WEBVTT - Why Tom Lee Thinks We Could See S&P 15,000 by 2030 0:00:03.120 --> 0:00:18.760 Bloomberg Audio Studios, Podcasts, Radio News. 0:00:20.440 --> 0:00:23.640 Hello and welcome to another episode of the Odd Lots Podcast. 0:00:23.720 --> 0:00:25.080 I'm Tracy Alloway. 0:00:24.800 --> 0:00:25.439 And I'm Joe. 0:00:25.440 --> 0:00:26.639 Why isnt thal Joe? 0:00:26.680 --> 0:00:28.400 Every once in a while, I think it's a good 0:00:28.400 --> 0:00:33.879 idea to pause and consider everything that's happened in the 0:00:33.920 --> 0:00:37.080 market and how it actually matched up to initial expectations, 0:00:37.360 --> 0:00:40.560 because I think, you know, we're recording this on let's 0:00:40.560 --> 0:00:44.400 see June eighteenth, s and P five hundred is at 0:00:44.680 --> 0:00:48.479 another record. Meanwhile, ten year treasury yields are at what 0:00:48.720 --> 0:00:53.160 like four point three percent now, and I think certainly 0:00:53.800 --> 0:00:56.360 two years ago, maybe even a year ago, I don't 0:00:56.360 --> 0:00:58.520 think anyone would have thought that stocks would rally this 0:00:58.680 --> 0:01:00.640 much in a rising rate environm. 0:01:00.640 --> 0:01:03.360 No, I mean, I think this has been you know, 0:01:03.480 --> 0:01:06.440 the beginning the middle of twenty twenty. I'm starting to 0:01:06.440 --> 0:01:09.840 lose track of the years. Parts of twenty twenty two, 0:01:09.880 --> 0:01:12.959 obviously the stock market was total dead money, and going 0:01:12.959 --> 0:01:14.840 into twenty twenty three, I think there was a lot 0:01:14.880 --> 0:01:17.800 of pessimism recession, and that would have been like, well, yes, 0:01:17.840 --> 0:01:19.720 this is what we expect when we get a rising 0:01:19.800 --> 0:01:22.679 rate environment. Stocks go down, the economy slows maybe a 0:01:22.720 --> 0:01:26.800 recession happens and then the market turned around, the economy 0:01:26.840 --> 0:01:29.200 continued to boom. But it's not like they cut rates 0:01:29.280 --> 0:01:32.440 or anything. And in fact, the main story has been 0:01:32.440 --> 0:01:34.760 that rate cuts keep getting pushed further into the future 0:01:34.880 --> 0:01:36.080 rate cut expectations. 0:01:36.319 --> 0:01:36.679 Yeah. 0:01:36.959 --> 0:01:40.600 Absolutely, But despite the record in the s and P 0:01:40.760 --> 0:01:43.399 five hundred and all these you know, we keep talking 0:01:43.400 --> 0:01:46.160 on the podcast about all the lines going up into 0:01:46.240 --> 0:01:48.160 the right, and there are a lot of them at 0:01:48.160 --> 0:01:51.400 the moment, there's some nervousness in the market right now. 0:01:51.440 --> 0:01:53.520 I think that's fair to say. So you see a 0:01:53.520 --> 0:01:56.400 lot of people, for instance, talking about the lack of 0:01:56.480 --> 0:01:57.960 breadth in stocks. 0:01:58.400 --> 0:01:58.680 Yeah. 0:01:58.720 --> 0:02:02.000 Look, if you're in sa P five hundred index fund holder, 0:02:02.920 --> 0:02:05.040 then there's a lot of conversations you just turn out 0:02:05.120 --> 0:02:08.079 someone's like, oh, there's lack of breadth. It's like, yeah, whatever, man, 0:02:08.200 --> 0:02:10.959 my ETF is up fifteen percent through the year. 0:02:11.000 --> 0:02:11.760 I'm happy with that. 0:02:12.320 --> 0:02:14.600 You know, like that's pretty great no matter what. But 0:02:15.200 --> 0:02:18.000 if you're an active manager, you want to beat the index. 0:02:18.080 --> 0:02:21.920 If you're worried about like durability, you might notice the 0:02:21.960 --> 0:02:24.680 fact that, like you know, if you strip out a 0:02:24.720 --> 0:02:28.679 few really big tech stocks like Nvidia and a few 0:02:28.680 --> 0:02:31.920 others returns are much worse, and so that raises all 0:02:32.000 --> 0:02:35.400 kinds of anxiety. Is this entire thing just sort of 0:02:35.600 --> 0:02:39.400 hanging on analysts demand for chips to run AI models? 0:02:39.480 --> 0:02:40.079 Absolutely? 