The Compound and Friends - Tom Lee Strikes Back

Episode Date: September 27, 2024

On episode 159 of The Compound and Friends, Michael Batnick and Downtown Josh Brown are joined by Tom Lee of Fundstrat to discuss: Tom's Q4 outlook, what usually happens after Fed cuts, geopolitical risks, Chinese stocks, a history of drawdowns, and much more! This episode is sponsored by Global X. Visit https://www.globalxetfs.com/ to explore a lineup of more than 90 ETFs, along with insights to help you navigate a dynamic investing landscape. Access a 30-day free trial of FS Insight, exclusive to The Compound & Friends audience, at: https://bit.ly/thecompoundandfundstrat24 Sign up for The Compound Newsletter and never miss out! https://www.thecompoundnews.com/subscribe Instagram: https://instagram.com/thecompoundnews Twitter: https://twitter.com/thecompoundnews LinkedIn: https://www.linkedin.com/company/the-compound-media/ Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Josh Brown are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. The Compound Media, Incorporated, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here https://ritholtzwealth.com/advertising-disclaimers. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: https://ritholtzwealth.com/podcast-youtube-disclosures/ Learn more about your ad choices. Visit megaphone.fm/adchoices

I'm not, you're not, you're not 1%. Do you say you identify as middle class? I do. I do. That's how I identify. Yeah, but you know what? When I had no money, I identified as upper class. Okay, so I can't identify with that? Like I would, if I couldn't afford to do something the way I wanted to do it, I would just not do it at all. Have you seen?

That's an upper class thing? Yeah, so my wife and I used to take two two day vacations when all our friends went away for seven days because we wouldn't stay in anything less than five star. So it's like we could afford two nights in a five star. That's the trip. I like that. And we both had the same mentality. It's like dieting.

It's like being on our upper class diet. We'll say more about upper class. That I don't know about. No, because you know like in Japan they say eat till you're 80% full and that's how you lose weight? Oh, it's not 180? Yeah, that's what I was doing. No, so if you're living 20% of the upper-class

then you're actually saving money. Yeah. Because you're not, other 80% you're not spending. So in our 20s, I once thought I was doing this really nice thing. I don't think my wife and I weren't married yet. So in our 20s, I once thought I was doing this really nice thing. My wife and I weren't married yet. I booked, there's like the Montauk Inn or something, like out east.

We were not Hampton's people in our 20s. We were barely surviving. We were living in Manhattan. So I drove three hours out to Montauk with her. We get there. I don't know anything. It's the most dilapidated rundown. It looked like they were about to demolish the hotel the next week and build something brand new. So we swing the door open. She takes one look. She's like hysterically crying. She calls her mom.

I'm just standing there like, but I had a realization. She doesn't want to just go on random vacations all the time. She wants to go somewhere nice. We don't have enough money to go for seven nights. So we do one or two nights somewhere really nice, and it's better. It's actually better that way. So Bob and I are the same. When I was probably, we were 23.

I took my wife, who was my girlfriend at the time, to Atlantic City, and we stayed in a motel, I swear to God. Yeah, she must have loved that. It was the most disgusting thing ever. Anyway. But no, but that's an, so you can be middle-class, but have upper-class tastes and you could survive. You just have to know where to save money.

Right. Or here's another example. I buy her, I buy her a bag for her birthday and she would say, don't get me one this year, get me one next year and we'll get one that's like nice enough that it's the value of two gifts. But I don't want five bags that are, you know, I don't want five coach bags. I want one Louis Vuitton bag. So when you can afford it, let's get a Louis Vuitton bag.

So I think that that's, I think that's like a legit mainstream mentality for... I think it's really wise. Yeah. Because you're picking your spots. Right. You decide what you're going to save money on and what you won't. And everyone, for some people, it's really wise. Yeah Right you decide what you're gonna save money on and what you won't and everyone for some people it doesn't matter They'd rather be away four times a year and they don't care where they stay. Yeah, and it's that's not our that's not our situation Has anybody has anybody in the room seen the new monster on that folks with the Menendez brothers? No, I'm not gonna watch that

Holy moly. It is good. So F***ing dark. Yeah Yeah, this is where they like blew away their parents. Yeah, so the parents were both abusive and It is they really said the things out loud and it was it's disturbing. Are they out of they in jail still? They're in jail. Yeah. Yeah, they'll be in jail for life. They killed people Right. Yeah, their dad is Javier Bardem He's a great actor Swear to God. What do you mean playing?

The dad the actor dad. Oh, I thought it was a documentary. No, no, no, no, no No, it's drama. So they did a series monsters on the Jeffrey Dahmer story where they reenacted So it's the same thing. It's Monsters, the Menendez Brothers. And it's, yeah, it's gnarly. I did not watch, I started watching Gangs of London this week. Did you see that? Uh-uh. It was like an AMC show that they put on Netflix.

And I think it's one of the bigger shows on Netflix now. Tom, are you a big TV movie guy? Or not really? Uh, I do, I love movies. And I love TV. I don't get to watch it as much. You're a busy man. What did you watch on the flight?

I saw, oh, I think I binged watched Diners, Drive-Ins and Dives. Oh, there you go. So I caught up and there was one episode on Old Greenwich. Like there's this Italian place. So now I have a place I want to check out. Where did you just, you got married, you had your honeymoon, where were you?

Well we had not quite a honeymoon yet, but we did go to Kosomoi. Kind of, like Kosomoi for two weeks after getting engaged. What is that? That's an island off Thailand. And then there's this wellness retreat called Kamalaya. So how long did you, I remember you telling me before you were leaving

you were gonna be there for a while. Yeah, we were there for 12, 12 nights. Okay. And I ended up doing a detox there. An eating detox, which means, I didn't realize, but I was eating like steamed vegetables for 12 days. But, so it was really painful, but then I, when I got back, I got my blood work,

and like my triglycerides dropped, my VDL, so then I realized it was, it made a huge difference. I was like shocked. The hard part, so when you say it was painful, it was painful because you were just craving, like you were going to the diet the whole time you were there? That's right. So towards the end, I did leave the resort to go to McDonald's. Okay. Because at a certain point... Made a double fish fillet.

Yeah, I can't do this anymore. But then the really hard part is when you get home and you're surrounded by everything that you're accustomed to. Yes. And there's too much choice. Yeah. So, well that's where, like what you guys are talking about. Like, so I learn because I do enjoy food and I do watch, like I like watching shows about food.

So I just been eating a lot less. And also because Esther's very skinny. So it's not, it's, she doesn't eat that much. So I'm eating less so you're gonna get right so you're you're gonna like you're gonna start to mold yourself now around that new lifestyle because now right yeah there's not more healthy eating okay I just watched on Netflix I know it's like from last year I just watched the chef's table series. They did the whole one on pizza.

So you can't watch that. Because then, because you start thinking that I might fly to Phoenix to go to Chris Bianco's restaurant like it's this I think it's like the six best pizza chefs on earth. Who's the host? There's no host. They just it's documentary style. They just go out to these people and you learn about the people's lives and how they arrived at the place where they are,

which is like the number one pizza maker in Italy, the number one pizza maker in the United States. Yeah, I heard about this show. What makes pizza so good? Is it like the dough or what is it? Well, I could tell you or you could watch it. I'm not gonna watch it. I can't do it justice in one sentence,

but what they all seem to have in common is they love the land around them, and they love the process of growing things, finding produce. They're not standing in the kitchen waiting for somebody to bring ingredients. They're involved from the very earliest stages. One guy is milling his own flour,

and oh, this is the guy the guy Chris Bianco is considered to be the number one pizza in the world right now by like very serious people. Is that in Scottsdale or Phoenix? It's in Phoenix and the really weird thing that he discovered so he was a Bronx kid working he learned how to make mozzarella by hand from like the Masters on Arthur Avenue in the Bronx when he was like 10. So but like the weird thing is he goes out to Arizona. He's an asthmatic. I think it's better the climate in the South West. The dry air.

The weird thing that he figures out is that literally the wheat and flour coming from Arizona is being sold to Italians in Italy to make pasta and pizza. I had no idea. Nobody knows this. So it's this really weird thing where he's like, wait, really? So I have access to literally the best wheat in the whole world for pizza and pasta. And it's in Arizona. And that's actually true.

What's the name of the place? It's called Bianco Pizza I think. Okay, because I'm going to be. You have to go to this place. Yeah, I'm in Scottsdale for a board meeting so I might try to stop by there. Is the line of service? Scottsdale is 30 minutes away from Phoenix.

Can you get in or what is it like? So I think right after the documentary hit on Netflix it was like impossible to get into for a while, but I feel like you could just walk up. It's pies, it's not slices. They only make six pies, like six types. And I think the New York Times, I forget who was the critic that said it,

and then everyone said, what are you nuts? He said, okay, go see. And people then flew out there and were like calling him from the airport. This is all part of the Netflix show. They're like, oh my God, you're right. The best pizza in the world is in Phoenix, Arizona. So it's like one of those weird things.

So I want to see your social media when you get out there. Yeah. I'm a pizza lover. I just blazed through that on the way home from California. I had the New Haven pizza on the way home the other day from the Cape. So overrated. I don't think so. You don't think it's overrated?

