Today's number 30. That's the percentage

of US travelers who now use generative

AI tools to plan trips. Ed, true story.

When I enter a foreign country and have

to fill out a visa form and it says

profession, I put chaos.

Boom. That's right. That's how I roll,

Ed. I'm an agent of chaos coming in.

I have so many travel stories, Ed. When

I was a first year analyst right out of

UCLA at Morgan Stanley, I don't know if

you know this, but I'm not like really

good with details. And before there was

GPS, there was maps and I lived in LA

and my other analyst, Don Larson,

we had to go to Stanford for a

recruiting trip. So, we're bombing to

the airport. I take a right turn on

Loiaga instead of a left turn. And

finally, Don catches up with me and

says, "You're going the wrong way." Turn

around, get to the airport, and we see

the plane pull away. And then we there's

one every 30 or 60 minutes. San

Francisco, we're at Stanford lecturing,

talking about how great Morgan Stanley

Fixed Income was, which was a total lie.

So we went up there and started lying to

people.

>> It's the job.

>> And then a woman comes in and says, "Is

Donald Larson here?"

And they said, "Yeah." And Don went out

and he came back in and he was all

upset. His father had had a heart

attack.

And because uh the plane we were we

missed went down and it was you probably

you're too young to remember this, but

it changed aviation history because a

disgruntled employee got on the plane

with a gun and employees up until that

point didn't have to go through metal

detectors. Pilots and crew and he shot

the pilot and the plane crashed and

everyone on on board died.

>> Oh my god.

>> And because I turned a right, we missed

the plane instead of a left.

>> Oh my god. I thought to myself, does

anyone I know know that I'm even up

here? And it was no. So, I didn't make

any calls. And of course, my friend, uh,

this Dennis, my roommate from the

fraternity, uh, was expecting me and

called my mom.

And my mom called my assistant. And my

assistant looked it up and said, "Yeah,

he was on that flight." And so I called

my mom and my mom had friends over

because they thought I had gone down in

this plane and she thought she was

hallucinating. Um, not a Hallmark story

here.

Not a Hallmark story here, but anyways,

Ed, people think I'm inconsiderate

because I'm late all the time and I get

lost a lot. I don't mind missing stuff

and being a little bit late. It's worked

out for me. It's worked out for me.

You're focused on the important stuff.

That's what matters. Um, but yeah, that

is crazy. I'm I'm just imagining you

driving a car right now, which I can't

picture. And I I I wonder, are you a

good driver? Cuz I know you don't you

don't drive anymore. Really?

>> I'm a great driver cuz I grew up in LA

and I started driving literally at the

age of 15 and a half. I got my learner's

permit and then back at California

Dreaming Culture in California was I I'm

not exaggerating. I got my driver's

license on my 16th birthday. And it just

freaks me out that my my son right now

is technically what is he 9 months away

from driving, which makes no sense. But

yeah, when you're in LA, you just drive

everywhere all the time. So, it wasn't

that I was especially deaf at driving,

but you just get you just get very well

practiced.

>> When When's the last time you drove?

>> That's really interesting. It's probably

in a couple years. I don't Yeah, I don't

drive, but I can drive stick. I can

drive a big rig. Wow.

>> I love cars. When you grew up in

California, you love cars. I just don't

I hate shoelaces, passwords, keys, and

cars because they all demand things from

me. Also, most of my relationships are

now starting to ask for something in

return, which is really buming me out.

That's not why we're here.

Um, the key term is service,

specifically acts of service from you to

me, and I pay for everything. That's the

deal.

Talk to me about cars, Ed. Do you own a

car?

>> Uh, I don't own a car. My girlfriend

does though and we we've so I drive

around with her car and it really is

sort of a game changer.

>> What kind of car does she have?

>> Subaru Outback.

>> So she's a lesbian.

>> Yeah, exactly.

>> Sorry, Ed. Should Claire, should we tell

them?

>> I had the same same reaction in my head.

>> And let me get it. You're She doesn't

want to have kids, but you're going to

get a German Shepherd puppy.

>> Do you want my car history? Yes. My

first car was the best gift I have ever

received. Hands down. Best material item

that has meant more to me than anything.

And I have a lot of nice material items.

When I was 15, when you lived in

California, if you didn't have a car,

you had no social life. There was no

there was no subway. There was no UR. We

had the RTD, which was just awful.

>> And so if you wanted to have any social

life, you had to have a car. And my

friend Adam got a Fiat Spider. And then

he bought an Austin Healey Mark 7. He

was like [ __ ] James Bond. He was this

good-looking guy in a leather coat. I

didn't have the money for a car. And my

mom borrowed money to buy an Acura and

she gave me her lime green Opal Manton.

I remember the day she came home. We

used to practice driving it. She'd come

home and go into the underground garage

in our apartment complex and honk the

horn and I'd run down and she'd teach me

how to drive stick. And on my 16th

birthday, she came home and in this new

like bad Acura and she came up to me and

put her hands on my shoulders and said,

"You're a handsome man who owns his own

car now." And she gave me the keys to

her Opal Mana.

>> That's nice.

>> Oh, I'm going to cry. Isn't that nice?

>> Yeah.

>> Anyways, I had that. Then I had a Ranola

car. Then I had a rabbit. Um, speaking

of closeted heterosexuals, convertible

rabbit. My my girlfriend in college

dated a guy with a convertible rabbit.

I'm like, "Okay, should we tell her?"

