Transcription
Uh, we wanted to quickly invite Scott Wapner from CNBC and Tom Lee of Funstrat to get on stage and let's talk markets. Tried to get Tom to take his damn jacket and tie off. He refused. Be no place to put his granny shot pin and his BitMind pin, but that's how Tom rolls. So, that's how we're going to do it.
It is timely as uh as Matt and Josh were talking about. Obviously, what's been taking place in the markets uh lately has people feeling a bit unsettled about where everything is going from here as the environment seemed to be pretty good up until about a week or so ago. We've obviously had some issues beyond that with private credit and AI and the spending around that. And Tom and I will cover all that, but I think it's probably useful, Tom, to begin with your current view of the markets. Little calmer today if you've seen the futures. Obviously, it's still in the red, but not nearly as bad as the last few days have been. So, give me your your view as we're still a bit unsettled, it feels, in the markets, but maybe the beginning of a more calm environment. We'll see.
>> Uh, yeah, good morning, Scott. Thank you. Um, and yes, next year, you know, maybe Hawaiian shirts for me.
>> Come on, Tom.
>> But I I in all fairness, I I'm actually
>> Read the room. Read the room.
>> I I'm traveling for the next 10 days. So, with my carry-on, which I never check in, I I need like the same uniform. Um, but I I think if I was an investor, when I look at the environment, um, it's very uncertain because, you know, nobody wants war and nobody wants problems in the Middle East that could really spiral. Um, but as much as that that's our gut reaction, I think when you look at what markets are doing, uh, they've been very resilient. This is arguably the seventh black swan we've thrown at the market since 2020. You know, from COVID to the basically shutting down the entire economy to, you know, the fastest inflation cycle in history. I mean, it goes on and on. And the S&P has been resilient every time. So, I I do think investors should take their cue from the markets and realize I think the S&P actually wants the PE multiple to expand. Um, and strangely, I might even add, I think oil prices being high is actually good for US stocks.
Okay, that's probably a controversial statement. Why Why do you believe that? By the way, the Wall Street Journal says this is the most severe energy crisis since the 70s. As some suggest, oil could go to 130, 150. Just because it went down over the last 24 hours doesn't really mean anything for the the big picture. What would that mean for stocks?
>> Yeah. Uh I did check uh callsh and poly market um and you know betting markets or prediction markets are expecting oil to be 100 even through June and past June. So I think we probably should assume oil and it's a prolonged period of high oil. Um but now this is not saying it's always true but I do think high oil has three reasons it's good for equities in the US. Um, one is the US is an exporter. So we are actually as an economy a net beneficiary of higher oil prices. The second is it's a relative issue but the US as an exporter but China and Asia and maybe whoever we compete with economically is a net importer. We start to look better or stronger on a relative basis. So it's a flows back into US equities. The third is that if grow global growth stalls because of high oil which I think it is likely um investors want to own growth stocks and actually the US stock market is basically 80% a growth index. So it makes mag 7 and the cryptos and the software stocks look better and that's what started to outperform in over the weekend and actually Monday. And and the last reason and it kind of I think important is that the Trump put only applies to US equities. So I think high oil helps equities or if you're getting bearish because of it, you shouldn't get too bearish on high oil.
Let me expand a little bit on the so-called Trump put because I'm curious as to how you as you know a strategist um and how how you would tell investors to assess an environment where just like back in April, you know, at the very depths of a market selloff, we've seen the president blink, right? And then the market has rebounded so dramatically that you feel like an idiot if you didn't buy the low or buy the big dip because we've observed obviously a pattern when you know the president obviously cares about the performance of the stock market. I'm not that's not breaking news. That's just the reality of the world in which we live in the prism through which he views success in many respects. the Dow's at 50,000. President's feeling pretty good about his policies and the economic agenda of the administration. If you have a declining market, it obviously takes an emotional toll uh on how he feels as though his report card looks. So, knowing that and whether that was what we got yesterday afternoon at 3:30, you can all judge that for yourselves. But knowing that the Trump put, as you put it, always exists, it seems, how would that influence your investment decisions in this current environment?