I don't know how it's overrated. I enjoyed the shit out of it. The potato rosemary pizza. It's not. That's really good. Did you get Sally's a pizza? What's it called? Sally's a pizza.

Sally's. Yeah. Incredible. It's Sally's or Frank Pepe's. Pepe. Yeah. And there's Modern I think. It's delicious. You like it but it's Yeah, and that's modern, I think. Delicious. What? You just you like it, but it's overhyped. No, it's annoying.

It's annoying to get you drive by it. And there's like 400 people. Oh, we order. We order it ahead. That's the only way to do it. Yeah. Yeah. I agree. I read it. I read it. Duncan, Nicole, Daniel.

Let's make a pod. The compound and friends episode one. Guys, let's make a pod. The Compound and Friends, episode 159. Welcome to The Compound and Friends. All opinions expressed by Josh Brown, Michael Batnick, and their castmates are solely their own opinions and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast. Innovation and opportunity aren't confined by geography. For investors seeking to chart a different course, the Global X International Access ETFs deliver targeted exposure to emerging markets

such as Argentina, Brazil, India, and more. Explore Global X's full range of ETFs including thematics, covered calls, fixed income, and more at globalxetf.com. Ladies and gentlemen, welcome to literally the best investing podcast in the world. My name is downtown Josh Brown. Welcome first time listeners here with Michael Batnick. Michael, say hello to the folks.

Hello, hello. And also want to shout out the people who have been with us since day one. We really appreciate you. Today we have a fan favorite. I think he's a fan favorite on every show he does, quite frankly. He is among the most sought after strategists and opinion havers on Wall Street, off Wall Street. Everyone wants to know what this man thinks, myself included, Michael included.

And let me tell you right now, today's show is packed. We have all kinds of stuff on what to think about in the current moment, Q4 Outlook, 2029 Outlook. We're gonna be doing a lot. Ladies and gentlemen, please welcome our special guest, Mr. Tom Lee. Come on, louder! Woo! welcome our special guest, Mr. Tom Lee.

Tom, welcome back to the show. Thanks for having me. We, we always have such a great time hanging with you. Let me get, let me get this out of the way. Tom is a managing partner and the head of research at FundStrat global advisors. FundStrat provides evidence-based research to institutional investors, wealth advisors, pension funds, family offices, and high net worth individuals. Before co-founding Fundstrat, Tom was the chief equity strategist at JP Morgan from 1999 to 2014. Tom, we're so happy that you're here.

Thanks. I'm glad to be here. And you know how I'm going to show you how happy I am? I am going to play an audio clip of somebody else. What are you doing now? Did the China moves over the last few days? But just because you were saying in the past you wouldn't go more than 10 or 12 percent or the most recent things we've seen are that you have about 12 percent of Alibaba. Does that mean you put those aside and you would own even more than that? As I said, the value at risk model is what I sleep at night. I'm having, I had a fine, I went over that limit on the Fed announcement,

okay, you know, in the last week. I went more when they said a day or two ago on their Fed, and last night, I did more. Just Alibaba, are you talking JD, Baidu, PDP, two ago on their Fed and last night I did more. Just Alibaba? Are you talking JD, Baidu, PDP, the two Chinese ETFs? Everything. Everything. ETF, you know, how we do futures, right?

Everything. Everything. Listen, a long time ago in 2010 I think I said everything. And you would say everything. I remember when you said everything. And you know say everything. I remember when you said everything. And you know what's good? And you were right. Everything, okay.

So if they, you know, this is incredible stuff for that place, okay. So it's everything. So that's one of the greatest hedge fund managers in the history of the world, David Tepper. Not as great as a NFL owner, but maybe the best is yet to come I wanted your take on this as soon as I heard it so I was getting dressed this morning So this is his reaction to what the Chinese Central Bank and financial regulators

Came out and they unleashed the bazooka is the way it's been put I kind of thought it it was a this is Tuesday morning it happened I kind of thought it was a big deal as soon as I heard it. We talked about it a little bit here but then I run into people that are like it's China it'll fizzle out in two days. I would love to hear if you think the buy everything call not if you think that's what people should do but like you kind of get as excited as it seems David Tepper did. Our stance at Fundstrat is to treat it like a real move. So we did a webinar yesterday for our clients and Mark Newton really pointed out this is actually a pretty significant breakout because we've moved to levels that you would expect

a much bigger retracement and he was talking about how many of these stocks then kind of approach multi-year highs. So Chinese internet stocks I'm guessing. Yeah, like K web K web or FX I and but it sort of fundamentally makes sense because you know at the end of the day China is trying to restore consumer confidence through a channel and actually equity markets is one because real estate would be very tough to stimulate here but not now. Right.

Yes. Okay. So so there could be a very self reinforcing cycle because we know there's also a lot of savings in China. So the Chinese stock market has lost six trillion dollars since 2021. It's the worst of the large economies coming out of COVID, coming out of the pandemic. And it's really a situation where you had a stock market that's like nine or 10 times earnings.

Some of these companies have 20% of their market cap sitting in cash. Then the Chinese government comes out and says, not only are we cutting rates, we're cutting mortgage rates, we're cutting restrictions, we're cutting regulation, we want to encourage mergers and acquisitions. I don't know how you do that, but they're going to do that. It's beyond just monetary policy. It's like almost like they want to reshape the way business people in China feel about taking risk again. Yeah, it's maybe to restore a sense of capitalism and risk taking an initiative. Do you think it'll work?

I think that they, we won't know, but in the meantime, it's a little bit like in Europe when Draghi said whatever it takes. That was a pretty big moment and that's what David Tepper was referencing when he said 2010, I think. Yeah, That was a pretty big moment. And that's what David Tepper was referencing when he said 2010, I think. Yeah. Because I think it makes sense. You know, it's a, you should be a little fire ready aim just because you, if you're, if you're lucky and then, and it retraces towards its all time highs, it's a huge move.

So I think it's a good calculator. You know any China bulls? Cause I don't. The stocks are trading at multi decade lows in terms of valuation. The in terms of the price action, we've got FXI, price at multi-year lows with the short interest at 61%. And this is good, I mean, this is a lot of fire powder. We had the second largest day of inflows yesterday

and the shorts are way off sides. FXI is the largest Chinese companies that are listed in London, right? That's that's what composes so 61% of the float of this ETF was short It's unbelievable and you had a gap massive gap up two days ago. We traced a little bit yesterday another massive gap of pile You've got to cover Yeah, and then imagine this in the context where the largest central bank of the world is is dovish. And so ours. Yes, the US and so people who have the six trillion cash on the sidelines or low leverage, this now suddenly looks like a really good way to have exposure that feels early. Do you

think the macro backdrop for US equities is about as good as it's been in a long time? Which is weird to say given that we're in a secular bull market 15 years in, but it feels like things are we're firing on all cylinders. Yeah. If I made a measurement gap between like perception of macro versus like logically macro, it's a huge gap. Cause I think many people think this is an extended rally and expensive market and a business cycle that's late cycle, but so much of what you can point to is early cycle. So that's a huge gap that is a positive. What's early? Well, for instance, housing has been in a recession, durable goods has been in a recession, you know, feel like a transport

such are breaking out, but they're cyclically they've been actually acting like they've been in a recession. So I think a big chunk of the economy has been recession-like. And the skeptics have been thinking this would pull the whole economy into recession. But instead I think the Fed is turning delvish and it's... The stock market this year reflects mid-cycle. Yes, I don't think we're late cycle. Like big consumer staples companies and banks. Like I feel like those are mid-cycle types of leadership groups. Like big consumer staples companies and banks.

Like I feel like those are like mid-cycle types of leadership groups. Correct, and if you look at something as simple as private investment as a percentage of GDP and it's around 25%, we've never been late cycle until this number's over 27% and then rolls over. That's a late cycle. So we still have a lot of room to grow.

Okay, so you sent us a bunch of stuff. We have a bunch of stuff that we want to show you Why don't we start from the first slide we have from you which is key interest rates now Versus negative 125 basis points by year end which is the Fed cut expectation So tell us what we're looking at and why it's important to you Yeah, what we have here is several segments of the economy, small business loans, mortgages, including adjustable rate and home equity, lines of credit, car loans and credit card rates. And we're showing how much these things will drop when the Fed cuts.

This is understating what mortgages will do because the mortgage spread today is... It's wide. Yeah, it's super wide. It actually, historically, is 170 basis points to the 10-year. It's like over 200, I think. Yeah, so it could drop almost another percentage point. What, the mortgage rate versus... For a 30-year fix today.

30-year fix versus what? Fed funds rate? Or 10-year? So if the 10-year doesn't move but the mortgage spread normalizes, we'll have a sub five percent 30 year more. I guess the question is what the the Fed is cutting they're gonna continue to cut ostensibly How long does it take for us to feel the effect of the same list because it feels like we're feeling it in the stock Market, when are we gonna feel it on Main Street? um, I think the first thing to look for is housing activity if

home visits pick up or applications pick up, or you can just watch the real estate stocks. So the real estate stocks are working really well, the Home Depot's of the world, which I own. But refi applications, monster week. Last week refis were 55% of all mortgage applications, which is a fairly high level. Yeah, and I've spoken to a few brokers.

