving back and
forth, then if there's a hiccup in your
supply chain or if you increase the cost
of shipping from one country to another
like you would with tariffs, then you
get into trouble. By the way, most
people may not realize this, but you
know, money has to move through a supply
chain. Talk more about that. Well, let's
say that you're
a bank in Asia and then you want to move
money to the United States. You have to
move it through an intermediary
and then it then from there it gets
moved to another intermediary. So
there's a supply chain. In fact, if
you're a global bank, so take Barclays
or JP Morgan and you have money in let's
say Japan and you want to move it to the
to the US, you have to use an external
intermediary to move the money. Banks
can't internally transfer the money
because it it violates OFAC or Fininsen.
If a bank has money in Chicago, a branch
in Chicago and they want to move it to
Texas, they have to move it externally
through the supply chain back into the
bank. Otherwise, so like you'd think,
oh, they just do an internal transfer
cuz it's all accounting and money is
like imaginary in a sense anyways. It's
just digital, but they they can't. They
actually have to move it externally
first. Okay. I think we're going to
probably put a pin in this and then come
back to it when we're going to talk
about Bitcoin later in the conversation.
But the reason why I brought up these
black swan events is I wanted to run an
idea by you that's come up in some of
the discussion around artificial
intelligence and tech. And this idea is
that if AI progress stops or collapses,
that could be a black swan event because
you have the valuation of some very big
companies being held up on the
expectation that AI is going to work.
Nvidia, Microsoft, uh, uh, well, not
Apple, but Meta has definitely played
there. Alphabet uh is is getting I think
probably well maybe mixed reviews on on
AI because of threat and search but a
large part of what people call the Mac 7
has had uh a valuation bump because of
AI and then you think about the private
funding I mean SoftBank is in the middle
of uh you know we think this 40 40
billion they're going to deploy a
trillion into AI 40 billion into open AI
um and if and a lot of this is based on
this expectation that AI will do
people's jobs and become like the
equivalent of human beings in many
different disciplines. If that doesn't
work out, then the bet, I don't want to
say, goes to zero, but doesn't work out.
There are probably a lot better ways to
put that money to work. So, is it is it
possible that an AI stall leads to
another Black Swan event, or is that uh
overplaying the AI story?
Um, I mean I can picture some black
swans driven by AI. Yeah, talk about
that. Um,
so
AI could create a black swan if it's too
successful
because it's going to create PhD level
workers at a cost that breaks all
economic models, right? I mean what is
the value of our work if something that
is not us can do it better and then if
it's combined with like a robot then it
can complete all tasks that and never
tires never needs vacation
it'll outperform every human and in that
world um and of course if it gets
sentient then it really is a threat to
like our modern civilization
Or it could even
make the definition of money unimportant
because you robots don't care about
money, right? So that I think is like
one black swan outcome is that it's
terrible. But what's the percentage? Of
course, you know, guys like Elon Musk
and a lot of the books written about
this like the coming wave put the odds
low because humanity hopefully
intervenes.
Um the second way it's like that you've
described the the setup is that the
bubble bursts in AI and I think that's
going to happen for sure. Wireless and
internet already give us the template
because wireless was an exponential
growth industry from 1990
and the growth didn't slow till let's
say 2015. So it was one generation
25 years of compounding growth of 40%.
The wireless ecosystem from
infrastructure, handsets,
software, carriers, the towers, all
peaked one-third into the cycle relative
to the S&P. So they all became market
performers.
All they peaked all at the same time.
Nothing will break away. But then 10
years into the cycle, two groups broke
out of wireless and captured the value.
The tower industry, which was like a
10bagger relative to everything else,
and Apple, which was late. Apple was
only a second chapter wireless story.
So to me, um, the AI story is
everything's going to peak at the same
time, probably one-third into the cycle,
but then in that period of consolidation
and shakeout, then one or two industries
truly pull away and capture the value
again. And so what does that shakeout
look like? Seems like it could be ugly.