0:02:40.320 --> 0:02:43.080 So today I am pleased to say we do indeed 0:02:43.160 --> 0:02:45.000 have the perfect guest. You know, I said in the 0:02:45.000 --> 0:02:48.160 intro that almost no one would have expected stocks to 0:02:48.160 --> 0:02:50.400 be where they are. This person did expect stocks to 0:02:50.440 --> 0:02:53.160 be where they are currently. This person is one of 0:02:53.200 --> 0:02:56.240 the few that I can think of that has basically 0:02:56.400 --> 0:02:58.960 called a lot of the market right over the past 0:02:59.000 --> 0:02:59.440 year or two. 0:03:00.040 --> 0:03:01.200 Probably someone we should talk to. 0:03:01.480 --> 0:03:04.240 Yes, absolutely so we are going to be speaking with 0:03:04.360 --> 0:03:07.040 Tom Lee. He is, of course, the co founder and 0:03:07.120 --> 0:03:11.720 head of research at Funstrat Global Advisors and FS Insight. Tom, 0:03:11.760 --> 0:03:12.600 welcome to the show. 0:03:13.120 --> 0:03:14.040 Thank you very much. 0:03:14.680 --> 0:03:14.800 So. 0:03:15.240 --> 0:03:19.040 I know you're sometimes described as an uber bowl. Is 0:03:19.040 --> 0:03:22.839 that a fair a fair characterization of how you feel 0:03:22.880 --> 0:03:24.200 about markets? 0:03:24.480 --> 0:03:28.160 I think that label is not reflective of how I 0:03:28.200 --> 0:03:31.560 feel about markets. I think that label is generally used 0:03:31.639 --> 0:03:35.840 by perma bears who've been perma wrong, and it's a 0:03:35.920 --> 0:03:37.600 cheap shot. 0:03:37.200 --> 0:03:40.200 Taken, Okay, but I get that it sounds like a 0:03:40.280 --> 0:03:44.240 cheap shot. But on the other hand, uber bowls or 0:03:44.280 --> 0:03:49.000 permables historically have like one hundred years of lines going 0:03:49.040 --> 0:03:50.600 open to the right on their side. 0:03:50.640 --> 0:03:52.680 So my view when I hear someone being. 0:03:52.560 --> 0:03:55.600 Described as a permeable is, oh, this is someone who, 0:03:55.720 --> 0:03:58.720 except for like five minutes here and there in twenty twenty, 0:03:58.800 --> 0:04:01.280 in two thousand and nine, is permacorrect. 0:04:02.520 --> 0:04:03.400 Yeah, i'd say so. 0:04:03.680 --> 0:04:06.400 I think people don't live in those longer time frames, 0:04:06.480 --> 0:04:08.880 you know. In the day to day. People live as 0:04:08.920 --> 0:04:14.080 if this is a street battle, and the label uber 0:04:14.120 --> 0:04:16.440 BWL is like someone well, you know what, he might 0:04:16.480 --> 0:04:18.160 lead us out, but I don't trust him because we're 0:04:18.200 --> 0:04:20.960 in a street fight. And so it's generally I find 0:04:21.000 --> 0:04:22.800 people saying it more as a cheap show. 0:04:22.839 --> 0:04:24.880 No, the people who say it are all really obnoxious. 0:04:24.920 --> 0:04:26.039 That I agree. 0:04:26.279 --> 0:04:28.080 I didn't mean to be obnoxious. Wait did you just 0:04:28.120 --> 0:04:28.920 call me obnoxious? 0:04:28.960 --> 0:04:31.599 No, you described when you said it, you were characterizing 0:04:31.640 --> 0:04:32.240 other people. 0:04:32.320 --> 0:04:34.440 Yes, well, I feel like we should give people the offense. 0:04:34.480 --> 0:04:36.479 Okay, excellent. I feel like we should give people the 0:04:36.520 --> 0:04:39.120 opportunity to describe their own work. But why don't we 0:04:39.120 --> 0:04:42.240 talk about something concrete, which is at the beginning of 0:04:42.279 --> 0:04:45.279 this month, Tom, you at Funstrat put on an S 0:04:45.320 --> 0:04:48.560 and P five hundred target of five thousand, five hundred, 0:04:48.680 --> 0:04:52.760 we're at about five thousand, four hundred seventy five or 0:04:52.800 --> 0:04:56.240 something like that right now. So just in that short 0:04:56.279 --> 0:04:59.440 time frame, you know, called it correctly. 