They say that people are buying arms and they'll just refi continuously. So things have turned. It's interesting. Mortgage applications, like for new mortgages, are not really responding yet. I wonder if people are waiting for rates to drop even further. It seems so.

Yeah, I mean, it could be a lag. But as you know, markets will move before the fundamentals. I want to ask you about, as a follow-up to what Mike asked you, like how long will it take? One of the weird things about this tightening cycle is that it didn't actually affect publicly traded companies the way that tightening cycles historically have, and we've gotten into all the reasons for that. You know, better credit ratings, large cash balances, blah blah blah.

Will that possibly also be the case in the other direction? Meaning like historically we might have seen companies react to lower rates quickly by making more investments. That might not be the case this time because they were never reliant on overnight rates. What do you think about that idea? Small caps. Yeah. What I think happened is the Fed signaled to the business world in 2022 that there's a hurricane coming. And so I think businesses got cautious and the really ones with plentiful cash weathered the storm well. small caps really got destroyed because of the cost of money

Isn't that crazy the government said or the Fed said hey, we're putting the brakes on prepare for a recession the company said, okay We'll prepare for a recession. No recession. Yeah. Yeah, and as you know, there's obsolescence So five percent of capital stock depletes what even tower companies, you know, five percent of towers fall so there's been deferred Expansion and that's why hiring is stronger because we defer capital spending you actually have more employment so I think that there's not only deferred capex there's mergers that have been on basically on hold IPOs too yeah capital markets and at a time when there's probably a lot of things that now could be done and now with some confidence and boards can improve.

So I think it's going to be very expansionary, but obviously biggest beneficiary should be small caps, because they got hit the hardest. Well, they've been ripping lately. I mean, they would have to go so much to catch up to what large caps have done over the last 10 years. They probably never will catch up. But do you think there's still a lot of room left in that trade?

Yeah there's a lot of room because you could you know you can measure it through either as lags you know five-year rich relative return or relative PE you know the median Russell PE is 10.5 times right now. That's wild. Of the profitable Russell companies. Actually if you only did profitable it, it's like 12 point something. And in the S&P, it's close to 18 times now. So you could just have an 80% move in the Russell just by the multiple expanding. But earnings are growing faster.

And typically, they traded a premium. So you have many ways to win on the Russell. Tom, a couple of weeks ago, we had initial jobless claims going in the wrong direction. We had unemployment going in the wrong direction. People have been saying that once unemployment starts going up, it tends to not stop until we hit a recession. I'm curious to hear your take on that.

Yeah, it is, I think, statistically shown that the employment market, when it's deteriorating, it doesn't just reach stasis It actually deteriorates to the point where you have a collapse. Yeah employment market It's like a point of no return where it just keeps getting worse. Yeah, because on the margin you like businesses are getting squeezed This time the unemployment rate tireless candidate I think like 75% of it is attributable to the increase in the available workforce.

So the unemployment market isn't deteriorating. It just started to grow at a faster rate. So he thinks that this is the reason it's not a deterioration of the labor market. Okay. And there were so many weird base effects in the labor market two years ago that it's possible we're just still like normalizing from that. Yeah. Might not be like a real cycle in the labor market two years ago, that it's possible we're just still normalizing from that. It might not be like a real cycle in the traditional sense. Yeah, and there is something a little funky, which is 25% of all private employment works in a restaurant, hotel, casino,

but in basically the leisure industry. And so I think that does flex a lot with if people start eating at home, restaurants could slow, but it doesn't mean there's an actual contraction. I remember way back in July when US initial jobless claims was going up and this became the economic data point that the whole market had its eyes on for just a minute there. And fortunately for everybody's sake, that chart has rolled over the four week moving average is turning lower.

Do you remember a time where this was like the data point that all the journalists were paying attention to? Actually I don't remember a time, but I know people are. Oh, you were, because dude, you were in Asia. No, it's like that one week you were away. But when you're talking about this happening, yes, I do remember this and- All right, here, let me kind of point out to you real quick.

See that spike right around July 24th? The market sold off. That's the week Claudia Somme hosted Saturday Night Live, okay? Yes. All right, so that's what we're talking about. And actually, I wanted to point out one of my clients who's a really good macro- Name names.

I would love to tell you, but he did, he used to be at JP Morgan, worked for Aina Drew, went to a hedge fund, but a former Fed economist. He said that a lot of the distortion was Texas, because there was some sort of storm and it shut down businesses. So he said claims were going to just go a little wacky. And so I think some of this was seasonality not isolating.

And do you remember the labor reports were really funky around then too? Yes. So I'm sorry, I do remember that spike. And I do remember Psalm even walking back her rule when it was triggered. Credit to her. Credit to her.

She said, yes, but it might not be apropos of this moment because A, B, and C. And one of the things that she said was, we had an influx of immigration, legal and illegal, and the labor force participation rate actually grew so like the denominator is different. So I thought that was great. She did this barrage of media. She was everywhere for like two weeks. But she wasn't taking a victory lap like, this is my big moment, the song rule. She was like, slow down.

So I respect that. Yeah. In a way, it's just a reminder there are pandemic distortions that we don't want to say this is different, but a lot of things look different. Tom, back to what the comment I made about just a beautiful macro backdrop We've got free about the stock market, which is breaking out all over the place. We have a dovish fed you have Full employment the job market is still very healthy stimulus in China. You have stimulus in China and you've got inflation coming down John chart chart on please. What are we looking at here? You have a chart of a lot of the components of CPI

back to pre-pandemic levels. Yes, that's right. And what that red line says is that before the pandemic, historically 50% of CPI components are below their long-term average. Oh, wow. So that's like, that's a sign of inflation's under control. We crossed 50 percent as you can see in late 2023 and that number now is crept to 55 percent. So

by this measure there's two things distorting CPI auto insurance and housing but actually most of the CPI basket is below its long-term. Well the thing is you're counting up the number of components of the basket. Yes. Some components matter more than others. Correct. So rent, if this was weighted, it wouldn't look this way. But this does point to why it's a great backer or backdrop, because what we're doing is we're emerging from an inflation war. That's going to feel really positive for consumers. So I think there's going to be a multi-year period where people are celebrating that actually. You say the consumer, hey good news CPI inflation

is now only 1.8% a month. They say yeah but how come I didn't get a raise? Yeah. How can I get another raise? And that's right and a lot of people want price of food to come down. Yeah. And it that's a really big one. It's going to be not. But it is coming down to the grocery store big time. Yeah, there are. I mean, I've now seen a lot of specials on meats, which is great. You know what I mean?

Like whether it's chicken or... Tom only shops at Ciderella. What's that? I don't know if the price is coming down at his grocery store. What's Ciderella? That doesn't matter. Let's keep moving.

All right. Tom, what usually happens when the Fed cuts and there's a no landing scenario or a soft landing? What are we looking at here? Yes, this table shows you how progressively over time when a Fed cuts and there is no recession, it is hugely positive for the equity market because when you get to three months out, the seven of seven times when the cutting cycle starts, stocks have never been lower. And six months out, never been lower.

And 12 months out, never been lower. Where the median gain is 16%, which is better than a typical 12 month return for stocks. So the key is whether- Sorry, just for the listener, these instances, January of 71, October, am I in the right column? Yes. The Fed cut and we don't have a recession.

This is what happens. So those examples, January 71, October 84, October 87, June 89, July 95, September 98, that one I remember, July 19, that one I remember too. So in these instances, if you're not going to have a recession and you have the Fed cutting, over the next three to six months, it's 100% historical win ratio for stocks. That's really powerful.

That's right. And it kind of defies how, as you know, a lot of skeptics said, oh, the Fed has never had a soft landing ever, but there's been many instances of no landing. So I think it's almost... Do people say that? Never had a soft landing? Yeah, they, well you know, there's still- I guess I've heard. Well how many times has inflation been above 9%?

Twice? Yeah. Once? Yeah, that's right. And one or two and- Yeah, the N equals two. Right, come on. So what are we doing here?

We're talking a lot about the perfect macro backdrop, stocks are breaking out, everything is kumbaya. What do you think are some of the, what are the biggest risks that we should perhaps pay attention to? Well, we surveyed our clients yesterday, like 1200 responses, and the top concern is geopolitical.

So is the- Which makes sense. Come on, it's always that. Yeah, and you know, it's hard to actually make an investment action unless it's World War III, right? And the second is the elections. That they, that, and this is like something where unless it's World War III, right? And the second is the elections. And this is like something where it's like a little bit how you want to position around it,

but most people can't have conviction about what they do until they know who's in the White House, even though it shouldn't matter. Professionals or regular people? It's in between. So let's say it's a family office, where they, as you know, family offices, let's say as a cohort, probably were more cautious the last two years. So now they're, see the Fed cutting and they want to actually invest,

but they want to time it even, so they have to make the second decision to get back in. And so I think they want to wait till after the election. I see they're playing it like Buffett. No, but you raise a good point. It's a long term, short term. Family offices, a lot of money, but very often answerable to one or two family members and it's not like if you piss off that client, all right, you know, it sucks, I'll just deal with my other clients.