>> Um, well, I think it's giving us a lot of reminders because there are, I think, two things that we usually advise our clients. two two of many things, but one is uh this sort of idea of the rule of 10 best days that if you don't and I've heard Josh Brown call it time and market, but if you take out the 10 best days, the 10 percentage B percentage one day gain days in each of the last 10 years, the S&P's average return drops from 16% to basically negative. It's almost 2,000 basis points of your return every year or 20% comes from just 10 days. So if you feel like you're going to time the market because you're worried about geopolitical risks, unless you've got perfect foresight, you're going to miss the bottom. And that's what happened last year. And the second thing that we always advise our clients is this uh idea of what they call in Asia kiki which means uh crisis is actually two words concantenated. It's danger and opportunity. I think investors are too quick to point out danger. I saw that over the weekend like all these doom tweets and people were getting oil prices through derivatives over the weekend like you know on hyperlquid it was oil hit 118 and everybody thought the economy would unravel you have to think of opportunity whenever there's danger so if if you see high oil you should also think how can I benefit and it's not just buying oil stocks but it was it turned out to be buying the mag 7
>> well JP Morgan says stocks are still vulnerable from here and could still go down 10% from current levels because of the war. Do you disagree with that?
>> Uh I I I think stocks can go down. I mean this year we our base case is that there will be a 20% decline uh at some point but the way we tend to view markets is markets will probably peak on good news and they bottom on bad news. So war is almost universally just a a cadence of bad news. I I don't think that's what causes stocks to go down. In fact, uh our team looked at the last eight major war war conflicts and stocks almost always bottom at the beginning of the conflict. So I mean remember World War II, I mean sorry if you study World War II, none of us were trading World War II. Uh that was a long war and it was actually a bull market. I mean wars are tend to be good for the economy.
>> Well, that's why the other day in the midst of, you know, the the the larger declines, you had somebody like Jonathan Kinsky of BTIG put out a note with the title, when the missiles fly, it's time to buy because people generally believe that during times of market upset, during conflict, it's short-lived. Now, this is different. We've had many conversations obviously Tom at the beginning of this year where you did suggest you thought we were going to have a nice move to the beginning. We're going to have a bare market potentially in the middle of the year and then have a nice move in into the end. Now you obviously didn't have this war on your bingo card. Um, so how does that influence your broader view about what you thought coming into the year? You already thought we were going to have a a bare market.
>> Yeah. Now I don't but you didn't have this as the the facilitator of that.
>> Uh that's right. Um in in some ways there's already been a bare market because uh software has had a draw down and uh the the withdrawal of liquidity. You know the amount of selling and then the short positioning is what you usually see at the height of a bare market. And we know that MAG 7 actually has become untouchable for many people. And we know uh everything correlated to software like crypto uh has declined. So I think basically half the stock market has been in a bare market already. Um but the the reason I don't think this is the bare market is uh too many people have turned bearish. Um, so you know, I I I think markets like if you think about late 2021 and that and we missed that decline, that was a time when people were quite optimistic and the market was falling in the face of pretty good news until it turned really bad. And uh I think that that's more likely happening later this year because, you know, we do have things that can cause investors to flip from being optimistic to scared whether it's a new Fed. Uh we still have a lot of AI spending. There could be new doubts emerging. Um so I'm kind of in the camp that we're going to be resilient through this war headlines and and make our way to 7300.
Well, you had you had the new Fed as as a key reason for why you thought there there might be a bare market in the beginning of the year. Now the Fed question becomes a little more complicated, doesn't it? elevated oil prices, higher gas prices, inflation was already a little sticky, heading in the right direction, but nonetheless above the Fed's target. Expectations now for a June rate cut are way down since the war started. How does that influence your thinking?
>> Yeah, I mean that's like as I think about later this year. So we have a process to nominate a new Fed which has happened but then confirming the Fed and then the Fed sort of starts to make his first set of public communications and history shows that every new Fed chair has been tested by markets. The median draw down is 13% uh within the first year. So let's say that that starts in the late summer and exactly as you said he it's almost in a quagmire a no-win situation because how does he convince the market that's worried about oil and inflation but also private credit being weak and an economy that is so confidence driven and maybe an an administration that makes investors pretty leery. Uh it's a very tough job. So I I can see that being the makings of a pretty big draw down later this year.
Well, it's complicated also by the labor market, which you know, the most recent jobs report wasn't good. I think there's a fair amount of concern in in the in the economy about AI displacing jobs. Talk about that all the time. And you see new layoff announcements, almost, you know, multiple ones by the week. So, you could say, well, that's a potential positive for the Fed cutting rates. But then you have sticky inflation now complicated by energy prices. So it's a true pickle that they potentially have found themselves in.