Anyways, and then out of business

school, hit it pretty early. Got got uh

the Lexus GS300, which was the bad Lexus

that never had a market, but it was a

Lexus and I was super excited.

>> Mhm.

>> Then I had three BMW 7 series in a row,

including Jason Stabers, who used to

work with us here at PropG, used to

houseit for me, and he calls and says,

um, I'm afraid we're on vacation. We

used to go to Hawaii because we lived on

the West Coast. says, "Well, um, I got

in a terrible auto accident. I ran the

car, uh, into the side of like I think

it was Grace or St. An's church. Like he

swerved out of the way, piled into

Jason total."

>> Yeah, Jason Savage total. He totaled my

first seven series. He doesn't bring

that up much anymore. You know, we do

employee reviews. You're about to get

yours tomorrow. Um, we're, by the way,

we're asking you for money back. You're

not getting a bonus. Um, but I remember

I couldn't wait to do his review cuz I

had it as the first bullet point in his

review. Total boss's car.

Um, anyway, so he goes, "I I've had this

terrible accident. Da da da. Your car

stop." I'm like, "Just stop right

there." I'm like, "The important

question is the following. How was the

car?"

>> Ed, are we done with banter?

>> Let's call it there. We've got a big

interview to get into here. All right,

let's get into our conversation with Tom

Lee, co-founder, management partner, and

head of research at Fund Strat Global

Advisors. Tom, thank you for joining us.

>> Great to see you and merry Christmas.

>> All right, let's pass right into it.

You've been vocal that investors are

still underestimating how strong 2026

can be. What's Why are you so bullish on

26?

>> I think the economy and stocks have been

suppressed for the past few years.

Part of it is, of course, that we've

seen six what I call extinction events

take place in markets. Everything from

COVID to the bullet supply chain effect

as the economy restarted to that the

fastest inflation cycle in history and

then followed by the fastest Fed hikes

in history. And then we've of course had

a very controversial administration

which which put tariffs in place in

April of this year that caused uh a

miniature bare market and then we've

even had the US bombing Iran's nuclear

facilities. I think all of these

collectively had made have made

investors very nervous about uh what I

call

investing in full risk because these are

what six black swans that happened in

four years. And I think on top of that,

we've had uh a Fed that's had has not

really given a green light about

monetary easing. And I think the Fed's

reluctance has actually suppressed

business quote animal spirits because

the ISM has been below 50 for for more

than 3 years now. So I think that's all

been a business cycle that has been

pretty good but not one that has been

really expansionary and I think that

starts to happen next year. It feels as

if the market has become so concentrated

or dependent or circling around a small

number of stocks that to be bullish on

26

sort of mandates that you're well tell

me if you think this is true indicates

that you're bullish on the Magnificent

10 and AI stocks. Is that necessarily

true? And are you bullish on the

Magnificent 10?

>> Yeah, I mean I think 2026 is going to

look a lot like this year. uh meaning we

are probably going to have many months

where the market is uh actually down

year to date. You know, I mean this year

we were down double digits at one point

before the market recovered. I think

that plays out next year, but for the

reason I I previously stated, I I think

that we end up a a bullish outcome

despite all the skepticism. And it does

require

large cap tech and AI stocks to still

produce earnings growth

and not have a lot of PE reduction so

that you still get positive return. But

I think the the rest of the stock

market, sort of the other 490 or so, can

actually perform well because if the Fed

is cutting and interest rates are coming

down and the business cycle is sort of

really starting, that that's good for

other stocks. As you say, we've seen a

lot of these black swan events, things

that you would think would freak the

markets out and make people worried. And

yet I look at what has happened in the

markets and my view of it is it's not

necessarily that it's

uh suppressing sentiment. To me it

almost looks like the market is deciding

to shrug everything off. So when you

describe how you know perhaps these

black swan events have made investors

perhaps have less lower risk appetite to

me I'm almost kind of taking the other

side of that in my head. like it seems

as if these things happen, these things

that are concerning. One example would

be what we're seeing with these AI

circular deals and it seems to me that

the market is kind of swatting it away,

shrugging it off and and the market

continues to climb and that's what we've

seen this year and we saw the previous

year and we saw the year before that. We

continue to have this bull market

despite what many would say are are

really uh concerning events. So, how

would you think about that? How would

you respond to my concerns there?

>> You're almost kind of mirroring what

we're observing but just with a

different take. I mean, our take is

markets climb a wall of worry. You know,

historically,

>> uh, when there's a lot of skepticism,

um, stocks can rise. In fact, you know,

markets actually peak on good news. You

know, they don't peak when people are

bearish. Markets peak when everyone's

bullish and it no longer responds to

good news. Just like markets bottom on

bad news and uh I I think many people

are skeptical but stocks have risen it

doesn't really mean markets are

shrugging off the concerns. That's one

way to interpret it. My other

interpretation is you know it there is a

wall of skepticism and I mean maybe

that's just the it is like maybe we're

just talking about the same sides just

of of the same thing and uh but

you know like if if someone asked me are

we is it worrisome you know I was a

technology analyst in the 90s so I

covered wireless stocks starting in 93

and I witnessed the bubble that was

created you know, a decade in the

making, really two decades in the

making. And by 99,

um, not only were was there no

skepticism,

there was,

uh,

you know, excessive entitlement,

investors were expecting stocks to do

explosively

and, uh, you know, a 20% upside wasn't

satisfactory and valuations were already

elevated and expanding. So, I'd say that

if I was trying to compare this to the

bubble of the '90s and, you know, and

and wireless was a central cast

character in that internet

infrastructure build, uh, where I don't

really see the echoes of that today.