You only have one client. And if you have a client where you know, they'll be mad. If you get really aggressive in front of the election and then there's an election related sell off, you're just not going to risk it. Yeah. And they want to preserve capital. You'd rather buy higher.

That's right. It's they want to preserve capital. And also then they're also glomming onto the idea, well, you know, EM, especially China's lagged and they don't mind being late or they might even be involved there because it's not election sensitive, right? All right, but so you know,

it's never what everybody's worried about. Yes, that's right. Is there no room to say though that while geopolitics is always the number one risk, in this particular moment there are three distinct geopolitical risks that are front page of the, if there's such thing as a newspaper, that are the home page story in everyone's face. Literally, Israel telling its army, be prepared to invade Lebanon. That's like a bigger deal than most of the time in that region. Then you have this unresolved conflict where, in Ukraine,

where basically the presidential election in the United States is going to decide whether or not that war goes on or is resolved with some sort of an armistice. And then you have this third thing, will they or won't they blockade Taiwan? Which I guess we could wonder about for the rest of our lives or it could happen tonight. I would argue it's a heightened geopolitical risk moment, relative to most of the last 10 years. Am I like naive for saying that or do you agree with me? That's what we hear from our macro clients, that this is one of the toughest sort of geopolitical periods ever.

These things seem binary. Yeah. Like it's low probability something happens, but it could unravel very badly. Yeah. And by the way, like China doesn't have to invade Taiwan. They could just get really involved with shipping lanes. You will see the Mag-7 lose like 30% of their market cap

because they can't breathe without what's coming from Taiwan Semi. Yeah. And everyone knows this. Like the whole world knows this. And every investor knows this. That's a gap down possibility that's in the back of everyone's mind as they're allocating to US stocks. That's right I mean I think anyone can look back like last year we fell 10% because of a poor

auction thinking no one's gonna fund the US deficit right and that was a 10% decline. I don't know anything about geopolitics but is China in the position given the state of their Their real estate market their stock market to really be doing that's what makes it more dangerous. That's so so the reason why No, I'm not gonna say dictator the reason why certain types of leaders in different places around the world Do aggressive things is usually not from a position of hey things are going great. So. That's right, that's why sometimes North Korea launches a missile to try to quell domestic. Yeah, okay, so all right, so given though,

that's like a perma factor that weighs on everyone and we're not going to resolve that today. Back to the stock market, there was record inflows into utilities this week. And Chartkin Matt showed us a table of the number of stocks broken down by year-to-date return bucket. Three of the top 10 stocks in the S&P 500

are utility companies, VST, CEG, and there's one other. I don't think it's on this chart. But utilities are rocking and rolling amazing Well, they are interest rate plays and AI plays I didn't think about the interest rate part, but of course, there's heavily indebted and they're like bond proxies. Yeah Yeah, there's two types of utilities though There's regulated and unregulated and there's a big difference between the two and like people want the unregulated Because those are companies that are building for this AI future.

These are the electric ones. Yeah, the growth side of the utility. And it kind of makes sense, because the nucleus of the AI world and data center is US, and so that means power has to be built around here, or maybe in the Middle East, I mean, who knows, but both kind of move in lockstep. You like that theme, you believe in that theme?

We actually had our summer interns work on that theme because there are three sources of sort of extraordinary power consumption. One is electric vehicles. The second is AI and data centers and the intensity of energy. And third is crypto, you know, is digital money. Okay. So all three are going to be sort of tailwinds for, I don't actually have the numbers off to my head.

Okay, but so the conclusion of that research was this theme has legs. Yeah, so power production. And it could be even things like ceramics and other ways to optimize energy production or cooling, like it's energy production and cooling, but all related to efficiency of power. If Mark Newton were sitting here, what would he say about the internals and the technicals?

Let's do this percentage of members above the 200 day. So, there's another one from Chart Kid Matt. This is the percentage of stocks in the S&P 500 above their 200 day or in their own bull markets. I mean, this, I hate to say the G-Wave. 76%. But it looks like Goldilocks. I mean we've got an expanding broadening rally that's not overheated. It's not like 90% of stuff. It's not like everything is working.

Yeah, it's a healthy market. But it's broadening out. Yeah, that's a sign of a very healthy market. And of course, Mark might even notice that we bounced along that average before recovering. You can get overheated though. Like if this gets to 80%, that's not a buying opportunity. That tends to lead to a cool off period. It doesn't have to be a long one,

but like you would agree we're getting pretty close to too hot. Yeah, or it's a test, because then if it's strong, it strengthens from there. Okay, all right. Is this something that's important to you, the behavior of stocks inside of the indices? The internals? The internals in general? I think that's important to you, the behavior of stocks inside of the indices? The internals?

The internals in general? Yes. I think it's important. I think people can sometimes over-interpret internals. For a long time, people were criticized in the market because it was led by seven stocks. But that's actually wasn't a sign of weakness. It was just a sign of concentration. We said on this show a whole bunch that we've had that over the last 15 years during this

secular bull market. We've had these times where leadership was really concentrated. The resolution has almost always been to the upside. So then the rest of the stocks play catch up. And we just witnessed that over the last two weeks. I think the dynamic would be different if people were fully invested and the markets narrow because then you realize you have no more oxygen But we have so much cash on the sidelines margin debt is still below where it was in 2021 So there's firepower and now the Fed's dovish right and China's turning so like as you're saying Matt Michael. It's like a lot

The macro is just the wins are at our back. They won't be forever, but for now they sure are. All right, we have some more stuff later in the doc on cash balances, but let's get back to your call on small caps. So you have a great chart showing the rolling five-year annualized return between small caps and large caps. And if you net out the two, the Russell 2000

is underperforming the S&P 500 by 5.7% annually over the last five years. So I'm reading this correctly, which is the worst period of underperformance since the peak of the dot-com bubble. Correct. And look what happened after. Yeah, because unless you can fundamentally make the case that small caps are worse businesses now, because the valuation gap is eight points of multiple if there's a chance

for the multiple to catch up including Fed cuts mergers you know regional banks biotech rallying all of this would argue that should flip so small caps should be outperforming. Let me tell you a story of how that happens and tell me if you think there's a decent chance of this being the way it plays out. For the last three years, we have worshiped at the altar of the hyperscalers who are building the infrastructure for the AI era, including the GPUs, including the cloud computing. So those stocks have already made the move on the AI age. No small caps meaningfully were involved in AI.

There was one, it was called Super Micro, they made it a large cap, and now the justice department is kicking their doors down. So it didn't go well. So no real representation of the AI theme in Russell 2000, which I think explains some degree of the lag. Here's the story for how that flips. What if all of a sudden sudden we start hearing on earnings calls for the mid cap 400 or the

small cap 600 companies coming out and saying all that money that we spent on AI, here is the yield of that in the form of increased profits. Either because they were able to expand revenue without hiring more people or they were able to save money on a big cost center for that business. That's the story of how small caps could play catch up. It's not a revenue growth story. It's an earnings and a margin improvement story because of AI actually enabling more productivity.

How? It's a fairy tale. It's a happily ever after. Everything that guy just said is bullshit. Could work? Could work that way? Yeah. And it's actually a dollar multiplier thing that you're talking about.

On top of that, because I know like Dan Ives has said there's like, I forgot, $3, $5 of non-AI spend that follows AI spending. Yes. And if that's infrastructure or if it's people getting jobs or if it's software or services or advertising, that does spill over. Not AI spending that happens because of previous AI spending.

That's right. And then on top of that, as you know, China's been dormant for a long time and that's- That's what they want you to think. Yeah. The source of incremental spending as it turns, because it helps Europe and then it helps the global economy. long time and that's what they want you to think. Yeah. No. Okay. The source of incremental spending as it turns because it helps Europe and then it helps

the global economy. Okay. So there is a, there's, we don't think the Russell's going to sell a 20 times earnings the way the NASDAQ does, but like there is a, there is a way that this could happen and these stocks could repeat what they did after the dot com crash crash, which is outperformed for us in the decade. Yeah, it was a 12 year relative outperformance cycle, you know, several hundred basis points a year. And that was a great time for investors because they could find a lot of great stocks that were 10x names, you know.

Are valuations as cheap now as they were in 2002? In small cap. Yeah, on median P.E. and on relative price to book, it's the same. Okay. What if we get some multiple expansion in some of the biggest sectors within the Russell 2000s, such as, I don't know, financials, regional banks? What are we looking at here, Tom? You've got a great chart showing the sector weightings of the S&P versus the Russell 2000.

Yes, and what we did was, in red, we highlighted things that are cost to capital sensitive. So biotech, financials of natural and industrials, and that's 49% of the Russell. It's 24% of the S&P. So yeah, Michael, as you're saying, like if suddenly just specific groups get ignited and we know industrial is hitting all time highs. This is a much bigger exposure in the Russell. We did the same thing for correlation to China. The Russell 2000, if it was a sector in the S&P, is second only to discretionary in terms of positive correlation to China.