0:04:59.600 --> 0:05:00.080 What did you did? 0:05:00.160 --> 0:05:00.600 You see? 0:05:01.680 --> 0:05:06.279 This is actually a textbook rally. At the start of 0:05:06.279 --> 0:05:11.720 this month, we alerted our clients that since nineteen twenty seven, 0:05:12.080 --> 0:05:16.080 when you look at the start of June, but markets 0:05:16.080 --> 0:05:19.000 were up in the first quarter, but then had a 0:05:19.120 --> 0:05:21.719 draw down in April, which is what we had. Yeah, 0:05:21.880 --> 0:05:27.120 that happened eleven times. Eleven of eleven times, June was 0:05:27.160 --> 0:05:31.039 a positive month. So May is essentially a recovery month, 0:05:31.080 --> 0:05:33.200 and then June is the month where markets go back 0:05:33.240 --> 0:05:36.559 to risk on. The median gain since nineteen twenty seven 0:05:36.600 --> 0:05:40.200 is three point nine percent, which calculated a fifty five hundred. 0:05:40.520 --> 0:05:44.560 There you go, simple math investing made easy, but zooming out. 0:05:44.640 --> 0:05:47.280 You're a fun strat for years prior to that, you're 0:05:47.279 --> 0:05:49.200 a JP Morgan I was a big fan of your 0:05:49.480 --> 0:05:53.720 org then correctly calling for much higher stock prices through 0:05:53.760 --> 0:05:56.360 much of the twenty tens, when you know there were 0:05:56.400 --> 0:05:58.760 still a lot of people calling for double dips in 0:05:58.920 --> 0:06:02.480 the sort of raw of a pretty large, bearish contingent. 0:06:02.800 --> 0:06:04.160 How do you work? What do you do? 0:06:04.240 --> 0:06:07.400 Because there are all different approaches that people have towards, 0:06:08.040 --> 0:06:10.760 you know, making educated guests as to where the stock 0:06:10.800 --> 0:06:13.640 market could go. How would you describe your approach? 0:06:14.520 --> 0:06:18.680 Well, fundamental to our process is evidence based research, so 0:06:19.480 --> 0:06:22.760 you know, at the core we really try to frame 0:06:22.800 --> 0:06:27.200 where history could explain where we are today. Okay, we 0:06:27.279 --> 0:06:30.520 rely on a lot of cross market signal, so to us, 0:06:30.760 --> 0:06:33.520 the bond market is always smarter than the stock market. 0:06:33.960 --> 0:06:36.400 That's why they say equities are the land to sea students. 0:06:37.000 --> 0:06:41.479 And the third is, of course monetary policy is really 0:06:41.880 --> 0:06:45.200 the driver, so you can't fight the FED. And then 0:06:45.240 --> 0:06:51.480 I think the fourth is that thematic approaches surpass cyclical 0:06:51.920 --> 0:06:55.479 What does that mean? Well, part of our work relies 0:06:55.520 --> 0:06:59.400 on what we call like thematic drivers. One is millennials. 0:06:59.600 --> 0:07:03.320 Ok so that since twenty eighteen we've talked about how millennials, 0:07:03.360 --> 0:07:06.120 which is the largest generation, are reshaping the economy, which 0:07:06.160 --> 0:07:10.600 they are mainly through fintech and changes in preference. But 0:07:10.680 --> 0:07:14.080 of course now coming is a big generational wealth transfer 0:07:14.120 --> 0:07:17.600 of you know, as much as eighty trillion dollars. The second, 0:07:17.600 --> 0:07:20.320 of course, is that there is a huge global labor 0:07:20.320 --> 0:07:23.720 shortage which has started in twenty fifteen and won't be 0:07:23.800 --> 0:07:28.960 resolved till twenty thirty five. And the two previous instances 0:07:29.000 --> 0:07:32.960 of global labor shortage resulted in a parabolic movement technology stocks, 0:07:32.960 --> 0:07:35.800 which has been part of our themetic approach, and now 0:07:35.800 --> 0:07:39.720 we see two other things like energy security and cybersecurity 0:07:39.720 --> 0:07:43.760 are huge thematic drivers, especially because of AI, and so 0:07:44.040 --> 0:07:47.760 this grounds our work. We not only use it to 0:07:47.880 --> 0:07:50.200 judge markets, but we use it to build our Granny 0:07:50.200 --> 0:07:55.400 Shots Core Stock portfolio, which is a thematic portfolio fixed 0:07:55.440 --> 0:07:59.400 the strongest stocks within each theme, and that has outperformed 0:07:59.440 --> 0:08:00.840 every year twenty nineteen. 