>> I think it's so interesting what you say

there about, you know, we're looking at

the same things and we're drawing

slightly different conclusions about

what that means for markets. Um and we

had a similar conversation with actually

um I mean you were the chief equity

strategist at JP Morgan. We spoke with

their head of investment strategy

Michael Semlast and we were talking

about a lot of these issues and where he

ultimately landed was he was quite

bearish or bearish um is

um and I just want to play you what he

said and get your reaction. See what you

think. It would be kind of shocking if

you didn't have some kind of

profit-taking correction

in 2026 at some point on the order of 10

to 15%. It would be I'd be I'd be really

surprised not to see that. So that's his

base case is some some sort of

correction 10 to 15%. Look at your 2026

outlook, you've got S&P price target of

7,700,

we're at 6850. So that would imply, you

know, a little over 10% um rise next

year. So two very different um views.

Where where do you land compared to his

view? What do you think he might be

overlooking and and and where do you

differ do you think?

>> Our outlook actually does call for a

draw down um next year. So very similar

to this year of probably closer to 20%.

So I think we are going to have another

miniature bare market next year but then

we're going to recover. I mean let's

let's take 2025. Let's say that at the

end of last at the end of 2024

and actually we did talk about you know

the idea of a draw down in 2025. But

let's say that someone plays the clip.

So let's say it's Michael Semblas but

you don't let's just pretend he's saying

at the end of 2024 and he says the mark

will be down 10 to 15%.

That doesn't rule out where we are by

the end of 2025 because in fact we did

have a draw down and I think I'm I'm not

again saying I actually think Michael

and I are pretty aligned in the sense

that I think there is going to be a draw

down next year. He says he wouldn't be

surprised, but to me it doesn't mean

that's the end of of the actual bull

market. And in fact, I think stocks

fully recover. So the the wall of worry

here that that we're talking about and

that that you outline in in your outlook

um you got several elements in there.

You've got um and these are the things

that you describe as people are worried

about, investors are worried about. So

politically divided nations, social

unrest, Supreme Court overturns tariffs,

new Fed chair, and then you have two

ones here that I I really agree with. I

feel like I'd love to have you dive in

on AI valuations

which I think a lot of people are

concerned about and then also 20% uh

equity returns in the past 3 years i.e.

each year for the past 3 years the stock

market is has risen by an average of

20%. Which may imply maybe we're running

out of steam at some point. Could you

just unpack what your concerns are in

that wall of worry? Um, and do you think

those would be the trigger of such a

correction?

>> Let's start with the one that you just

mentioned. The stock market,

you know, it we're up 16%. So, I think

if we rally 3 percentage points, we'll

be 3 years of 20% gains back to back.

Um, and it's actually more common than

we realize. Um in fact when we look at

uh the last 65 years you know it's

happened in 20 different I think it's

happened 20 times in different countries

um and multiple times in the US I'm

sorry 12 times it means a lot of good

news is priced in I mean of course you

know stocks being up 20% a year three

years in a row it's definitely pricing

in a lot of good news so to me I do

think that we have to consolidate those

gains and and that's why I I think a

draw down next year makes perfect sense

to me. But uh because there isn't a lot

of leverage in the economy, you know,

household sector has not really borrowed

money. It's been expensive to borrow

money and even margin debt, it's risen,

but it hasn't risen parabolically.

So, it's actually essentially tracked

S&P gains. Um,

so that's it's not like people are

borrowing faster than the market's been

going up, especially if you look at a

5-year um kagger. So I I would be in the

camp that as long as the economy's

holding up, that draw down is going to

be viewed as as a buying opportunity.

Um, now on AI valuations,

it makes perfect sense for someone to

say a lot of the valuations for AI are

probably absurd because

this is the nature of like of a of a

exponential sector, right? If we

look at a industry that could grow

parabolically for 10 years,

all of the future value

is in the latter half of those years,

right? So it's and then we're trying to

discount that back to today. And so

stocks are going to look absurdly

expensive. And more importantly,

investors make a common mistake, which

is that they assume that the existing

universe of companies

are going to be the central cast

characters over the next 10 years, which

is not the case. So, the reason

valuations don't make sense today is

that one of all the AI stocks,

I'd say it's probably safe to say only

10% are going to be good investments.

Maybe it's even generous, maybe 5%. And

of course um there's going to be a new

emergence set of new players. And in

fact the economic model might change but

it doesn't mean it's a bad investment.

And and we we've highlighted this as

generational trades in past reports. For

instance like if you look at the

internet

um if you bought the internet basket in

99. Okay. So you bought it near the peak

and you held it to today. you actually

still outperformed the S&P 500 even

though 99% of the stocks went to zero.

So it wasn't it was a bad investment if

you tried to pick a winner, but it

wasn't so bad if you held it as a

basket. So I think AI

>> it's probably going to be fair to say

90% of the stocks are going to be

>> do way worse than people expected. They

were too optimistic. But I think as a

basket it's probably going to

outperform.

>> That all makes sense to me. I'm with

you. But it seems to be a little bit

more nerve-wracking when we realize that

a lot of the AI companies are the

largest companies in the world. It's the

big tech companies. I mean, I think

Google is an AI company at this point or

an AI stock, Meta, Nvidia. I mean, these

are the largest most valuable companies

in the world. Um, and the market really

depends on their their performance. So

when I think about the idea that you

know many of these companies and the and

the expectations that have been pinned

to the AI cycle the fact that that could

affect some of the largest most valuable

companies in the world where we're

seeing the highest concentrations in

those small companies that higher

concentration than we've ever seen uh in

history. To me that makes it scarier

what you just said. So I guess my

question is do those companies do the

big tech companies, the Magnificent 7,

do they count in your analysis of AI

valuations being too high and the

possibility that perhaps we might lose

out or that that the value won't

actually show up for many of these

companies.