>> Yeah. Until I mean I'd say the easiest situation for the the new Fed would be if the market was already down 20%. And then he starts to make his first statements then he can sort of be doubbish. Right. Um, but if the S&P is around 7,000 and he's making coming in, and you're exactly right, we don't have visibility on labor and inflation, I I could see how it's the market will test them, but I think at this moment, I I don't think markets are sort of pricing that. I think they're pricing in a lot of concerns. As you said, they're worried about AI uh and the amount of spend. I think people are overly worried about AI capex. I don't think the numbers are that big yet. they can get a lot bigger. Um,
>> not not that big yet.
>> Yeah. I'd say
>> like 700 billion dollars this year, Tom.
>> Yeah. So something to keep in mind is someone looks at 700 billion and thinks it's a huge number but you know globally uh we spend almost 10 billion on construction activity and like almost $5 billion on cars and and like gold prices in a single day move almost one and a half trillion. So like the total AI capex this year is four hours of gold movement like you know I mean gold is a moves the network value changes by about a trillion and a half a day. So I think AI spending is still small in an 80 trillion economy.
I think we used to suggest that if any of the hyperscalers cut back their spending that it would be a market negative because we would say uh oh we bit up all these stocks their multiples have expanded on the idea that this AI boom is going to be long lasting and have some great durability to it. Now I almost feel like that's changed where you know the market is almost looking for the first hyperscaler to find religion and maybe cut their spending a bit. How do you think the market would react? In fact, if let's just say in the next earnings period we got one of the hyperscalers to say, you know, we're going to dial it back. We're going to take a little more of a wait and see approach. Would that be a market negative or a positive?
>> Uh I mean I always look at stock versus flow. So like cumulative AI capex is four trillion. If the spending slowed it would raise the question of like the cumulative amount of money spent. Like it would make people doubt whether it's actually a good endeavor. So I I think it would be a negative if AI spending slowed. Um but again I I think there's still upside to spending. I mean total labor compensation spending globally is like 60 trillion something like that. So it's, you know, AI is a fraction of total labor costs right now.
What do you make of the way that the mega caps have traded through this this period of turmoil in the market? You know, there was a point 18 months, 24 months ago where these were viewed largely as safe havens. Then that was tested a bit obviously when the spending started to to ramp up and questions about an AI bubble started to percolate a little bit heavier. Uh but these stocks seem to many of them ha become a a port in this market storm again.
>> Yeah. Um I mean I think uh MAG 7 um we know are widely held stocks and so they're used as proxies for liquidity. So whether it's a global investor uh who's long US you know they're owning the mag 7 and a lot of hedge funds can only buy large liquid stocks. So the Mag 7, you know, really occupy a lot of portfolios, but the the valuations have become uh ludicrously cheap. Um for instance, you know, the the Mag 7 are still the highest debt rated companies out there with the ex, you know, and Oracle is not a mag 7. Uh so their cost of money is cheaper than many governments. I mean, in other words, you know, Meta can borrow cheaper than like most of Europe and uh in Japan and and so stocks should have a PE multiple that's above the cost of debt of a company. So, they should all be 30 33 times earnings. I mean, even like in Nvidia, but they're all trading in their 20s and they trade at half the PE multiple of like Costco and Walmart or Coca-Cola. I mean, the if someone says the moes on Costco and Walmart justify their pees, I mean then the Mag 7 have a proportionately good mode. I mean they I think the multiples have a lot of room to expand in in the Mag 7.
We haven't really talked that much lately. I feel like the the so-called circular deals that have happened within within AI, you know, Nvidia invests X amount of dollars in such and such company which then buys chips from Nvidia and then also does business with somebody else to to complete the the circle. Should we be more concerned about that than than we have been in the last let's say month?
>> Uh yeah, I mean I think the word circular is um over is providing a negative connotation of what's happening. The reality is is that AI spending can only be accomplished by large companies, you know, I mean like it's not like meta can buy chips from like mom and pop uh chip makers, you know, or power. uh all this infrastructure requires you know largecale proportionate players. So it's almost impossible for this not to be circular. I mean it's the same way like if you look at the oil industry there's eight majors that buy oil. Uh so globally oil prices are set by basically eight majors and refiners but we don't say oil is a circular business. There's only certain people that can buy the oil and refine it. And I think that's the the same of of mag seven. But I might say that there's no shortage of uh actual capital that wants to fund AI. I for instance, you know, OpenAI is doing a huge raise right now like over 110 billion and I've talked to many uh allocators. They can't get access uh to that because so much has already been spoken for. There is it's basically impossible to get access to the cap table of open AI.