0:08:01.360 --> 0:08:03.240 I'm trying to think how to phrase this question, but 0:08:03.320 --> 0:08:06.720 what do the strong themes mean for the overall market? 0:08:06.840 --> 0:08:10.800 Because I think everyone would agree that stuff like AI 0:08:11.520 --> 0:08:15.680 is interesting and promising, maybe a little overhyped at this point, 0:08:15.720 --> 0:08:18.480 but you could make the argument that there is potential there. 0:08:18.920 --> 0:08:21.560 And yet you know, we've seen the S and P 0:08:21.640 --> 0:08:24.560 five hundred as a whole go up, and there is 0:08:24.640 --> 0:08:28.120 that argument over breadth, like how much of this is 0:08:28.200 --> 0:08:30.840 purely AI? And the stuff that people are getting excited 0:08:30.880 --> 0:08:34.959 about versus general optimism about the market. 0:08:35.360 --> 0:08:37.120 Well, I mean, if I look at the stock market, 0:08:37.160 --> 0:08:39.680 I think it is playing out with all the things 0:08:39.720 --> 0:08:42.760 you just mentioned, because the groups that are affected by 0:08:42.880 --> 0:08:46.319 high and tight monetary policy have really lagged, whether it's 0:08:46.360 --> 0:08:50.880 the regional banks or industrial multiples are being suppressed. And 0:08:50.960 --> 0:08:54.679 we know that the spend and actually now some of 0:08:54.720 --> 0:08:57.920 the synergy coming from AI is driving not only the 0:08:57.960 --> 0:09:02.360 producers of AI like and some of the software companies, 0:09:02.360 --> 0:09:05.840 but in many of the companies that are levering leveraging 0:09:05.880 --> 0:09:09.160 this for revenue growth. So I think it is playing out. 0:09:09.760 --> 0:09:14.160 But overall, I think it's on balance a healthy economy 0:09:14.200 --> 0:09:17.400 because companies are generating good earnings growth, and the labor 0:09:17.480 --> 0:09:22.079 market has come back into balance, and consumers aren't highly levered, 0:09:22.120 --> 0:09:24.880 which is really the big deal because to me, when 0:09:24.920 --> 0:09:28.640 consumers can't borrow more money because they borrow too much, 0:09:28.720 --> 0:09:31.680 that's really when the economy hits the tipping point. 0:09:31.520 --> 0:09:33.840 When it comes to consumer balance sheets. Just on this, 0:09:33.920 --> 0:09:35.400 what do you look at when you say, Okay, the 0:09:35.480 --> 0:09:39.600 consumer is not high levered. I alouls say discussions like oh, 0:09:40.000 --> 0:09:41.400 excess savings gone. 0:09:41.960 --> 0:09:44.040 People look at total credit card debt. 0:09:44.200 --> 0:09:45.599 Yeah, what do you look at? 0:09:45.800 --> 0:09:47.960 Well, I think the gold standard is still the debt 0:09:48.000 --> 0:09:51.040 service ratio, which the Federal Reserve puts a lot of 0:09:51.080 --> 0:09:53.880 time into and employs a lot of economists to build 0:09:53.920 --> 0:09:56.880 a fair view. And the debt service ratio today is 0:09:56.920 --> 0:10:01.079 still under ten percent, which you know, for instance, before 0:10:01.600 --> 0:10:05.680 this decade, you'd be in a sort of peak consumer 0:10:05.800 --> 0:10:09.840 borrowing at a fourteen to sixteen percent level, so consumers 0:10:09.920 --> 0:10:12.200 can if interest rates don't move, they can borrow forty 0:10:12.200 --> 0:10:15.840 percent more money. I think the cash say excess savings 0:10:15.920 --> 0:10:18.480 is a spurious argument because I don't remember it in 0:10:18.520 --> 0:10:22.360 my thirty years people saying consumer cycles turn when their 0:10:22.400 --> 0:10:24.839 excess savings is gone. I mean, that's not really been 0:10:24.880 --> 0:10:26.559 how the business cycle works. 0:10:27.000 --> 0:10:29.800 You mentioned thirty year career just then, and I realized 0:10:29.920 --> 0:10:33.679 I'm kind of unfamiliar with you other than at funstrat. 0:10:33.920 --> 0:10:36.160 Can you maybe give us a recap of what you've 0:10:36.200 --> 0:10:37.440 been doing for three decades? 