Why do you think that is? Everyone thinks it's the opposite. Everyone thinks small caps are more domestic focused and large caps are more exposed to China. You're saying it's the reverse? Yeah, I think it has to probably do with the fact that it's a backwards thing, but CCC spreads to BBB are correlated to the Russell.

CCC spreads to BBB is correlated to emerging market relative performance. Oh, so we're not talking about percentage of revenue. We're talking about actual securities prices. Yes, it's a risk premia. So when people are bullish on small caps, they're probably also bullish on EM. Like just because it's almost like a similar category. It's a risk appetite measure.

That's right. And triple C is your speculative grade bond versus your barely investment grade. And that spread has rallied. Whereas EWJ or emerging markets and small caps have lagged So there's a catch-up trade relative to credit. I want to stay on these on the on this pie chart for a second guys What's the 24% and the 49%? What does that indicate? Oh, so it's the sum of the red So this is some other market weighting of biotech plus financials and industrials in the S&P It's 24% of the S&P is those three industrials in the S&P, it's 24% of the

S&P is those three sectors. Okay. And in the Russell, it's 49%. So if you're going to be bullish on the small cap trade, which you are, you have to be at least constructive on biotech and you have to be very bullish industrials and financials X major banks. That's right. Okay. Financials X major banks. That's right. Okay, and discretionary which is

9.8 percent of the S&P and then 10% of just in the Russell. Yeah, you get the same exposure to discretion which is highly sensitive to China Okay, so what you're giving up tech drop cuts cut in half. Yeah, so you're you're 30% in information technology in the large cap You're 13% of the Russell too. So you're going to be de facto underweight tech. That's right, and that ties to what you were saying about if the AI halo moves to the recipients of AI. The users. The users. If it plays out, if Dan Ives is right,

and everyone is spending on AI because it's continuing to help their profit margins, then you would think at some point those stocks get some credit for that. Many of these customer service intensive companies have already shown the AI bots, which are getting more intelligent, have already cut service times or customer resolution time.

So yeah, it should be showing up. Okay. Tom, you have a great chart showing that earnings per share in all of these quintiles that you broke it down to of the Russell 2000 versus the S&P, earnings are growing faster within the Russell. So why do you think the multiple has had a lid on it? Is it just because of where interest rates are?

I think it's two things, or three things. One is money flow. There just hasn't a lot of money sloshing in the stock market. Just investor appetite, you mean? Yes, because they, investors do like to buy what's going up. So price momentum attracts capital. The second is the Russell percentage

of companies that don't make money is around 40%, of which the majority are biotech companies. So it distorts the aggregate Russell EPS number and makes the Russell look like it's why not use the small cap 600 Which is all profitable companies. Yeah, so they I I Jr. Which is S&P 600 is yeah is a Really good measure. It's a quality shift versus the IYM or whatever IWM either me does it look similar to the numbers look similar in the S&P 600 Uh, I don't know if they're on my head

But yes a small caps are just growing faster both top line and earnings as you can see Like the the 20% fastest growing companies in the Russell are growing at a hundred over 100% Wow The 20% fastest growing companies and S&P are only growing earnings at 29 So you're saying small cap earnings per share is it an 18.7% growth rate over what period of time? That that's 2025 2025 versus 2024 and then S&P is only 11.4% growth next year. Yeah. I mean, so I guess one of the obvious risks is earnings don't meet expectations. Because at the end of the day, not to discount any of the geopolitical stuff or all the horrible things happening around the world, but what drives the market really are earnings. Yeah. And we're priced for, I don't want to say profession,

but we're priced for, we have't want to say perfection, but we're priced for, we have optimistic expectations embedded into the market today. So that's an obvious risk, right? If just, if the businesses don't perform the way that investors are hoping. Correct. And, but if I did an overlay, feds on an easing cycle, so cost of money is dropping. China could be turning, which helps Europe, which means capital spending surprise. Labor market is softening, so wage pressures are easing.

These seem like to be helpful to what could be positive earning surprise drivers. Let's take a look at these sub industries. So you have a table here. These are the top 20 gigs for sub industries with highest five-year correlation to the FTSE China 50. So obviously copper number one, I think everyone knows that, semiconductor, electronic equipment, that

all makes sense. But then you have like some things that maybe people aren't thinking about, like specialty chemicals, data processing and outsource services. Most people don't know the ticker symbols in these groups, but you're pointing out that cyclicals are highly levered toward China recovery. Yeah. So it's like a new tailwind to the bigger story. Yeah. Is the way to think about it. And it's new stocks that might not otherwise be rallying. Yeah. And I think it's simply is like, hey, if FXI does double and it double is not like

it has to go to an all time high. Yeah. We know that there's going to be many stocks that benefit from that. And it doesn't mean, I mean, Nvidia will, but Nvidia can't double. Like the bigger upside is in smaller. How about the casinos? I mean, that's obvious.

They've already been repping. A lot of the, like LVMH, a lot of the companies that sell luxury brands to Chinese buyers, like those have been depressed. Yeah, and it also is China making overtures to wealthy individuals in China and business leaders to not give up hope, right? Because consumer confidence has been rock bottom.

This is meaningful to Europe because Europe is a bigger trading partner with China. They're certainly sending more things into China, like Mercedes-Benz Louie and the rest. Okay Does that mean that we could take it a step further and say Europe is also a buy or would you not go that far? To the extent you heard Tapper say everything like five times Yeah, is everything extend to Europe or not really well when you buy Europe you're buying Yeah, is everything extend to Europe or not really well when you buy Europe you're buying

industrials and financials yes And so I would say European industrial companies are probably the same or better than American so I think that they should work Okay, that's like Phillips and like all those yes But in European chemical companies, but I would say European tech companies aren't as attractive as US tech Yeah, and there's only two or three of them. Yeah, that's right. Of any size. Okay, what's this equity multiples and investor positioning? So we've got China allocations, this is Kataras from Goldman.

China allocations and active funds and hedge funds globally. And there's just no investor appetite there, you know, for good reason. It's been a shisho over there. I would guess that this is probably looks similar for emerging markets as well. Like, as you talk to clients, is anybody excited? Like, how under-invested are people in emerging markets broadly? Oh, well, they... Because as you see, it's been multiple years. At this point, there's probably a lot of indifference.

They don't even... It doesn't even emerge in their mind. We're going to do some EM stuff later in the show, so I don't want to doesn't even emerge in their mind. We're gonna do some EM stuff later later in the show So I don't want to step on that right now Do you want to do this drawdown stuff from Goldman? Okay, Tom? I wanted to show you this I thought this was really well done. It's actually from September 9th Medfaber unearthed it recently and That's why it's been making the rounds But what this is is bear markets and corrections have been less frequent since the 1990s. So what the Goldman piece is saying is that you could see it. You could just look

at the colors. Everywhere you see orange is a 20% drawdown. Everywhere you see dark blue is a 10% drawdown. Everywhere you see light blue is 5% drawdown. The light blue is as prevalent now as it was 30 years ago. There's less of the 10% drawdowns and there's less of the 20. It's not that we don't have them, it's that they don't seem to be occurring with as much frequency as they used to. Are my eyes playing tricks on me or is that what we're really seeing? And you have these long stretches of time without any.

Yeah. I think if I overlaid recessions, the red bars would almost line up perfectly. We did something like that. Yeah, the depth and duration of recessions is just getting shallower. Yeah. And part of it is the US is more of a service economy versus manufacturing. So there's less volatility of the business cycle. We're addicted to spending money. Yeah, it's a consumer economy. Yeah. And but part of it too does tie into the 50s to late

60s, where there was a period where there wasn't drawdowns, even though we were actually a very manufacturing intensive economy. Right. That sort of ties into the demographic tailwind that, you know, 50s to 70s was a period where your total prime-age workforce was growing continuously. And beginning in 2015-ish is when that started happening in the US. So demographics are a really big part of whether or not you're gonna get recessions or how severe they're gonna get? Yeah because what you have is a constant wave of you know the prime-age workforce is your smartest workforce and the most productive and also the one most likely

to borrow money. Okay. So that's a wave of like for the economy of buy the dip. Yeah. You know I mean like because it's a consumer coming to buy the dip. And so I think that supports the business cycle. And of course then stock markets become less volatile. Let's put this next one up. Michael, you want to do this one? What are we looking at here, Josh? This is in-

Back to you. In August, 94% of equity indices had a drawdown of 5% or more. The proportion of the 32 global equity indices had a drawdown of 5% or more. The proportion of the 32 global equity indices in a 5 or 10% drawdown is what we're illustrating here. This is also Goldman. This is a lot of synchronization, I guess, is what I would notice first. What else do you see here?

I mean, to me, I'm just eyeballing it. Of course, when that number hits 90, you have to buy that tip. Yeah. Yeah. Because it's probably something that's more mechanical than like based on any specific news. Yeah. When the market liquidates.

This market's down, therefore that market's down, right? Like on Domino's? Yeah. When markets liquidate for no good reason, unless you're about to fall off a cliff, it just meant people panicked. Alright, two more from here. I like these shark charts. I don't know what they're called.