How do you think the either OpenAI or anthropic IPOs will do? Does it matter who comes out first?
>> Uh I mean both are going to be really successful because there's a lot of pent-up demand and I think people actually use these products. So they feel like I mean as you know some of the best stories and stocks out there have been products that people use and then they become shareholders like Tesla. I mean Tesla is supported by owners of Tesla cars, right? And so, uh, I think the these are going to be very successful, but they're also the first real liquidity event for venture in a long time. SpaceX and uh, Open AI, you know, are going to create, you know, a trillion dollars of American net worth gains. I mean, that's, you know, the tax refunds coming out now are 150 billion. I mean, we're talking like a trillion of wealth effect coming from something that's not the stock market. So I I think it actually boosts GDP.
Let's talk about software. Um, we've [clears throat] talked around the edges on it, but we haven't really gone deep on that. It's obviously a significant market concern. The disintermediation of software companies relative to AI. You've seen multiple examples over the last month. Various uh segments of of the software industry having a problem on a anthropic claude announcement or any number of other things that have been in the news flow. How do you view that? Do do you think those stocks have have washed out enough these software names?
>> Uh yeah, I mean I think software has bottomed. So like IGV uh we think actually has made a major low. Um so we're recommending it to our clients. I think one thing that people who are building AI products and using like claudebot and uh and thinking that enterprise will deploy soft uh AI as a replacement for software. they're really forgetting why they use software companies which is really for the maintenance. Um, you know you're if you're deploying your own internal claw to do some CRM function it might work because you've really invested the time building it uh for the first you know year but you're going to now have to continue to upgrade it and monitor it. you're taking on the role of like what software companies do and I think that's when software companies the ones that really are entrenched and provide a lot of value actually start to see demand recover so I I personally think software has bottom
>> I think that people are afraid to to try and call a bottom in some of the SAS names how can you be so sure that those have bottomed
>> uh well you know the the best way to know if something's bottomed is that if there's more bad news and they don't go down like you know Yesterday was a good day to see a lot of bad news out there. Uh and you should have worried about growth and if you thought software is in a downtrend, it should have really dumped. Uh sorry, it should have fallen a lot yesterday, but it actually basically was flat.
>> Yeah. The next big test is going to come as as we learn more and more about where these these models these AI models are going and who's going to be disintermediated e even further than than they are they already have. I think I think that's the issue that I would I would take with trying to judge them here. [snorts] We're learning almost day to day, if not week to week, that new developments and new announcements from any of these large language models has a displacing effect on a lot of these software companies. The SAS model seems to be highly in question at the the current period point of time.
>> Yeah, I mean a lot of things are in question, Scott, uh from AI because it is a a good worker replacement. you know, there the global labor force a very large percentage might be performing better if it was a robot than a human you know, um so I understand why investors are worried but the one thing that I find is that we tend to price in negative information so quickly and that's your opportunity as an investor because at the end of the day if someone says is uh you know of the hundred names in IGV uh you know like 90% cease to be functioning businesses. I mean, it's possible like, you know, copers went out of business and like, you know, horse carriage makers. Um, but many of these companies are going to be self-aware and instead of actually riding the horse buggy to the last horse, they're going to be pivot to making cars. So, I I think that that's and first of all, you know, a lot of the original car makers were horse buggy makers. So, I I think that that's what we have to be aware of. software is your conduit to replace labor and we know labor is a $60 trillion a year market.
All right. How concerned are you about private credit?
>> Uh yeah, it's I think it's bad. Um, you know, we knew it was bad at Fundstrap because last summer when we were visiting our institutional clients and many were allocators. We asked them about private credit because last year some of the cracks were emerging and many of our uh pension and institutional clients were still allocating to private credit and they said look private credit is this is just the other side of the balance sheet of private equity and I think that's a misperception because as you know private credit really is a credit quality decrement below the private equity you know it's usually more levered companies that may not actually have alternative funding. So we you know you could we could tell that it was a market misallocation because as you know something not it's not quite a bubble but you know you're not going to make money when there's too much capital flowing into a market that should only be small in size.
Okay. So as as private credit grew larger and then the the asset managers wanted to get their products in the portfolios of retail investors more and more to continue to fuel the unbelievable growth that private credit had seen. Are are you suggesting that that was the possible top? Because you're you're talking almost at the same the same time as you were noticing some of the trends in private credit, private credit asset managers were leaning more heavily into the retail channel.