Oh, yeah. That's going to be well we
know that you have to create capital
loss for investors like the internet
bubble bursting.
So the when the internet bubble burst
it only triggered a mild recession that
like in 99
because the loss was concentrated in
tech mainly and some telecom and it
really hit some geographic regions very
specifically. The reason we had a bigger
recession after that was because of
9/11. But it really would have been a
mild recession, you know, like that's
why the the GDP data was fine and
actually like 90% of stocks were doing
okay. In fact, small midcaps actually
positively gained during that period of
time because the internet bubble
bursting didn't take down the economy. I
think if the AI bubble bursts, you're
not winding the clock back to zero, but
it may have burst because it may be
bursting because someone decides to do
containment like pull the brakes on this
and saying like we're too close to
generative AI or we're too close to
sentience. You mean artificial general
intelligence? Yes, sorry. Artificial. Do
I do you think that this industry is
even capable of pulling the brakes? I
don't.
I think people are going to have to make
some decision because you're right. I
think AI safety like if we look at
employment and AI safety I think it's
one less than not even 1% of all jobs
filled.
If you look at the financial industry
and say classify job as safety it's more
than half of the jobs is safety.
So the AI industry has to invest in
safety. But you're right there's like
zero incentive for safety right now. Um
because the financial industry doesn't
have like an open source version of
finance that's trying to build the same
thing and give it away and it's sort of
keeping pace with their innovations. And
now like we did if we did a simple
thought exercise and said if you want to
train morality
of a of AI using internet
it's going to be the the most unmoral
entity ever because it sees that to gain
and win has nothing to do with
integrity. I mean if you trained AI on
the Bible for instance you would raise a
highly ethical in you know entity. So I
think that's what we have to sort of
fork as a society is like do how much
sentience do we want something to have
that actually has no moral guard rails.
Right. Right. So the other side of it is
like like I mentioned maybe the
technology doesn't work as planned and
doesn't get to this this part and that I
think it could mirror that same thing
with that you mentioned with wireless
where there were expectations of the
technology that weren't going to come to
fruition uh until a decade later. But
that when when you start to see that
when you're onethird of the cycle, you
peak then how do we know that we're
onethird of the cycle in with AI? Yeah.
Well, I think
like I can sort of give you some
guidelines that I saw in the late 90s,
you know, that maybe we can just say
roughly use it again today. But so in
1997 I wrote this report called the
mobile data report. Mhm. Which was
actually the first report that Solomon
Brothers ever produced about like how
the wireless industry could actually
like replace computers like it's like
you know what you mobile data like what
you could be doing. And uh you know like
we ended up like companies like Worldcom
use this report to to do their wireless
strategy. But we thought mobile data
could be like a $40 billion business by
20 I forget the you know 15 years out so
2010 or whatever.
And uh it turns out that like mobile
data is like turned out to be vastly
bigger but the stocks didn't do that
well. And actually the companies that
captured mobile data were was like Meta
which didn't even exist in the 90s right
it was Omnis Sky that was the company in
the 90s and Palm Pilot but they ceased
to exist so I Palm Pilot would have been
the first iteration of an iPhone right
um so I think today or back then what I
noticed was people had had to play with
their models to justify valuations so
cost of money had to go to like 5% and
then the terminal
PE or the what you call the terminal
multiple was higher than the the best
stocks were trading at today. So you had
to rerate the entire industry to justify
the valuations. So you knew that someone
was going to take a loss because these
are unrealistically funded models.
So you know Nvidia is not crazy today
you know because it's 30 times earnings
which is not a premium. I mean, Toyota
traded at 40 times earnings for years in
the 90s just making cars and Nvidia is
not making a car. You know, they're
making a a really difficult to replicate
chip. So, I guess we're not there yet,
but you'll know because everyone's
having to fake their model to explain
why they're still buying the stock. But
let's talk about the private companies.