>> I might even just add to your concern

because there's a because there's a lot

of capex here too. So that these are you

know a lot of the mag 7 used to be asset

light businesses you know they the

remarkable of equity you sort of rentse

seeeking model of them was that they

could create growth with very little

spending I mean R&D spending was there

but really capex was not

>> there but today as you know uh AI is

extremely capital intensive and it's

energy intensive

and It's only justifiable if it's

replacing

real work somewhere else. Then you can

justify because now it's creating assets

to replace future opex. You know, I'm

going to give you a spin about what's

happening that is not disagreeing with

what you're saying, but it's probably

observing a change in the reality. Okay.

which is

tech companies are becoming a bigger

part of our life. Um so naturally

they're going to have a larger share of

spending. Uh, by the way, we wrote about

that um in 2018 that in if you go back

to 1930

and you just use simple demography,

okay, population tables, whenever the

population growth rate grows faster than

the prime age workforce,

which means you have compounded labor

deficit, you've always had a technology

cycle.

That is 1948 to 67.

in 1991 to99. In both of those periods,

the population

growth rate was growing fast, which is

demand, faster than worker supply. And

we entered the third epic or era of

labor shortage, which started in 2018

and it's going to last to 2035.

So then technology spend

is necessity because you don't have as

much labor available. So there's going

to be less wage spend.

>> Yeah.

>> Now if I substituted the word and called

this um instead of the word banks uh

tech companies I called them financial

institutions.

We would not be saying there's a

financial institution bubble because for

every level for every unit of GDP growth

there's a unit of financial spend. I

mean it's literally the other part of

the ledger. And in fact the financial

industry has all circular spending. I

mean think about this. Real estate is

valued as a separate asset but every

company needs real estate just to run a

business. So why are we valuing real

estate like in a GDB sense? Real estate

should be an interim product not a final

product. Um so I think tech is

becoming so central to the economy,

especially because of labor shortage,

that we're

when we see tech intensity growing,

people are flagging that as a bubble,

whereas I'm actually just pointing out

is it's it's actually out of economic

necessity. But it becomes a bubble if

the multiple we're applying to the tech

streams don't justify higher valuation.

I think tech earnings are probably more

valuable than Costco for instance.

>> Yeah, agreed.

>> Or Walmart, right? But do you know

Walmart trades at 37 times board

earnings and Costco trades at 50 times?

So Nvidia trading at 27.

I mean is that is there a bubble in

Costco and Walmart because Nvidia is at

27 times earnings?

>> 100%. And we've looked at that those

cost that Costco valuation. It's crazy

is I I totally agree. But then I go back

to what something that Aswath Deodoran

said when he joined us on the podcast

and he said uh he can't see value

anywhere. He thinks everything is

overvalued when he looks at the stock

market. So that's the other side and I

as Scott and I have discussed you know

we're not necessarily in agreement with

him on all of that. Um but that I think

becomes a concern and then to the to the

circular deal making and the capex point

I think the concern unlike the financial

institutions is like the we we haven't

seen the AI product proven itself yet in

terms of its ability

um to provide the value that we're

pricing in I guess is is the is the

problem. We haven't seen that these data

centers one I mean are even going to be

necessary to keep the workforce and the

labor market going as you say to keep

our economy growing at a fast clip.

Therefore, it seems that we're making

giant giant predictions with not that

much evidence, which, you know, we could

call it a bubble or we could just call

it what what I said, which is we don't

really know what's happening and yet

we're spending tons of money. And so, if

there becomes a moment where suddenly

everyone says wasn't what we thought it

was, then that could be quite damaging

to portfolios.

>> Yeah, 100% agree. Because by the way,

anything that is relying on future

growth,

none of us is an expert on the future. I

mean, that's right. Like that there's

many roads to the future. Um, one thing

I just want to point out, Benjamin

Graham's book, The Intelligent Investor,

which I did read. I don't know if you

remembered his rule of thumb about what

a proper PE is.

>> No, please.

>> It's 12 times plus two times the growth

rate. That is in his book. I'm just

saying when I when someone says they're

a value investor and they're saying

stocks are expensive, I know they didn't

read his book because I read the book.

>> I love that.

>> But you know, as you know, that's cuz he

didn't believe things could grow 10% a

year. You know, that I mean, that's the

real like 10% is a lot of growth um back

then.

>> Yeah, that was a pre-digital economy.

>> The second point I would make is when I

did wireless in the '9s, okay, now I was

in my 20s. Um I was a senior analyst at

the age of 23. So I was really lucky to

be very young and actually a senior

equity analyst. But when I was covering

wireless,

the industry only had 34 million cell

phones in 1993.

And the industry telecom services was

dominated by long-distance and local

telefan these things called the Bell

operating companies. And they made all

their money from two businesses. The

Bells made the biggest profit maker for

the telephone companies was the

directory business and number two was

local business telefan. They made more

money selling local exchange service to

Chase than they did from any other

business.