I call them shark charts because it looks like a dorsal fin. I like these because they illustrate like the passage of time in a given trend. So this is bull markets have been longer since the 1990s and the dark blue is representing the amount of years since the last 20% drawdown. So right now we're working on like an average, you know, decent. But we've if you just look at this and you say what has been changing in the stock market over the last 100 years, the lengthening of a bull market seems like an obvious thing

that jumps right out at you. Yeah, that that's very apparent looking at and what's kind of interesting is when I align it with what our clients say, which isn't always correct, many are expecting the market to fall 20% at any time. Yeah, you know, so like that is not in people's minds. I think in people's minds is the market could just tumble anytime. Here's the last one from there. Since 2010, buying the 10% dip has been very successful.

And we know that because the S&P just made an all time high last week. But what this is showing is the average return and hit ratio for positive returns for buying the 10% dip strategy since 2010. It's 100% hit ratio of course, but like just the trend in how much easier it's gotten to just automatically buy that 10% dip.

And so Tom, to some extent when I saw this I thought of you because you have been the guy consistently every time there's a dip, you're not telling a different story. You're saying this is when you want to buy. And it's so simple and it seems like everyone should know that. They don't know that or they're afraid to say it or some combination of the two. Do you agree with me that that's become your persona?

Yes, I'm employing Einstein's eighth wonder of the world, right? Compounding. Right. I mean, this is a pretty powerful, so the average return two years out after you buy a 10% dip is 35%. What else do you actually need to know

if you only knew one stat about whether or not dips should be bought? That's the only stat that you need. And then just pray for dips. And then pray for more. Tom, I'm just staying on this topic. I just want to give you and Funstrat some flowers while we have you.

I wrote about this today on my, I was about to say my sub-sector, my beehive. You broke the mold in terms of the way that Wall Street commentators work. Jason Zweig's dad said this to him, and it's always stuck with me, it's so true except for you, you broke this. His dad said, lie to people who want to be lied to and you'll get rich.

Tell the truth to those who want the truth and you'll make a living. And tell the truth to those who want to be lied to and you'll go broke. And on Wall Street, it's incredibly easy to build up a big following and warn people that something bad is about to happen. Those people sound insightful. It's incredibly easy to build up a big following and warn people that something bad is about to happen. Those people sound insightful. It's incredibly easy. I think staying bullish is really, really hard. People say, oh, he's always bullish.

Yeah, it's hard to stay bullish. And guess what? You've been right. We've been in a bull market for 15 years and the same people that have been at your ankles, biting at your ankles, waiting for this thing to end, you've been steadfast, you've done it your way, and you've got Rich Telling the Truth

to people that wanted to hear the truth, which is really hard to do, so all credit to you. Thank you, thanks. Anything you want to add to that? You know, I would say what Zweig said sort of resonates with me, because I remembered when I started in this business, someone says you don't get fired for recommending Coke.

Coca-Cola, not. Well, either way. Yeah, and so most people always play in the middle of the fairway. So then, when I was a Recreate Research Challenge, you just, if you stayed in your consensus and you just got people meetings, you could make a very good living as a researcher.

What's your S&P year end target? Plus 8%. Yeah. Just do that every year. And what will earnings do? Plus five, you know. Yeah, earnings will be plus five, market will be plus eight.

Yeah. Okay, so but you don't seem to want to play devil's advocate. You have a point of view. This is our point of view. This is the evidence that we've collected that we think backs up that point of view. I don't hear hear a lot from you about bullcase base case bear case, which seems to be The new in vogue thing that the strategists on the street do i'm not mad at them for doing it Because what they're doing is they're laying out a range of potential outcomes and maybe it's a little bit more

Intellectually honest. Do you think if you were sitting in the seat at JP Morgan, you would be playing that game or probably not? I probably wouldn't play that game because it's not clearer than what we're thinking. Right. Like even if those were the three scenarios, most of our clients would prefer us to say, okay, this is the least probable,

but we're picking this, yeah. Okay, so all right. So is it helpful though to create lists of all the things that might go wrong? Because I see that you don't really do a lot of that either. I think you're aware of the negatives, but you're not constantly updating a catalog of all the things everyone else is saying. First of all, it's unnecessary. We have TV for that. Everyone knows. But like second, like what is the purpose of the exercise? I never understood it.

So you're not doing a lot of that. Yeah. And I think the reason is, unless you can assign a cumulative probability to each one and then say what this aggregate represents, then it's just, it's your hedge. Because then you can say that you listed 20 things that go wrong and if one of them happens, you're like,

oh that's why we were wrong and it makes Most people will position as a reason they were right. Well, I get it people don't want to be wrong in public. It's embarrassing Yeah, so yeah, so one other thing I wanted to ask you that then on the election side Which you said is the second most prevalent thing people say they're worried about If you had a strong opinion that one thing we were going to happen versus another, and this is a very close election for a lot of reasons, but like let's say you really felt like you knew what was gonna happen, would it materially change your view of the

opportunity in stocks right now or not really? Yeah I think what you're saying is like let's say I had a crystal ball, so I knew who was going to win. Like you know it's Trump or you know it's Kamala. What would that even do, given like the growth drivers that you're citing, which are not reliant on either of those outcomes per se? Yeah.

I would say it makes very little difference to what the SMP will do, because I think- You believe that? Yeah, I think we're going to rally. And both policies are still pro growth. You know, I mean, it's not like someone's going to drive us into an economic. Ruin it within two years.

OK, but for some specific, if you watch CNN, you wouldn't believe that. But neither one of these presidents is talking about doing something that could jeopardize the things that you think are going to drive earnings. Yeah, and especially without a sweep. You know, without a mandate. Because none of them is going to really be winning on a mandate. I also have a hard time getting too worked up over something, an event that is on the calendar, where the event is binary, we have two possible outcomes.

The market is not going to be, maybe it will be, the market is probably not going to be caught off guard with one or two of these, with one of these candidates winning. That's right. There'll be an emotional. It's on the calendar, we know it's coming. Yeah, there'll be a lot of emotional purging and you know, people crying. You know what's even funnier?

After the outcome of both of the last elections, stocks rallied like crazy. Does no one remember 2021? It was an orgy. Does no one remember 2021? It was an orgy. Does no one remember 2017? It was plus 30% of the S&P. It's two different parties winning. Yeah, at a time when the Fed's dovish.

Yeah, okay. Let's do this demographic chart. So you're showing here major market turning points with each generation's peak. And you've talked with us about this topic before. I find this topic to be really fascinating. First of all, tell us what we're looking at and then we'll get into why it's important. So this is a chart showing the Dow since 1900. You have to use the Dow because... Yes, because unless we could backdate to 1950, pre-1950. And then using Pew Research data,

we mark the peak size of a cohort that they've identified. And it's not the year of birth because of immigration and death. So each generation, for instance, the baby boomer generation did not peak in total size until 1999, even though they were born 40 years before.

Oh, that's interesting. Because we get baby boomers come from Latin America and Asia, and they're technically of that age cohort. Yeah. And actually it's happening today, right? We've had so much that it's probably pushing out the peak of millennials. And so when you do that analysis that greatest generation peaked in 1930

Silent generation peaked in 74 the boomers peaked in 99 Gen X peaked in 2018 insane These are all major market turn marks when the mark equity markets peaked. Okay, so the millennial peak This is this is the amount of people in the cohort not the age the amount of people Yeah, and the age average peak is like around 38-ish. So we're gonna have the most millennials living in America in 2038, you're saying? Correct. That's when there will be the most of the people in that cohort.

Yes, and 38 is the middle range of the, we feel like an urban institute, when people reach their peak debt year. Their peak debt year. Their peak debt year is like age 49. So from age 30 to 49, people's consumption of capital is above their income, peaking. So how do you use this layer of insight, like in building portfolios or thinking about the opportunity in different asset classes?

Well, in this case, this has been very instructive on enrolling relative inflation. So we have a chart that shows route 10 year rolling inflation follows this cohort, the number of people age 30-50. And interestingly, it also correlates to rolling S&P returns or equity returns. So equity returns tend to accelerate into that peak. As you get closer to the peak. Yeah. Okay.

And I think in the last three cycles, the 10 year rolling return was 500%. So in the year 2037, you want me to start taking off some risk? Yes. Okay. Or because the PE will be 30 times, right? No, I like this way of thinking.

You, I know you employ a lot of people and fun strat is fast-growing. I know you have clients of all ages, too Which I also think makes you unique relative to the rest of Wall Street people of all age groups all experience levels want to hear What you have to say which I love I like to think of us that way, too Yeah, you guys definitely that way so so do you find there to be an interesting difference between Millennials and Gen Z as it pertains to investing and just being like participating in the economy? Because I think it's the starkest divide there is right now. Like I think the Xers are now acting more

like boomers these days. But Millennials versus Gen Z, I think, is really interesting. What are your observations between those two groups or do you not see that distinction? Well I see a big difference between Gen X and Millennials as you're saying. Gen X and Millennials? Okay. And Gen X is kind of a conflicted cohort because they did experience two huge recessions. So for them, their risk appetite can be very different. There is a class of investors that we're finding that are much more fearless. And I don't know if they're Gen Z or...