0:10:37.840 --> 0:10:41.800 Yes, I've essentially had the same job for my entire 0:10:42.240 --> 0:10:46.440 post college career. I started off at Kidder Peabody in 0:10:46.480 --> 0:10:47.880 the early nineties as. 0:10:47.720 --> 0:10:48.600 One of my old bosses. 0:10:48.679 --> 0:10:53.400 Was it Kidder Peabody, David wire No, No, someone else said, okay, sorry, 0:10:53.440 --> 0:10:53.880 keep going. 0:10:54.240 --> 0:10:54.560 Yeah. 0:10:54.600 --> 0:10:57.000 I got into stock research at that time, and I 0:10:57.200 --> 0:11:01.080 was working at the sector I was assigned was wireless. 0:11:01.080 --> 0:11:04.600 So the first fourteen years of my career ARC was 0:11:04.640 --> 0:11:08.559 as a technology analyst covering the wireless industry, which again 0:11:08.679 --> 0:11:11.160 for my clients, many of which I still have from 0:11:11.200 --> 0:11:14.000 those days. No, I'm not an uber buwl because there 0:11:14.000 --> 0:11:17.040 were many times I had cell ratings on stocks. But 0:11:17.760 --> 0:11:20.680 it's not fun to be telling people the shortest stock 0:11:20.720 --> 0:11:24.200 that they own. That's when they're very angry. And then 0:11:24.679 --> 0:11:30.600 in the two thousands, wireless was consolidating and I wanted 0:11:30.640 --> 0:11:32.679 to find some other things to do, so I started 0:11:32.679 --> 0:11:35.400 to do some work on bankruptcy bankrupt stocks because many 0:11:35.520 --> 0:11:38.640 wireless stocks from bankrupt I did a whole piece called 0:11:38.640 --> 0:11:41.080 the Chapter after Chapter eleven where I looked at over 0:11:41.840 --> 0:11:46.600 two thousand publicly listed bankruptcies. I used our Mumbai team 0:11:46.880 --> 0:11:49.240 at the time, we called it Momba team at JP Morgan, 0:11:49.240 --> 0:11:51.600 and we went through all these filings and we found 0:11:51.600 --> 0:11:54.120 that stocks that emerged from bankruptcy do well. So we 0:11:54.840 --> 0:11:57.240 had a whole strategy around buying bankruptcy stocks and then 0:11:57.320 --> 0:11:59.560 JP Morgan asked me at the time if I wanted 0:11:59.559 --> 0:12:03.160 to become the small cap strategist on top of wireless, 0:12:03.679 --> 0:12:07.359 so I had two jobs. I ranked in both categories, 0:12:07.559 --> 0:12:10.040 and then in seven they asked me if I wanted 0:12:10.080 --> 0:12:12.280 to become the chief equity strategists, which I've been doing 0:12:12.280 --> 0:12:17.040 ever since and started fundstret twenty fourteen. So this is 0:12:17.080 --> 0:12:17.840 our tenth year. 0:12:17.960 --> 0:12:18.560 O congraguate. 0:12:18.640 --> 0:12:24.000 Congratulations. Okay, So, given your history with the wireless companies 0:12:24.080 --> 0:12:26.600 and technology overall, I feel like I have to ask 0:12:26.640 --> 0:12:31.160 you about AI and Nvidia and all of that. Is 0:12:31.200 --> 0:12:35.720 there any common thread or any valid comparison between the 0:12:35.800 --> 0:12:39.920 AI boom that's happening right now and say, the Internet 0:12:39.960 --> 0:12:43.000 bubble of the late nineteen nineties and early two thousands. 0:12:43.520 --> 0:12:46.480 There are a lot of parallels. When I started doing wireless, 0:12:46.480 --> 0:12:50.360 there were thirty four million cell phones. Today there's seven billion. 0:12:51.120 --> 0:12:54.440 So it's a hypergrowth industry that grew almost in parallel 0:12:54.440 --> 0:12:57.600 with Internet because without mobile you wouldn't really have the 0:12:57.600 --> 0:13:02.360 Internet that we have today in the early stages of 0:13:02.400 --> 0:13:06.320 that growth. So when you look at penetration, Wall Street 0:13:06.440 --> 0:13:11.000 always underestimates the importance of the technology, and part of 0:13:11.040 --> 0:13:15.520 it has to do with it's a generational lens. Every 0:13:15.559 --> 0:13:18.480 new technology is adopted by a young cohort, people in 0:13:18.520 --> 0:13:22.040 their twenties, teens, or even thirties, but