So when wireless was happening in the

'9s

as me in my 20s, my imagination was

ignited and you know I talked about how

you know you could do so many more

things with cell phones and we joked

about how it would have changed the path

of like the revolutionary war right if

Paul Rivere had a a cell phone. Um, but

most of the money managers were in their

40s and 50s and all the experts were in

the 40s and 50s and they mostly thought

cell phones was an expensive yepy toy.

They said the economics didn't make

sense. You could never fit that much

traffic on cellular waves and all the

money was in long distance and local. So

the telephone companies and the

long-distance providers including MCI

would do everything to protect their

existing businesses and use regulatory

uh strengths to make sure cellular never

really grew.

Now look back that was of course the

wrong bet. And remember cellular

companies had to build they had to spend

$50 per pop to build out a cellular

system. So if you took any city

of 10 million people, you had to spend

$50 per person just to build a basic

system. It was enormously expensive and

cell phone penetration was 6%. You had

to make a bet that you would have a lot

of penetration. Uh I think that I'm

seeing people make the same arguments

against AI

and I think one of the things we have to

say is which lens are you using? If

you're using it through the lens of a

40-year-old really wealthy person, no

new technology looks interesting to you

because you're more interested in

protecting your wealth and incumbency.

But young people are the ones who change

the world. Look at Chase Institute.

Credit card spending growth only comes

from people under age 50. And what are

young people doing with AI? I mean, my

daughter is uh one of my daughters is in

college, my youngest.

They

have adapted to Open AI and chat GBT in

a way that I can't even fathom. And so

those people represent the future

vintage of AI adoption. Just like

cellular adoption in the '90s, it was

70% of 20-year-olds had a cell phone and

it was like 5% of 60-year-olds. So, of

course, all my clients who were in their

50s and 60s said, you know, who needs a

cell phone? They didn't realize that

those 20-year-olds become 60 and that 70

became 90 and soon everybody had a cell

phone. So, I think we have to be more we

have to think about how the 14-year-olds

using

these models compared to us because

we're already you know we've already

lived our lives and we've established

our regimes and our so it doesn't mean

that AI stocks are correctly valued. I'm

just saying we have to really understand

that the future change is coming from

young people.

We'll be right back after the break and

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>> We're back with Profy Markets.

>> You said something, Tom, that really

stuck out to me. You said that we went

we're in this labor shortage cycle from

2018 that will last through 2035.

And I I just you can't avoid the

catastrophizing around the destruction

in the labor force from AI. Do you still

believe we're going to be in a cycle of

labor shortage even with AI?

>> I vacasillate cuz there's times where

I'm I like when I read a book like The

Coming Wave, I panic and I realize like

wow like we uh we need to re-educate

society. Um, but one thing that gives me

hope is that we did at Funstretch study

another technological wave that wiped

out at least 20% of the labor force um

in in the 20th century which was frozen

foods. So, what many people don't

realize is that when Charles Bird's Eye

uh created Flash Frozen, which by the

way was a venturebacked by Goldman

Sachs, it was a VC backed um company.

>> I love this.

>> And by the way, his name is Bird's Eye

cuz he was an ornithologist. He actually

was studying birds. Um, but he found

that the Anoui tribe in Alaska had kept

their fish super fresh and because they

were putting it in a frozen saltwater

solution that flash froze the fish. If

we look at the labor tables from the

20s, 40% of the US labor force was

employed on farms. It was literally we

spent most of the economy was people

working on farms and most of the service

sector that was defined back then were

household servants, people working for

someone else. Food was over 25% of the

wallet prior to frozen foods being uh

widely, you know, mass market because

most food spoiled on the way to the

supply chain. And so grocery aisles were

mostly fresh and what they what was

frozen back then had freezer burn. It

was terrible. So um flash frozen allowed

suddenly the cost of food to drop

dramatically because you had less

spoilage and the number of people

working on a farm today is down to what

2% of the US workforce. So flash frozen

was the really the key innovation that

brought down the cost of food from 20%

of the wallet to what is it five or 6%

today and reducing farming labor from

more than I think it was 40% of the peak

down to two

an economist in 1920 okay let's just

pretend on CNBC in 1920 there is none

but let's say there was a CNBC in 1920

and these economists were saying frozen

food if it comes along and it it's going

to wipe out 95% of all farmers

this is going to wipe out the US economy

the US economy can't survive uh frozen

food and instead it freed up time right

and it created it allowed people to be

repurposed and it created a completely

new labor force so I Scott to your point

I think that there is an adverse outcome

but then when I look at past episodes of

huge labor disruption, it's actually had

positive outcomes.

>> Every technology thus far, it's followed

the the cycle you're talking about. Some

short-term destruction and labor and

then profits and innovation get

reinvested and we reinvent ourselves.

But I want to we're about the same age,

Tom. I want to walk down memory lane in

the 90s. I think you were you were a

telco analyst with Ker and then Solomon.

Is that right?

>> Yeah, that's right. and I was raising

money for internet companies that uh the

internet company that started e-commerce

companies in the 90s and I can't help

but this smells a lot like Teen Spirit.

I feel like I've been to this movie and

I have this certain muscle memory and I

might be wrong but I'm curious if you

would if you think my timeline trues up

with your where you think we are and

that is the economist perfectly called

the dot bomb. They said how it would

happen, how it would unwind. They were

exactly right. But they called it a 97

and the NASDAQ doubled between 97 and

99. And what you said also that really

struck was that the market seems to be

calling climbing a wall of worry. And

that is in 97 and '98 we were just very

anxious. These things are overvalued.