>> Yeah.
>> Was that a sign that we should have seen at that at that moment like this could be a potential problem?
>> Well, there's definitely changes that have to take place. I mean one thing that's observable to every to us and to many people is the private market is bigger than the public market like there's more privately held companies in private equity portfolios whether it's like you know if you look at prequin data than publicly listed companies and the solution in many people's minds is let's make private credit and private equity more available to retail investors but actually that's not true price discovery, right? Because there's gates and you're seeing
>> it's much less liquid.
>> Correct. The real answer is take these private companies public. So, put them onto exchanges where there's price discovery and there can be short selling and mergers and governance. And I think that's what we're seeing is there's too much private credit.
Okay. So, when I asked you the first question, you you said it's bad. What does that mean? How bad is it? and and does it have is it systemic? Is it bad enough to cause a significant problem in the financial system? How bad is it?
>> Um I mean it's bad enough that financial stocks haven't done well this year despite what should be uh a good environment. But you know there's a lot of people that carry like a Leman hammer, you know, a GFC hammer and and think that this is the GFC again. I I find a lot of people in, you know, hyperbolically saying it's the same as the GFC. I don't think so. I think there could be a credit cycle. So you have to discern winners and losers, but you know, would would this cause me to sell Goldman or JP Morgan like those companies can easily survive and even prosper if private credit has a downturn? In fact, they might actually do really well. uh you know JP Morgan is basically become a technology stock right like they they make money through every cycle uh AI is really one of their allies they can take advantage of AI to make better credit decisions and also reduce compensation costs so I I think this is a good opportunity for the big financial players
okay let's spend the last two and a half minutes that we have together talking about crypto because you you're certainly a crypto evangelist I I would suggest uh it's at 70,000 I'm looking at it I was just looking at it right now to make sure I had the price right. It's almost 71,000. It's up almost 3% today as Bitcoin. Um, you still as sold are you still as sold on on crypto uh as you were because it I think many of the the narratives around it haven't proved to be durable. It's not digital gold. It's not a replacement for the dollar. You can call BS on me if you want, but I mean I I feel like this is what it's proven not to be. Not digital gold. Gold is gold. Gold has done incredibly well, better than at least in the last couple years or this year bit better than Bitcoin for no question about that. Now, people will say, well, over the last five years, there's no better performing asset class than Bitcoin. So, they throw it back at you that way. Um, but what what is your current view on it? Did we make some assumptions that about this that are just not true?
>> Uh yeah, I think Bitcoin uh now it Bitcoin is 15 16 years in existence. Um and over any rolling period, uh Bitcoin has outperformed every asset class. Like as much as gold's done great, you know, um you've never lost money owning Bitcoin, holding it for three years. But here's another interesting stat. If you look at Bitcoin's relative performance to gold, I'm sorry, to inflation since 20 2009, it's outperformed inflation 97% of the time. So, it's actually stored your value better than inflation. Gold in that exact same period of time only beat inflation 52% of the time. So, in other words, Bitcoin has hedged you better on inflation than gold. Even though gold le the last last couple years has done great is Bitcoin important more important today than before one people are worried because of quantum and I think it's a true problem for Bitcoin but it's not a problem for blockchain um blockchain has proven itself to be uh actually a better solution and that's why we're seeing uh two really important trends really build on the blockchain. The first is Wall Street is tokenizing things. I mean, it's not just Robin Hood, like cutting edge companies. It's Black Rockck and the JP Morgans. They're building digital coins, tokenizing funds, uh, and actually arguably rebuilding their business on ledgers. I mean, look at ICE. I mean, ICE just made an investment into OKX, a crypto exchange. I mean, that's a huge deal. Um, and the second is AI because a AI agents, you know, and if people are building Claudebot, if you send that into the world to collect payments, the most secure way to do final finality on payments at the lowest cost with fractions of a penny. You can't do it with PayPal or banking systems. you know, they they only go two digits, but you might want to collect a microp payment of a millionth of a penny, but you do it a million times. Stable coins have six like tether and USDC, which is circles, they have 16 zeros. They can collect microp payments even for tax authorities. So, and then private keys, agent systems can easily deal with crypto wallets. So I I think AI is going to be building especially as it starts to do commerce a lot on the blockchain and so I would be overweight any of the blockchain stories out there today which includes Ethereum you know Salana and others.
All right well Tom Lee thank you very much for joining us on the stage here at Future Proof and we will see you again next year.