I mean, I know it's private, so
everything is different in the private
market, but um OpenAI is in the middle
of this. We know they're at least
getting 10 billion, maybe 20, maybe 30,
maybe 40. They're losing, they lost 6
billion last year. They're probably
going to lose money this year. They're
not going to make money according to
their projections till 2029. Now, if
they work and they reach AGI, great. Uh
if they don't, what happens? Yeah. Well,
fortunately like let's say you know the
open AI and the the peer group
collectively isn't multiple trillions
right so it but it is you know nearly a
trillion ultimately when we get to the
peak of valuation for all these things
it's not that different than um what
happened to when the internet bubble
burst fiber
industry really was required consumed so
much capital. I don't know if you
followed the Selex back then, but they
were digging up rail lines, um, digging
up cities to lay fiber. And then people
said after the internet bubble burst,
there's so much fiber, we're never going
to use any of it, like we have so much
excess capacity. But after the bubble
burst and fiber prices collapsed,
a couple things happened. You know, the
second owner of a hotel made money. So
the the people who ended up owning these
and then because you lowered the price
there was a lot of innovation. It
created travel companies, you know, like
Expedia wouldn't exist without
Netflix couldn't exist without
collapsing fiber prices. Although
Netflix actually never paid for
carriage, but you know, I mean like
internet streaming became profitable and
um so I think that will happen with a
lot of code that it it may be rerated as
you said because it's so open sourced
and I'm not making a prediction. I'm
just saying that that's possible to look
for. So let's just talk briefly one more
about one more thing when we talk about
this potential black swan event with AI
and it's going to your first point of it
becomes too successful. So you mentioned
that like okay if AI can do PhD level
work then
basically people won't be able to make
money working and society could fall
apart. The story that the AI companies
tell is that we'll have abundance and
everybody will have exactly what they
need and you can have one person that
will do whatever they want because
they'll have these warehouse data
warehouses of geniuses behind them. U
why why why so when you went to the
black swan uh possibilities you didn't
take that side you took almost the other
position. Why is that? Well,
I think it's possible that it's exactly
what you described, which is all of our
needs are met
without needing to work. So, housing and
food and
um I don't know, a lot of recreational
activities.
It means the monetary system probably
ceases to exist. I mean, because then
for instance, do you need to go to get
an Ivy League education or do you need
to be the best student in your class
when your robot's always going to be
smarter than the smartest human in the
class? You know, like it's going to
change what we define as achievement.
Like, why do we work hard? I mean it is
it's some people might consider it
nirvana because let's say the 10% of the
people do aspirational like that they
live their life aspirationally like
that's when we grew up you know not
everybody wanted to be the best but when
you look at societal impact or in a
company like at my former employer which
had 200,000 employees the adage was
always
20% did 80% % of the work or really like
8% did 90% of the work, right? Yeah.
Well, that there there's no incentive
system for that anymore in a world of
abundance. So, I do think it the
consequence is money may stop mattering.
And then if we're able to do whatever we
want, then why wouldn't there be a
situation where everybody gets
everything they need if money doesn't
matter? Sure. But then stock like stocks
may not matter. Yep. You know, like or
what is a company any anymore because
it's not a group of highly skilled
people
and if it's a high group of high skilled
robots, well, anyone can copy the code.
So then there's no advantage for a
company. I mean, it's it's it's actually
probably
like one of the some people might say
that's a good I think that would be a
kind of a very dangerous outcome. Okay.
All right. All right, I definitely want
to talk about which AI companies are
going to win and touch on a little bit
about why the market has been so
resilient. Uh, and then maybe talk a
little bit about Bitcoin. So, let's do
that right after this. And we're back
here on Big Technology Podcast with the
great Tom Lee, the chief investment
officer at Funstat Capital, also the
head of research at FS Insight. Tom,
it's great to have you here. I've been
looking forward to this uh for a while.