most people on 0:13:22.080 --> 0:13:24.200 Wall Street are in their forties or fifties, so they're 0:13:24.240 --> 0:13:29.480 one generation removed. I remembered when our PC Analystic Kidder said, 0:13:29.640 --> 0:13:31.640 why would you have one computer per household or even 0:13:31.640 --> 0:13:33.720 more than that, because they're twenty five hundred dollars. And 0:13:33.800 --> 0:13:37.400 I know when cell phones first emerge, people thought it 0:13:37.440 --> 0:13:39.360 was a yuppie toy and it was going to be 0:13:39.840 --> 0:13:42.520 only for people make seventy five thousand a year. But 0:13:43.160 --> 0:13:46.760 what I learned as a Wilds analyst was teenagers and 0:13:46.840 --> 0:13:49.360 young kids, especially in Europe, were using cell phones. So 0:13:49.480 --> 0:13:52.480 I used a vintage model saying that if one hundred 0:13:52.520 --> 0:13:55.080 percent of like teenagers have a cell phone by the 0:13:55.080 --> 0:13:58.679 time they're sixty, the penetration rate should be whatever it is, 0:13:59.400 --> 0:14:03.200 that's AI. The adoption rate for AI is staggering, but 0:14:03.480 --> 0:14:06.359 the use case is important because there's a labor shortage. 0:14:06.840 --> 0:14:10.439 So to me, I think it's very likely we're underestimating 0:14:11.360 --> 0:14:14.120 how much revenue all these companies will make. I can 0:14:14.120 --> 0:14:17.960 give you some simple math. Yeah, please, the global labor 0:14:17.960 --> 0:14:20.240 shortage by the end of this just by the end 0:14:20.240 --> 0:14:24.200 of this decade is close to forty million worker equivalents, 0:14:24.680 --> 0:14:29.440 and that's three trillion of wages. Okay, we're turning labor 0:14:29.480 --> 0:14:33.320 cost into silicon a center or into tech automation, of 0:14:33.360 --> 0:14:37.840 which we know today eighty percent is hardware silicon. So 0:14:38.920 --> 0:14:42.200 does that mean whoever supplying the chips might have a 0:14:42.200 --> 0:14:47.680 two trillion revenue probably, and right now the largest share 0:14:47.720 --> 0:14:49.760 of that would go to a company like in Vidia. 0:14:49.920 --> 0:14:52.240 So if in Video is one hundred billion in revenues, 0:14:52.280 --> 0:14:54.400 now you know what does by the end of this decade, 0:14:54.400 --> 0:14:57.040 is it it's eight hundred billion of trillion dollar revenue company? 0:14:57.080 --> 0:15:00.280 And then what should we discount that rate at I'd 0:15:00.280 --> 0:15:16.200 say there's probably a lot of upside. 0:15:18.120 --> 0:15:22.080 So that's sort of the argument from the fundamentals perspective. 0:15:22.360 --> 0:15:25.680 The other thing people like to do is they like 0:15:25.760 --> 0:15:30.000 to draw these dual axis lines where they're like, here's 0:15:30.040 --> 0:15:33.160 the chart of Nvidia starting at some arbitrary date, here's 0:15:33.200 --> 0:15:36.440 the start of Cisco starting at some arbitrary date, and 0:15:36.480 --> 0:15:38.640 then they line up the peak so that the peak 0:15:38.720 --> 0:15:42.280 always happens to be right now. But regardless of the 0:15:42.320 --> 0:15:47.240 fact that that's, you know, largely what naves and scammers do, 0:15:47.760 --> 0:15:51.560 it is true that just from an overall index perspective, 0:15:51.600 --> 0:15:55.040 there is an incredible lot riding on a handful of 0:15:55.080 --> 0:15:58.840 companies right now, whether it's in Vidia specifically, the mag 0:15:58.960 --> 0:16:02.760 seven more broadly, and that you know, in nineteen ninety 0:16:02.840 --> 0:16:05.600 nine there was just an incredible weight on Cisco and 0:16:05.640 --> 0:16:09.080 Sun Microsystems and Microsoft and a couple of others. Do 0:16:09.120 --> 0:16:11.280 you see any parallels in the market environment. 0:16:11.720 --> 0:16:14.720 Yes, there's a lot of parallels, but there are some differences. 