I think that's Z. Okay. So Z starts investing in 2020. All they know is lottery. And it's a video game for them. And they're not as afraid of markets as millennials were when they were the same age. Yeah, and they have instant liquidity

with large potential leverage just because using options, which has now become larger than cash equity, so which is not bad, because that's the world of credit. The credit world doesn't trade cash bonds. They trade almost every other instrument besides a cash bond. Right. Do you remember all the articles like, will millennials ever fall in love with the stock market?

Sure do. Will their parents do it? Will they ever invest? Will they ever move out? Why don't they have sex? It was like it went on for like 10 years. No one had to write that article at Gen Z. And I think the pandemic had something to do with it.

But they just like turned 18 and started trading crypto. Like they didn't need five years of hand wringing, whether or not they'll ever take risks. So I find that to be really interesting. And I feel like, I don't know what that means for investing going forward. I do think what it means for financial media, these people celebrate their losses

more than they celebrate their gains. They seem to like take particular delight in showing a zeroed out brokerage balance on social media. It's a really interesting difference. Yeah, in some ways, and I'm not saying I was contemporary at the time, but you know, in the 80s, there were futures traders, and that was like the era of Tom DeMarc and Larry Williams. And many individual traders turned $2,000 into $2 million or, and people wrote books.

There's a lot of books from that period. The turtle traders. Market wizards. So's bandits were around. Yeah. And so maybe we're just, you know, in a really good way because the 80s then led all the way for 20 years, a generation of by the dip holders. And I think maybe that's what we're also witnessing today. I think it's cool that our 20 year olds are risk positive versus the last generation which were very risk averse.

I think that seems like it's good. It's great for capitalism. It's great for capitalism. They want to invest in companies before they even come public. They want to start companies. They want to start businesses. So I think that's really good. Like within reason, if we could maybe lose some of the nihilism that comes along with it. Yeah.

Do you guys remember that survey from the Wall Street Journal? I don't remember the year. It might have been after the GFC where by country they said, you know, is it a good idea to start a business? And in Japan it's like 6% of people think it's a good idea. Wow. And in Europe it's like 12. Okay.

But in the US it's 94%. So Americans just like to take risks. Good here. Tom, here's a crazy staff here. Gunja and our friend at The Washington Journal tweeted this this morning. Assets and money market funds have increased $126 billion since the Fed's jumbo size rate cut and hit a record $6.76 trillion on Tuesday.

What is it going to take for... Somebody said this always happens. Which part? The huge inflow into money markets after the first cut of a... Why does that happen, do you think? I forget the explanation, but it had something to do with people moving the money from something else in preparation to invest it, and this is a way station. That was like...

I forget somebody said, this is what happens every time there's the first cut of a rate cutting cycle. There's a huge amount of money poured into Money Mart. This is almost like, okay, fund my casino. Like, fund my account. So I don't know where this money specifically is coming from. This sounds like a lot. What is it, 100?

126 billion? But this could be people about to buy stocks. Yeah, it could have moved from like what they call like an M3 account into this M2, right? Yes. Well, I mean, that's pretty bullish on the surface if that's even close to being true. But I guess the question for you, Thomas, because I am of the opinion that this money is stickier than some are thinking.

I think people are going to stay and stay and stay. It's just the inertia. So I wouldn't be surprised if under 4% money is still hanging out in there. I don't know how much of the 6.76 trillion is going to stay in there. But it sounds like you might disagree. I'm curious to hear your take. Oh, I mean, I agree that it's sticky because I think if we did a survey of people who think inflation has a second wave, we'd be shocked. It's probably 40%. Wow.

Why do you think it's that high? Because I, you know, we get charts from our institutional investor clients and they go, Tom, there's a second wave coming. And then they show like cargo rates, you know, or oil. And they're like, or it's happened every time the Fed eases. Now you get a second wave. So every there is a lot of folks who think inflation isn't over. And this is a Fed policy error.

I mean, they could be. It could be right. Yes, that's right. Well, how does inflation reaccelerate? What would be the trigger? It has, it depends on the source. So if it's wage inflation, that means wages have to be accelerating, but they're already deteriorating.

That seems unlikely. Yeah, it's unlikely. Housing would have to have a second wave of... That could happen. It could, but as you know, there's actually a lot of rent and a lot of unoccupied housing. And the housing markets are weakening. But it could. It could reverse all these things happening. Well, historically, so maybe this is in these people's charts and maybe they're just missing this very obvious thing.

Historically, we were an energy importer. And now we're either fully sufficient or an exporter and It's probably less likely to get the second wave Coming from oil prices so long as we are able to produce as much as we do. Yeah, that's right We're probably positively geared to oil now. Yeah, which is weird and that will not appear in a chart You're showing me from the 70s. Yeah of a next wave of inflation Yeah, and then there'd have to be a supply disruption because that was like the root source of this wave.

Okay. So, want to do this AI stuff? Yeah, quickly, we can't get out here without talking about semis. So semis are now 10.7% of the S&P 500, down from a peak of 12.6% as the market went higher, mind you, by the way. And this is not phony manipulation.

There's 7.5% of net income of the S&P 500 up from, I don't know, 4% before this AI wave cam. Like profits are driving them higher. There are bigger percent of market cap, there are bigger percent of the overall corporate profits. You can't extrapolate this kind of thing out forever is it overdone already well I would say almost in my mind I think the semiconductor intensity of everything we buy is going up yeah so I everything

has a chip in it yeah everything has a chip it may not be an Nvidia chip but it has a chip and I would say to me that's been observable from early on. And now that we're more of a digital economy, it makes more sense. More of our GDP growth is also native digital as well. Given that you think that technology is going to become, you say likely become, 50% of S&P 500, I'm guessing you think that AI will not be a bust.

That's right. I think AI is... What's in this? There's a lot going on here. Yeah, this is a multi-layered chart. Okay. The top half of this chart, which looks like waves, is the measure of the gap between the number of total working age population versus people. So like when this wave is positive,

that means you have a shortage of workers relative to the total population. Okay, got it. And then you'd think, what do companies do when you have labor shortage? You have to invest in automation. Yeah, so then the bottom chart is tech's price ratio to S&P and it's gone parabolic every time.

So every time there's a prolonged labor shortage, which I think we just lived through, the result is that companies invest more in tech. Yeah, because otherwise you have inflation. Well, we just had like the mother of all prolonged inflation issues and labor shortages outside of the 70s. So it would stand to reason companies

are taking a lot of meetings now about how do we make sure this never happens again. That's right. And then a second overlay on top of this is that the global labor shortage is even bigger. Yeah. And the US is the primary supplier of technology worker replacement. So I have a whole chapter in my new book and the chapter is called Just Own the Damn Robots. I still think that's like the most obvious investment thesis that exists. I don't know which stock at any given time,

but like it just seems to tailwind there as permanent. Yeah. Like it might have a couple of down quarters like in 2022, but like bigger picture, there is no company in America that's like how could we spend less on tech? So BlackRock is preparing to launch, this is from the journal, a more than $30 billion AI investment fund,

$30 billion with Microsoft to build data centers and energy projects to meet growing demands stemming from AI. Wow, yeah. And that's probably not enough money, right? Because I think OpenAI's CapEx is like $50 billion. Well, there's a debate internally at Goldman Sachs. You probably read the article this week.

It was in the New York Times. They have an analyst named Jim Covington. And he says it, I was scarred by the dot com bust. He was like a 22-year-old, got his first analyst job at Goldman Sachs, and they laid off his whole group within a couple of years. So I think he's acknowledging that he looks at things through that prism, but he's basically saying anytime in history where we build too much of something

that no one really needs, it ends up being not great. And he's seeing the same parallels now. He's basically saying, I don't see where the ROI is on a trillion dollars in spending. So Goldman, very wisely, they have some really bullish people on AI there too, which of course they do. They turn it into content. They had their biggest AI bull debate this guy,

their biggest AI skeptic, and they invited an audience. So this is the biggest investment bank in the world. Not sure whether or not AI is.com 2.0 or something different. So I think it's hard for everyone to understand like did we bid these stocks up too much or maybe are we underestimating it? I mean open AI is what? 100? What did they say? 100? Is it 150? Yeah, I mean these are so right and now they're going to be full blown for profit. They're not going to pretend that they're doing charity work. But how do you know that this AI thing isn't setting us up for the,

even though the internet turned out to be real, it also turned out to be a lot of wasteful investment leading up to it. How do you like, how could you really be sure that we're not doing the same thing again? We don't, right, without perfect fore foresight but I think Covington should review those interviews in the 80s where people debated the personal computer and it was the experts that dismissed the future of personal computing. Okay so there's been skeptics for every technology way. Yeah. Okay he could also be right he

could be right and then wrong long term. That's another possibility. And one thing that people haven't studied is after the dot com bust of 99, the biggest stock winners were the dot com stocks. The ones that survived. Yeah, because once, see when fiber prices collapsed that opened the world for Priceline, eBay, social media, and the structure was very favorable. There was no reciprocal termination so Netflix could broadcast without paying for carriage

on the internet. Right, but what you had to know in 99 was buy Priceline, don't buy Etoys. Because they weren't both going to make it. Yeah. Okay. Like like because they weren't both gonna make it. Yeah, okay Or like let's say that there is a AI crash and so the price of AI computing crashes Who wins when the price of computing drops and maybe it's exactly what you said. It's all the companies that use it meta Yeah, well so right so the GPU salespeople don't win Per se if the price of GPUs drops because of falling demand, but maybe the end users benefit.