So, I think that um just to tell folks
who you are, um I see you on CNBC all
the time. You're a CNBC contributor um
as am I. And uh you have these amazing
moments where like you'll show up on
Squawkbox and be like the S&P 500 is
going to go up uh what like 1 or 2%
tomorrow and then it does. How do you
know these things?
um you know it's a lot of it is
uh evidence-based because we do a lot of
sensitivity analysis to try to
understand where we are in markets. So a
lot of our statements that we make are
high probability statements but for that
to actually happen is luck in a sense
right because something has an 80%
chance of happening doesn't prevent this
being one of those 20% days that it
doesn't happen. So right because if
something let's say if something happens
90% of the time and it's happened a a
million times but the next three times
it doesn't happen. So like those three
calls fail statistically it's still
going to stay at 90%. For accumulated
history. So like 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 in 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 um 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 say anchors the
valuation of a company. Let's say it's
earnings or this S&P like let's say that
what anchors it is the Fed's dovish.
Okay. But then we worry about tariffs
and and recession. So like that's
pulling down the market.
You can always look for what will
counter that argument of recession. And
like for us this year it's 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 if the 10ear is at 4% high
yield need 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. So
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 on 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. Yeah. Then these signals show us a
different path. And it kind of gets to
like the broader market here. uh you've
like you mentioned you were bullish in
the April low which means that when just
cuz I explained for our non- finance
listeners when the market went down and
you know we were in full bare 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 uh that investors
this was uh 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 stock the S&P 500 was actually
positive for the year. And honestly,
sometimes I can't either. Like we're
talking again, this is Monday, June
23rd. The episode comes out Wednesday
morning the 25th. Uh we're talking
literally in the aftermath of the US
bombing Iran and the S&P 500 is up on a
Monday with the prospect of a broadening
war. I don't get that. But the things
that you pointed out where the Fed is
still hawkish, people think inflation is
high, oil could go uh higher, and you
said stocks have moved without
explanation. Um, so what gave you the
confidence to believe that we weren't
going to see uh a a deeper dip with the
market and predict that it's come back
and and I think your belief is that it
will continue to go up. Yes. Um so we we
do have a published history of our
research. So clients our clients can
check check fact check us but okay 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-eek period. It's really rare to
basically like literally
cause a plane to drop, you know, 10,000
ft. And um almost every waterfall
decline is a V-shaped bounce unless
there's a recession.
So that's why we got so keyed up on this
high yield market because if we fall,
but we don't have a recession, that just
means you everyone just panicked. They
did a fire ready aim. And so we argued
you'd have a V-shaped recovery. And a
V-shaped recovery is a symmetric bounce
back to the old highs.
And um, of course, everyone argued
against it for logical reasons. They
said tariffs, they're not going to be
solved for a year. you know, uh, 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 25 no liquidity.
Well, no. In 2020, the Fed did like
That's when they said it. Fed did a lot
of QE. And they're like, there's no QE
coming. But we said that history says
you have a V-shaped balance, 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 re recover.
I'd say that's really my take away 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 saying. Or or they
say you buy when the guns fire. You know
what I mean? And but that's true. So, we
were advising our clients that you sell
the buildup, but you buy the invasions.
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. But what if the war is really
bad? Well, so here it was our
calculation, which I think maybe people
would agree the US wouldn't take action
if they thought it would daisy chain
into a prolonged war because there's no
appetite. And Trump clearly said he
doesn't want to pull us into a war. So
if they're taking action,
they've either signaled ahead to Iran
that this is a limited action or they
know that whatever action they're taking
is decisive and limited in scope. So
that's why I could see why you would buy
the invasion, right? And it'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
necessarily but this whatever we're
going to blow this thing up and
I don't know I'm not a political expert.
I'm just saying I can understand why
we're rallying today. But to do this job
well, you have to be um you have to game
game game plan a little bit for like or
you have to get into the minds of
leaders. Uh the 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?