There's no way we can sustain this. And

the markets kept going up. And then in

99 we had this this zeitgeist where all

the short sellers all the long hedge all

the hedge funds I mean Julian Roberts

just like threw in the towel and gave up

and said I can't predict this market.

And then there were all these articles I

remember one specifically in the Wall

Street Journal saying maybe we have

moved to a new economic model that the

internet has ushered in and we should be

thinking about things differently and

then wham the market crashed. So, if I

were to look back and try and equate

this to the '9s and the internet, you

know, the internet timeline, it feels

like we're more like 97 to 98. A ton of

catastrophizing that might indicate a

surge up. My sense is when price prices

are PE multiples are crazy, which I

would argue they are right now, they go

insane before they crash. Does this

timeline a is that even useful to think

about this economic history? And does

that timeline sort of were 97 98 not 99

uh true up with what you're thinking?

>> It does Scott. We both have experience

of 35 years or more uh in markets and in

technology

and we have to keep in mind that the

median tenure of a portfolio manager

today managing a fund is 9 years.

So they've experienced the markets

really only since 2015, you know, being

generous. So to them, the '9s is only a

legend that their bosses talked about or

things that they heard and it's become

second and thirdand stories. Now

when I was a wireless analyst there was

so much meat to the stories in the '9s

in the like by the in the 97 period like

real things happening TDMA

adoption the quality of the customers

were good um there was real spending

taking place it wasn't um startups

paying for everything you know but by

the late 90s the customer quality had

already essentially you exhausted the

post-paid world. You had to suddenly go

into a prepaid model and uh you know you

technology what we called it bleeding

edge. There was innovation coming but

there wasn't apps and services to

support it like you know picture

messaging and you know these were still

years away. So, uh, I'd say that it it

there is going to be a moment where like

we've all gotten so accustomed to stocks

going up that we insist that that's the

new regime. Like that's what you're

talking about in like 2000, right?

That's when everyone capitulated. But

that's not what I encounter today. Um,

you know, when we talk to our

institutional investor clients, this is

a market that's frustrating to them

because they don't really want to be

buying. uh and buying expensive stocks.

There's a lot of discipline in place

today and I think that that discipline

is the reason markets are climbing a

wall of worry because I think there's as

you know a lot of cash on the sidelines

sentiment is still really bearish and a

lot of people are claiming that we're at

a top but again I just you know in my

experience you know people are not

bearish at the tops they're bullish at

the tops and I don't really find that

many bullish people

>> when people talk about the types of jobs

that AI I will quite frankly destroy. I

think they're describing the analysts at

Fundstrat. So tell me what is actually

happening on the ground at Fundstrad.

How are you using AI and what if any

impact is it having or do you think is

going to have on your human capital?

Wall Street itself has

actually been a victim of technology

because um you know first many

investment firms have been using

essentially versions of AI systems for a

long time right they've been investing

in quant systems and models and

the sellside firms have invested in

technology to replace labor constantly I

don't think there's been a year in my

career on Wall Street that money wasn't

being spent to actually reduce the labor

intensity of the job. I mean, I

remembered when I was at JP Morgan, you

know, in the 90s and the early 2000s,

trading occupied a huge percentage of

the cash equities business real estate,

you know, it was a couple floors and

then one day

went to electronic systems and like the

number of traders went to like, you

know, a tenth of a floor. So I think

that's the nature of Wall Street that

every job is eventually automated

away and so value capture

uh is shifting around. In the '9s when I

started equity research was a back

office job you know it wasn't like cuz I

went to Wharton undergrad I and I

graduated I wanted to get into research

it firms weren't really actively hiring

for research. Research was an

apprenticeship industry. you had to like

find a job and find an analyst that

would hire you and take you in. Of

course, research has become a much more

important business today as other parts

of Wall Street

became commoditized. But, you know, when

I graduated in the '90s, traders were

the highest paid people, the sales

trader. They were like the masters of

the universe. And of course, now it's

just a it's just computer code. So, I I

think you're exactly right. in the

future

an a mediocre research person is not

going to be any better than a mediocre

open AI like or LLM right so uh Wall

Street needs to constantly evolve I know

that at our company we are using AI at

at so many levels it's not just research

and we are using it to ingest data but

it's really the how we manage our data

now and even how we manage our customer

service experience, you know, because

Fundstret has 11,000 RAA um and family

offices plus um around 400 hedge fund

clients. So we but the way we manage

them and identify their needs um we are

using AI. So, um I I would say I have

not found any of the AI models that have

been shown to us and that we trial cuz

everybody wants Fundstrat to adopt one

of their models has not been good at

stockpicking. We actually run uh three

ETFs. Fundstrat Capital has Granny

Shots, GRNY,

GRJ, which is a small midcap version,

and GRNI. The GRNY has a one year of

history has outperformed the S&P by 800

basis points this year. Um, and it and

none of the AI systems that have been

shown to us have actually outperformed

our own process for stock picking.

>> What would you say makes a great

researcher and a great analyst? And then

I want to get into crypto. Um, so this

is one of my final AI questions, but

when you talk about AI is going to

replace the analyst, um, what are the

kinds of skills that makes you

irreplaceable as an analyst? What kinds

of things should, uh, white collar

workers, working professionals in

general be trying to work on and be

trying to hone in order to not be

replaced by AI?

>> AI is very good at looking at the past.