Yeah. You know, like who benefits from a PhD level employee that now you can rent for one-tenth the cost, you know? Okay, we're going to do one more thing. This week, President Javier Millet of Argentina rang the opening bell of trading at the New York Stock Exchange on his way to give an address that from what I've read, was pretty positively received at the UN.

I don't think two years ago it would have been. So there's been like kind of a mindset shift around his approach. What a photo. So this is one of my favorite pictures of him and he is very photogenic. He does shtick like this all the time. But I listened to Meb Faber and Rob Citrone, who's like one of the best emerging markets investors in the world. So they had a really great conversation about Argentina and Rob has been to the

country 57 times. And so have you been to Santiago twice last year? So the point is this is one of the best stock markets in the world. Let's put this five year chart up, John. This is the global X MSCI Argentina ETF ARGT. Don't see many people talking about this one. It's up 70 percent. It looks like from pre pandemic and it's obviously it's not a giant market.

In its day, it was one of the biggest global economies. Here's another one. This is Argentina just versus all of Latin America, the ILF. So Latin America in the last five years is up 13.5%. This is up 227%. Yeah. Amazing. When you see individual country stories like this that have this really interesting Valuation which Argentinian stocks you couldn't give them away, and then they have these like political tailwinds and

You say like a lot of these pieces are lining up. Do you get excited about those? We saw that with Japan recently China might be the next one. Like, is that the type of thing that you think a lot about or do you kind of leave those opportunities for other people? Well, I think those are unbelievably positive things because it shows you what a single person can do. Right? He gets elected, puts in reforms, changes rents, reintroduces capital lists like ideals and there's a boom. People, a single person makes a difference anywhere.

I was talking to a professor of economics at University of Miami two weeks ago. He was saying the difference between Millet and every other politician is he's willing to endure the J curve. The J curve is like we got to go down before we go up. And he destroyed a lot of cap, like a lot of, he had to throw out a lot of bureaucrats and he had to like do a lot of damage in order to, but now the J curve is... Yeah, and a great personal risk to himself. Correct. Made some very powerful enemies, put up with the media, put up with the skeptics.

This thing looks like it's for real. I mean, I'm just looking at the stock chart, but... And I'm not trying to mix names in the... But like, Fed SharePowell gets a lot of credit. You know, as a single person, he made a big difference too in this cycle. Okay. All right. We love that.

Tom, this has been so much fun to have you here and pick your brain about all these big topics. We just want to say thank you so much on behalf of all the listeners. We always end the show with favorites and So now we know that you watch diners driving some dives Okay, what was the coolest thing about outside of the the all the vegetables you ate? What was the coolest thing about your trip to Asia? well It one of the coolest things about my trip to Asia was I think it was just a good, nice to spend two weeks

in a new environment. Because I still worked. I actually did some interviews, wrote our notes, but in a completely different place. And it gave me a new perspective. Like a different setting. Yeah. OK, so what kind of impact does that

have on the way that you work when you're in that setting? Well, one of the things that I think is always important is to disconnect ourselves from the noise because it's too easy to get caught up in, like, what you think matters. And so it gives you a chance to step back and I, you know, it's a fresh look. It's almost like I'm re-entering my job, like for the first time. Yeah, I love that. Do you get the same feeling at Future Proof?

Oh man, can I tell you how amazing Future Proof was? Yes, please. Like I told you guys. Is this mic on? Yeah, I think you're gonna probably run it, but I can see that thing being five times bigger. You said that to Mike. Tom, I told Josh and Matt immediately.

I was like, guys, Tom Lee said this. Yeah, I think this thing's just going to... You'll have to take over Newport as well. Why do you think it's going to get so much... I think it will too. I don't know about 5X, but why do you think it's going to be so much bigger? Well, it's probably one of the few that really successfully brings these really large institutions and advisors. But then I found a lot of folks who really want to learn about investing.

So not professional money managers, but they're there to either hear stuff about the stock market, learn about products. So you got three cohorts. You're not, you know, it's not institutions to professionals. This is everybody. And that's why I think this thing could get huge. When people came up to you there, and I saw people wanting photos with you,

you're completely... I mean, it's already huge, sorry. It's going to get huge. You're a total, thank you. You're a total rock star there. And people were just so excited to see you in person. There's like people circling you, waiting to talk to you.

It's awesome. I mean, I don't know if you love that, or if it freaks you out, or some combination of the two, but people are really excited to see you. What was the thing that they said to you most frequently or what was the best thing somebody said to you? Well, it's nice to meet folks because we are trying to help individuals make better decisions.

This is a life thing. People work hard to save their money. We want them to grow their money. And then that works for them as they get older. I mean, that's kind of what we're trying to do for folks. So it's nice to see people getting helped. And it's nice to put faces to names because I met a lot of folks that maybe I knew from before,

like through the name. Or subscribers or... Exactly, so it's nice to meet everybody. Well, we were so thrilled to have you there. Thank you so much for coming. Michael, I'm told you have a favorite for us. I'm very excited about this. Tell us.

I have two. One, Warner Brothers, one, Netflix. Warner Brothers, I saw the first episode of The Penguin and I had a great time. I'm all in. The second episode's tonight. Oh, is it? Yeah, they're dropping one every Thursday night.

Okay. I had a great time. It freaks me out that that's Colin Farrell, right? So he said if he never sees that suit again, like it'll be too soon. It's like six hours of preparation to make him fat and disgusted. Yeah, it must be a nightmare.

So I'm very excited for that. And also on Netflix, I watched the first episode of Mr. McMahon last night, the six part doc on Vince McMahon. And stroll down. Do you know about this? No. Vince McMahon, the founder of World Wrestling. Mm-hmm.

I know the name. So the Ringer produced, like Bill Simmons, I don't know if it's the Ringer, but Bill Simmons produced a huge documentary, it's like 10 years in the making. So they filmed it before the scandal came out. Oh, wow. So it is just a deep dive into the character,

and he really is an icon, like a global icon. What he did for that business, the personal atrocities aside, just the thing that he did for that business, it's really an incredible character. Yeah, and what's interesting is, he fully cooperated with the documentary, and then it was two days away from being aired,

and he came out and shit-talked it. Yeah, he's like, oh. He's like, I don't know what this is. I don't know. But that's after sitting for interviews with them for years and shit talked it. He's like, I don't know what this is. But that's after like sitting for interviews with them for years and years and years. So in perfect McMahon style. It's like the twist. It's like one of his, it's like one of his wrestling events basically. So, uh, very, very cool. I wanted to just mention, uh, as my favorite and I shouldn't be doing this, uh, but I but I'm supposed to turn over a new

leaf and like relax but like I ate a Levain cookie yesterday after not having had one for years so shout to Dan Nathan who hands me a tin box of Levain cookies there's like eight of them in there each one of these cookies you can cut it into six and share it with people, and it's like enough. So I had two. Full ones. Anyway, I think it's the best cookie in the world. Yeah, they're amazing. They're really good. And if you give that as a gift to somebody like Dan gave to me, that's like, nobody will ever be disappointed with a tin of Levain cookies.

No. And I think you could ship them anywhere. Yeah, because Dan may have had to wait in line on the Upper West Side, right? He sends somebody. Oh, he sends somebody, yeah. No, Dan Dan may have had to wait in line on the Upper West Side, right? He sent somebody. Oh, he sends somebody, yeah. No, Dan's down on the teens. So I think they must have their own over there. Anyway, if you send somebody a thing of Levain cookies,

it's awesome. And they'll be like, oh, I don't want this. You totally want it. So shout to the bakery. All right, that's it from us this week. Thank you so much, Tom Lee. Let's tell people how people can learn more about you. You are on Twitter at funstrat.

You are on LinkedIn as well. And the website for funstrat research is what? There's two. There's funstrat.com and fsinsight.com. What is the difference between funstrat.com and fsinsight.com. What is the difference between funstrat.com and FSinsight.com? Well, for an individual or an RA, FSinsight.com is like the on-ramp to kind of become an online client. It's the gateway drug, if you will. Yeah.

And then Funstrat is like a little bit more bells and whistles for the higher... Institutional investor, yeah. So somebody that needs like more. Yes. It's great that you're serving people at every level. I think it professional investor. Okay. So somebody that needs like more. Yes. Okay. It's great that you're serving people at every level. I think it's awesome. That's probably why you have the fan base that you have.

The people love you. So once again, thank you so much. And thank you guys, John, Duncan, Rob, Nicole, Chark Kid, Matt, Sean, everyone who worked on the show this week. We really appreciate you. Thank you to the listeners. We'll see you soon. I think we got it.

We got it. We got it. We got it. We got it. We got it. appreciate you thank you to the listeners we'll see you soon