Well, part of it is is guess. Okay. Um
cuz I don't I don't sit in the White
House and I'm, you know, I don't know
what's happening, but I do know that we
could look at a at the prior
um 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
has been shown that it it may not
survive court challenges. So that's why
we thought eventually there would have
to be some dialing back.
Just a quick aside since we've done a
couple forks, it is interesting that
terrace was the first moment there was
some daylight between Elon and the
administration that continued to build
uh when it came to the big beautiful
bill. Yeah. Do you think Elon kind of
maybe this is a crazy idea, but do you
think he kind of like jumped on the
grenade and tariffs and like publicly
publicly bashed him bashed them to sort
of start a roll back even if it meant
the end of his partnership with Trump
because they were too important for
Elon's business to continue? Like the
the roll back was too important for
Elon's business because of his
partnership with China and the supplies
coming in from Yeah. outside. Yeah. I
look that could you never know
Washington because you know what there's
a lot of misdirection right um and so
that's very plausible what I would say
is I I would say it's clear that the
White House had was enchanted with the
idea of using tariffs but they as much
as they warmed 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 offramp do and as
opposition built they chose to take the
offramp like you know it probably would
have been wrong and many did assume this
is that Trump is going to stick s stick
with tariffs and that's it come 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
offramp and you know the ultimate
offramp is scapegoating somebody and I
think the ultimate scapegoat would
probably be Navaro if if they have to
get a full off-ramp of 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 US economy and we're in
the middle I think we're in the middle
of one of our 90-day pauses. It's hard
to keep track these days. Um, so maybe
things could go back on. Yeah. Well, you
know, I think Washington's used to a lot
of this extend tic tac to extend tic tac
ban extending it ceiling. You know what
I mean? Like it's the history of
Washington. And you know, even in
finance, there's the term pretend and
extend. I mean, if you if there's some
event and you want to delay it, you just
keep extending and pretending. So,
you're right. Uh I would say no one
should be up in arms if we have an
extended pretend. So the threat of
tariffs remains because at the end of
the day he can do a different channel to
actually implement tariffs. So there's
no reason you lose leverage by extending
it another 90 days. Are the US and China
too interlin to get into a serious trade
war?
I 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 it's
supply chains can move. What does that
mean? Well,
it's
we'll be it'll be like a whack-a-ole. If
we're trying to tariff China, but then
they move manufacturing to another
country, do we try to prevent that
country from having
uh economic access and close their
borders? You know, I think at the end of
the day,
it's
we're trying to use the wrong instrument
to to cure a disease. Oh, it's like the
thing that happened with Apple. uh US
tariff China, Apple moved production or
really assembly to India because it was
Foxcon 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, it I think people forgot like sort
of like that the conversation that was
happening in the 2008 910 period when
like Apple was opening manufacturing
overseas. Um, and 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 I think
tariffs don't offset the regulatory
burden that many companies face doing
anything here. So
the answer the really the best answer is
make it easy for American companies to
build and and that means reduce
friction. tariffs might be adding a lot
of friction to the process. That's
fascinating. Yeah, it makes sense. Be 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 US does. But often times
you can put power in the hands of these
bureaucracies and it gets abused. Yeah.
And so one of my friends was an a
private sector EPA lawyer and he passed
away. But at during that period of time,
I had several lunches with him and he
says, "Tom, what people don't understand
is the EPA can literally prevent any
merger from happening because they can
raise an environmental concern that has
nothing to do with the actual business.
And so you you had basically enormous
power wielded by folks who didn't
necessarily care about letting
technology stay in America. And so, and
it wasn't necessarily that it's
polluting. It may be because
the guy's close to some gar, you know,
someone who runs a garment factory
doesn't want the garment to go out of
business. So, it's, you know, it's
non-economic friction.