So if you need to build a model uh you

need to recall data even say give me the

last 12 times something happened

that that is AI but as you know to do

true training then you need to have it

work in the future

now future has not a binomial outcome

it's multiple forward scenarios

and the probability abilities are

unknown of each future event. Okay? So,

you're dealing with so much uncertainty

that I don't know how an a probabilistic

way to

uh give you a single point answer would

ever work. I mean, to give you an

example,

someone will say this is the fair value

of a stock and they say this is the PE

and this is the E. And I I can never

understand that because I'm always

wondering which E are you using and you

know I mean like cuz price is today but

then which forward metric and then how

do you discount it? How do you explain

to AI that you have to look at 10 years

of future earnings but

>> you don't know which future earnings

will actually matter the most uh and

then how do you assign the weights? I

mean that's really what we do at Fund

Strat. we're constantly assessing the

probabilities of future events and and

then deciding we do have to pick a

direction, right? Then we say this is

the path we're going to take, but it's a

guess. Um so I think that the best

qualities of a researcher at least in my

opinion are uh you do need to be

unemotional but you also need to know

the difference between conviction and

being stubborn

because stubborn is riding something

when and believing in something when all

the facts have changed. conviction is

basically riding through the volatility.

And it's not easy to tell the difference

until history has already passed. And I

think you know the third thing that's

really important in markets is to know

what's already priced in. I don't know

if AI is going to really have a good

sense for

like if all if AI is the only thing

managing money in the future, I think a

human will beat the market because all

the AI systems will be predictable. You

know what I mean? Um and then you can

spoof them all. Um, so that that like

that that's really where I think human

judgment matters because you know I'm

constantly surveying our clients and I'm

in constant touch with them. So I I kind

of know where the money is and what the

bets are and how they react to

the Fed and I don't know how you can

program AI unless it is well they'll get

very good but they really have to think

not just on a specific outcome but on a

series of future outcomes and that's

what we're always sort of obsessing

over.

We'll be right back. And for even more

markets content, sign up for our

newsletter at profarkets.com/subscribe.

We're back with Profy Markets. Speaking

of future outcomes, last month I want to

talk about crypto. Last month you said

you think Bitcoin could go as high as

$200,000 in January.

We're currently at 94,000.

Uh it's been a rough couple of months

for Bitcoin and for crypto. Uh where do

you stand on Bitcoin right now? Do you

still believe that we could hit 200K in

January? Um what do you make of what's

happening in the crypto markets?

>> Well, crypto's had a a rough year. It

was actually having a great year until

October 10th. Uh because on October

10th, Bitcoin was up 36% for the year.

and now it's currently

I think it's like flat for the year. Um

so it lost a lot of its gains.

Uh I'm still very optimistic. Um because

crypto

still has its best years ahead, but

crypto

should have had a good year this year

and it was on track to until there was a

liquidity crisis on October 10th.

That was a bigger wipeout in terms of

liquidation than any event in history.

The most recent one before this would

have been 2022 with FTX.

And that wipeout pales in comparison to

what happened on October 10th. But in

2022, it took 8 weeks before crypto

the smoke cleared. The leverage wipeout

was enough in the mirror that that

crypto prices began to recover. This

week is the eighth week since that

crisis. Um, and I think crypto prices

are beginning to actually recover. Uh,

that's why I think Bitcoin can can

double from here by the end of January.

Now, many people don't expect it because

of the 4-year cycle.

Um, and that's going to be the big

question. If Bitcoin breaks 125

in January, there is no four-year cycle.

>> What did happen on October 10th? like

everyone knows crypto markets got hit.

It seems unclear to people what actually

happened and as you say it was one of

the largest liquidation events that

we've seen in the history of crypto.

What happened?

>> I'm going to give you what what we've

been able to piece together and I would

say that it's it's like a

90% correct because you know uh there's

going to be 10% you don't know if there

was something else. Just to clarify, is

the reason we don't know what's

happening because of the anonymity of

crypto? We don't know who owns which

wallets and so it's harder to track

what's actually happening. Well, it's

that and plus you know um you know if

when we look at liquidation events like

in for in in the stock market

90% of what someone will explain is

probably correct but 10% like 90% it

would be 90% to correct say that the

February to April decline was largely

due to the Trump tariffs.

>> Yes.

>> But the other 10% would be like well

stocks were already expensive and they

were overdue for correction. So that's

that's what I mean by 9010.

>> So give us your 90%. What do you think

happened?

>> On October 10th, there was two things

that happened. One was a triggering

event which was Trump announced uh you

know a reescalation of tariffs with

China like a tripling of proposed

tariffs and um because markets were

closed historically

uh crypto is what reflects reaction to a

macro event. uh when you're already

aftermarket hours like if the S&P was

open it probably wouldn't have been got

punched as hard but crypto prices fell

now crypto prices falling system can

handle that uh because you know crypto

is a hypervolatile by nature so large

swings in prices shouldn't really

overload the system and even volume

shouldn't overload the system because

crypto trades uh you know there's so

much automated trading however ever

there was an algorithm in place that

actually what I call a glitch happened

on a on a specific exchange. Okay. Um

many people use leverage in crypto. I

mean it attracts leverage trading

but people put up collateral so they can

do leverage trading. One of the

collaterals is stable coins. Okay. And

stable coins are pretty safe collateral

because hey, if it's Tether, it trades

at a dollar. Uh it's pretty safe

collateral. And so you can borrow a lot

against safe collateral. And if it was

USDC Circle, that's also a really stable

coin because it's uh st it's backed by

dollar. However, a there was a popular

stable coin called USDA. Uh it was an

algorithmic stable coin. Okay.