0:16:14.760 --> 0:16:17.080 You know, keep mind Cisco sold a one hundred dollars 0:16:17.080 --> 0:16:20.040 box in video selling at fifty thousand dollars chips, so 0:16:21.000 --> 0:16:24.680 the moat around that is much much greater. I also 0:16:24.800 --> 0:16:28.640 think to contextualize this, we need to look at the 0:16:28.640 --> 0:16:34.760 global economy. If we're turning labor cost into silicon, then 0:16:35.240 --> 0:16:40.280 which countries are really the primary suppliers of technology? The US, 0:16:40.480 --> 0:16:43.560 by a country mile is the only supplier. So the 0:16:43.680 --> 0:16:48.760 US is essentially exporting technology now. And that's different because 0:16:48.800 --> 0:16:51.960 Internet was more democratized, people just put up towers and 0:16:52.000 --> 0:16:54.960 laid fiber. You can't, you know, create your own version 0:16:55.000 --> 0:16:57.400 of an Invidia chip you have to buy from video. 0:16:58.160 --> 0:16:59.600 So I think that. 0:17:01.080 --> 0:17:05.239 Tech will probably be, you know, forty fifty percent of 0:17:05.280 --> 0:17:09.760 the global stock market weight where we know that's probably twenty. 0:17:10.119 --> 0:17:12.760 Oh wow, it's probably like eighteen. I mean, you know 0:17:12.800 --> 0:17:14.280 in the US it's only forty. 0:17:14.000 --> 0:17:17.480 And what in the US it's forty. Globally it's eighteen. 0:17:17.600 --> 0:17:19.320 And you say it's going to go to forty to 0:17:19.359 --> 0:17:20.800 fifty percent globally. 0:17:20.520 --> 0:17:24.880 Yes, because you're replacing recurring labor costs with the capital investment. 0:17:25.160 --> 0:17:30.359 Interesting, so you mentioned the net present value of tech 0:17:30.440 --> 0:17:34.439 stocks just then, and I'm curious talk to us about rates, 0:17:34.680 --> 0:17:37.600 the higher interest rate environment and what it means for 0:17:37.680 --> 0:17:40.920 stock valuation, because I think this is where people are 0:17:41.080 --> 0:17:44.080 either a little bit surprised or perhaps a little bit 0:17:44.160 --> 0:17:47.359 nervous the idea that even in the higher rate environment, 0:17:47.880 --> 0:17:49.600 stocks can move upwards. 0:17:50.960 --> 0:17:51.280 Yeah. 0:17:51.359 --> 0:17:53.960 Well, again, I can cite some history and then maybe 0:17:54.040 --> 0:17:58.600 provide some context. Please, Since nineteen thirty five, when you 0:17:58.640 --> 0:18:03.399 look at the relationationship between the tenure yield and ford PE, 0:18:03.920 --> 0:18:08.520 it is not linear. It is a dynamic relationship, and 0:18:08.720 --> 0:18:13.359 between four and seven percent it is positively correlated. So 0:18:13.520 --> 0:18:18.720 when interest rates go up, pe rises. Logically, it sort 0:18:18.720 --> 0:18:21.000 of makes sense because you're seeing it now. When you 0:18:21.040 --> 0:18:23.880 have higher rates, it's barriers to entry. So the existing 0:18:23.880 --> 0:18:27.159 companies make more money, and companies earn money on their cash, 0:18:27.560 --> 0:18:30.399 so the unlevered companies are actually you know, for Apple, 0:18:30.440 --> 0:18:32.879 it's like six seven eight dollars in earnings, right, it's 0:18:32.920 --> 0:18:37.080 some big number. Actually with splits its lower and between 0:18:37.119 --> 0:18:41.080 four and five percent. The median Ford PE has been 0:18:41.320 --> 0:18:44.880 eighteen and a half and forty eight percent of the time. 0:18:44.960 --> 0:18:46.199 It's actually above twenty. 0:18:46.880 --> 0:18:49.680 Anyway, what is it what says inp trading at now? 0:18:49.760 --> 0:18:53.480 Well, then the pe, the Ford PE is probably around eighteen, okay, 0:18:54.000 --> 0:18:56.879 but the median Ford pece sixteen. 