And uh you know 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 you know
more than me Alex but like China's
iPhone manufacturing advantage is they
they move huge populations of female
workers to to produce phones because
they have the finger dexterity
but they can only like work for 90 days
because they burn out from the
intensity. But you know robots now have
um you know the same dexterity. So you
don't that's not the constraint like to
be building iPhones in 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 uh picking
an item out of something that comes to
you via robot and then putting it in a
bucket and then taking it out of that
bucket and putting a label on and
shipping it. We're going to hit a point
where that's going to be completely
automated by robots whether it's
humanoid or a human humanike 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 fungeible 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.
Yep. And of course that means you can
bring a lot back to the US too. So my
sense is that China is pretty far ahead
on humanoid robots. When you look around
the world, do you have a sense as to
where these might come from? Yeah, it's
going to only be three maybe four
countries. It's China, USA, Japan, and
Germany. M 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 uh 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
um you know a hidden chip hidden code so
I I think that's why arguably China's AI
is way ahead of the US because they've
had better surveillance and therefore
their robots will be more intuitive. But
then, 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 have to deal
with. Yeah. I think I think provenence
matters, you know, because it's
provenence.
Is this like a sleeper spy? So, this is
my sort of crackpot theory of the case,
but I think that we are underestimating
when we talk about humanoids. Um, how
violent human beings will get against
them. We just saw in LA there were this
this burning of the Whimos. Um, you can
look at that at a bunch of different
ways. uh I think it's being
underappreciated how that is in some
ways a symbolic revolt against
automation and big tech and if if you
let's say okay just putting this in 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 don't can't provide to
your family anymore you know that thing
has cameras on it you don't care You're
you're you're tipping it over at the
very least. Yeah. There's going to be
very it's going to be if if this
happens, it'll be the most difficult
tech roll out we've ever seen. Yeah.
Because you're exactly right. There's
going to be a distributional consequence
of a robot. So, until we get to that
world where someone says there's
abundance, there's first displacement.
And yeah, if people are displaced and
they can't be remployed and they're
idle, why wouldn't they be angry, you
know? So I Yeah, it's the history of the
world. That's what happens. It's could
be very 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 robo taxis park, you know,
who knows? It's You're right.
Um we've already seen it in some ways
with the Teslas. Well, 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 I've heard
recently that there's a real dispersion
in terms of where the gains are coming
from in in the Magnificent 7 um 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%. And if you're
trying to assess like, well, I mean,
obviously it's not all AI related, but
the ones that are up definitely have the
bad the better AI story. So, do you
think that we're going to see like Mag
the Magnificent 7 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. Uh some of the
winners will turn into losers because we
were deceived because some something
forked. Okay. One name you probably
didn't mention but should be considered
an AI winner is Netflix. Oh. Um
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 but 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'd 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 bought 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. Yeah. But um but
Apple like for instance 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 you know Apple might do what they
did in O 2007. They weren't cutting edge
on 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 cur the you know 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 podcastformational purposes only.
Uh so take what you're hearing and view
it in that lens. Uh 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. Yeah. Talk a
little about that. Um, so Granny Shots,
ticker gr. Why is it called Granny
Shots? Is it a shot so easy that a
granny could make it or uh in a way,
yes, it's named after the way of
shooting a free throw unconventionally
underhanded. Yeah. Popularized by Rick
Barry, NBA Hall of Famer. But the idea
of a granny shot is that, you know,
doing a granny shot is is the correct
physics way to throw a basketball and
that's why your completion percentage is
higher. Rick Barry 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 we
constructed the seven themes that are
the most important to the market
and then we find the strongest stocks in
each. But a granny shot has to be a
stock linked to two themes. So it's
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, um, Granny Shots
has outperformed. The S&P year to date
at Granny Shots is up 9%.
Morning Star ranking, it ranks as top 3
percentile.