0:18:57.880 --> 0:18:59.880 What should we make of the fact that a lot 0:18:59.880 --> 0:19:03.520 of the market is not doing well? So again, you know, 0:19:03.840 --> 0:19:06.160 for those of us who are just like the boring 0:19:06.560 --> 0:19:09.600 put it in an index fund investors, amazing year, But 0:19:09.640 --> 0:19:12.120 there are big chunks of the market that doubts only 0:19:12.160 --> 0:19:14.600 up two percent, I know, or something like that. What 0:19:14.600 --> 0:19:17.080 should we read? Does it say anything that so much 0:19:17.080 --> 0:19:20.280 of the market is doing pretty I guess mediocre this year. 0:19:21.040 --> 0:19:22.920 I think it speaks to a lot of things. One 0:19:23.040 --> 0:19:25.360 is the market is starved for cash, and there's six 0:19:25.440 --> 0:19:29.959 trenty of cash on the sidelines. Finram margindet is like 0:19:30.119 --> 0:19:32.600 twenty percent below where it was in October twenty twenty one, 0:19:33.200 --> 0:19:35.000 So there isn't a lot of money slashing in the 0:19:35.000 --> 0:19:37.240 stock market. I know, it's weird because we're at record highs, 0:19:37.960 --> 0:19:41.280 so that if there is money actively trading, it's just 0:19:41.320 --> 0:19:44.600 buying the high volume sectors, which is tech. From a 0:19:44.680 --> 0:19:47.520 rates perspective, that and I kind of mentioned before, like 0:19:47.600 --> 0:19:51.160 the groups that are hurt by type policy have really 0:19:51.200 --> 0:19:56.960 been sucking wind. So I think if monetary policy eases 0:19:57.160 --> 0:20:00.760 or people aren't more convinced of it than expansion is 0:20:00.800 --> 0:20:02.760 going to be pretty fierce later this year. 0:20:03.280 --> 0:20:05.520 What is your outlook for rates at this point? Because 0:20:05.520 --> 0:20:08.880 you mentioned the strong consumer earlier, but on the other hand, 0:20:08.960 --> 0:20:11.800 we have seen a little bit of weakening in the 0:20:11.880 --> 0:20:16.320 labor market. We have seen CPI start to soften, although 0:20:16.320 --> 0:20:18.680 there's a lot of debate over whether or not that's 0:20:18.680 --> 0:20:19.960 going to be a durable trend. 0:20:20.280 --> 0:20:25.960 But what are you see well, I think inflation, if 0:20:25.960 --> 0:20:29.000 we looked at historically how people looked at inflation, whether 0:20:29.040 --> 0:20:34.840 it's the surveys or ISM's inflation's under control because like 0:20:34.880 --> 0:20:39.080 for instance, the ISM services manufacturing, the price is paid 0:20:39.119 --> 0:20:42.439 component is below the long term average right now. So 0:20:42.480 --> 0:20:44.840 at fifty seven, people think fifty sev means price going up. 0:20:44.880 --> 0:20:49.400 That's not true. It's averaged like fifty eight since inception. 0:20:49.560 --> 0:20:53.040 So actually price trends are below where they have been. 0:20:53.320 --> 0:20:57.040 I think people aren't using history to understand where we 0:20:57.080 --> 0:21:01.320 are now. And if you look at UMISH surveys, both 0:21:01.359 --> 0:21:03.760 one year and five year inflation expectations are below the 0:21:03.760 --> 0:21:08.000 long term average. So consumers and businesses in their perception 0:21:08.080 --> 0:21:12.720 don't think there's inflation. CPI is elevated, but as you 0:21:12.760 --> 0:21:15.760 guys know and talked about, and many economis point out, 0:21:15.840 --> 0:21:18.840 it's really due to two components that are kind of 0:21:18.880 --> 0:21:22.359 lagging right one's shelter and one is auto insurance. And 0:21:22.480 --> 0:21:27.639 you know, the median CPI inflation rate right now is 0:21:27.680 --> 0:21:31.760 one point four percent your year. It's long term average 0:21:31.800 --> 0:21:35.400 is one six Everything except for housing and auto insurance 0:21:35.440 --> 0:21:36.240 is below trend. 0:21:36.440 --> 0:21:39.440 Median is when you just look at what each component 0:21:39.560 --> 0:21:41.520 is doing, and some are higher and some are lower, 0:21:41.520 --> 0:21:42.920 but the median category. 0:21:42.640 --> 0:21:45.639 Yeah, there's one hundred thirty seven components. Another way to 0:21:45.680 --> 0:21:49.399 look at it is what percentage of the basket of 0:21:49.520 --> 0:21:53.640 CPI equal weight is below their long term year year 0:21:53.640 --> 0:21:56.080