Since the April low, it's a one 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
uh you can outperform and AI is only one
of seven themes which is why when we
talk about is AI driving the market I
can point to many other things that have
really been driving performance. Okay,
now before we leave, we have to talk a
little bit about crypto. So, um, we, you
and I were both at this investment forum
that Stephanie Link from High Totower
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 uh, you
advised everybody to buy some Bitcoin
and that Bitcoin has a lot of runway
left. Um, I have said on the show for a
while that I was skeptical of this web 3
idea that you can build on top of the
blockchain. And I' I'd love to hear your
thoughts on that. But, uh, to me, I
think that Bitcoin running up to it's at
101,000 per Bitcoin right now, uh, is is
pretty remarkable and has the fact that
it has surged even as a lot of the web 3
hype has collapsed. maybe that 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 uh in in
your mind whether it 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 uh we might be
towards the top of Bitcoin and I'd love
to hear your argument against it which
is that we basically have a president in
the White House that is you know as pro
crypto as you could ever get who's
launched his own coin. Maybe we could
talk about that another time. But um
basically the question is everything
that Bitcoin maximists have want to
happen has happened. It's now being
traded by mainstream financial
institutions. So why does it have a
opportunity to go up from here? Um
I think Bitcoin's you utility is going
to go up exponentially in the next 10
years. So, one of the reasons Bitcoin
has risen to 100,000
uh is just simple network value. Um,
when we first wrote about Bitcoin in
2017 and Bitcoin was under a,000, we had
said it could get to 25,000 by 2022
because it's a network value asset. So
we just said if you model number of
wallets and activity per wallet, which
explained 90% of the move of Bitcoin
from 2009 to 2017, you would get to
25,000 2022. And you 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. Like that
wasn't a thing, but then people realized
it was valuable to own the real estate.
Like some retailers are more valued
because they own the building. That's
what Bitcoin as your working capital is.
And then but banks are also quite
interested in Bitcoin
because of stable coins. So stable coins
might be the web 3 app that's really
recreating financial services because
one a stable coin works better than a
regular dollar. You don't have to send
it through middlemen to transfer. That's
right. Now if you if you want to move
billions and trillions, you just use the
stable coin market. And it's proving to
be more profitable for a bank circle
like I won't comment its valuation but
as a net income or tether is a better
example because it's not how to 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 that you blockchain
has proven you don't need to know the
counterparty. You just have to trust the
code. Mhm. And so Tether
from a net income basis makes more money
than most financial institutions. I
think it's would be the third most
profitable financial institution in the
world. Wow. So what's a better bank,
right? What's a better financial
services model is building it on the
blockchain. So I think stable coins is
the killer app that's proving because
Bitcoin anchors everything
because you know you don't need a stable
coin 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 if you again model this
out and utility because remember stable
coins
is only a $250 billion market today. So
you realize that stable coins
collectively are the tw 12th largest
holder of US treasuries.
They like they own twice as much as
Germany for instance. Wow. So the US
government does in fact want stable
coins to proliferate because it's a
guaranteed long. Stable coins never have
declining assets of US Treasury markets.
And dollar dominance, it's 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.
Stable coin usage is only 20% in the US.
Almost 60% of stable coins trading takes
place in Hong Kong, China, and Japan.
So you can see that it's creating more
demand for dollars outside the US. And
then therefore, Bitcoin will continue to
go up. Yeah. Because it Bitcoin secures
the entire blockchain. Okay, Tom, we got
to 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 uh spoke with me in
person. We're going to do a couple of
webinars for your Fundstrap community,
which I'm really excited about. Yes,
that's going to be this actually
Wednesday on the 25th, so the date this
airs and um Alex, I'm really excited
about it. You know, I'm can't wait to do
it. I'm I'm I'm definitely excited. We
should talk about the killer robots when
we're on there. Uh but but um yeah,
let's just keep talking and and thanks
again for this really insightful
conversation about AI, the stock market,
crypto and tariffs, all the things. So I
I definitely leave today uh much more, I
think, illuminated on 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 Ron Roy to
break down the news. Until then, we'll
see you next time on Big Technology
Podcast.