>> Okay. And on one particular exchange

because of the shock of Friday uh

internal prices like people bid ask of

or that stable coin actually got out of

whack. Suddenly the price went to 65

even though it's supposed to be

essentially worth a dollar. So but

within one exchange that the the quoted

price dropped to 65.

Well, that meant that all the collateral

for every account that used that

particular stable coin to borrow money

was now in deficit.

Okay? Even if it was just one dollar

that traded at that price, it was

already putting every single piece of

collateral at risk at into deficit. So

then something it called ADL was

triggered, automatic deleveraging.

And so in in one exchange, everybody who

had who had used that stable coin as

collateral basically got wiped their

accounts liquidated.

Well, what were those accounts long?

They were long altcoins and all these

different cryptos that suddenly got

dumped on to spot exchanges. So then on

all these other exchanges, suddenly

some cryp some altcoins suddenly went

down 99%.

because there was a lot of selling from

ADL, but it triggered a domino effect of

all these other exchanges triggering

other ADLs because spot prices of all

these alts dropped. So, that to me was a

glitch because it was like an illlquid

quote that didn't represent a true VWAP

triggered an ADL that triggered a

cascade of ADLs and that led to millions

of accounts being literally zeroed out.

um it won't happen again I'm sure

because in the future I'm sure they will

use a composite set of prices and or if

there's a variance between what's quoted

internally versus on spot or if it's a

volume based measure

so that's why I don't think it would

happen again but that's what happened on

October 10th

>> okay we finally got our answer I've

asked this question to many people and I

I never get a proper answer uh my

takeaways from that are that you know it

seems vulnerable this asset class that

is, you know, supposed to be a hedge in

a lot of ways. Um, we are learning in in

various ways is extremely vulnerable to

to what seems to be almost nonsensical

mechanical glitches. Um, which I guess

that is my takeaway.

>> In 2020, the price of oil went negative,

right? I mean, oil is the most liquid

commodity in the world and it traded at

a negative price.

So these glitches happen in all markets,

but it does happen in crypto because

it's a it it's a gigantic place where

people are trying to experiment and

create, you know, uh what they view as

free from censorship and interference.

But of course, there's every event's

going to bring something new. And you're

100% right. you know, it it's terrible

that it happened. Um, but again, I

remembered oil was negative, you know,

and people actually were able to buy

negative oil.

They were paid to like take oil.

>> I guess I I'll I'll wait for a negative

stock price.

>> I'd love the opportunity to get Yeah.

negative stock. Remember remember bonds?

Corporate bonds had a negative yield in

Europe. You were actually paid to own

like an issuer was paid to issue a bond.

Can you identify any sectors or

geographies that you think are

dramatically over or undervalued right

now?

>> Undervalued

uh I think is small caps because there

is real earnings growth now coming but

there is no money flows. So small caps

are a whole group that inst professional

investors can afford to ignore because

no one else is buying them. you know,

the amount of acted money in small caps

is like at record lows. Uh I think

financials are also dramatically

undervalued Scott because

well this is where we could be wrong but

in my view I think the financial sector

is actually becoming a tech sector that

as money is becoming more digital and as

AI implementations are heavily heavily

taking place in financial services it's

going to make comp it's creating an

advantage for the companies the

companies who who issue capital And in

and companies like JP Morgan

probably as we just discussed earlier

could really dramatically reduce their

dependence on humans uh which is their

largest expense. So I think financial

companies are increasingly going to look

like tech companies and their multiples

may become more like tech multiples. Um

so that that to me is one group that in

the future could have a 30p even though

they used to trade at 10 times earnings.

We've been talking with a lot of uh

different people in the markets. We've

been talking with renowned professors,

uh investment strategists, economists.

We talk with a lot of people. Um most of

them are somewhat bearish right now. You

are one of the only real bulls that

we've talked with. Um I've seen you

described online as a permable. That was

what Bloomberg called you.

What do you think about that label? Um,

and how how is it that you are bullish

right now uh in a sea of bears? And what

do you think that says about who you

are?

>> I was first called a permable in 2009.

Um, and in fact, it was major newspapers

that were using it as a mocking term.

Here's what's interesting. 16 years

later,

what was the right call to be?

>> The optimists have won.

>> And yet today, if I had to say what

proportion of investors

are bullish versus bearish, it's really

risen in the last year. Uh in in fact,

it's kind of close to the 2009 levels. I

think people are already betting on the

fact that we're in a bare market.

Um, and now many people were convinced

of that in 2022 because of the Fed hikes

and they just never changed their views

three years later. Um, but as you know

what what made people a lot more bearish

is also because President Trump is a

very unpopular president. He's a very

divisive figure. I'm a registered

independent so I have never tried to let

politics be involved in how I view

markets but uh it's I can't help notice

that I think that political lens plays

into many of our clients views around

markets that they tend to view when

Biden was president there were a lot of

people who are critical of Biden I

thought the economy I cared I've cared

about the economy I thought the economy

was fine uh I think the economy's

still doing fine under Trump. Uh so

that's kept me

I I use that as one level of coding that

I think has kept people bearish. Uh but

you know I I think America is as long as

it's a place of innovation and we are

because we're at the center of AI I

think it's pretty bullish. But but you

guys have raised the key point. I mean

there's a chance that this AI is a

disaster for labor markets and if it is

the US will be the least scathed but

everyone's going to go down. Tomley is

the co-founder management partner and

head of research at Fundstrap Global

Advisers a leading independent research

firm. He has more than 25 years of

experience in equity research and has

been top ranked by institutional

investor every year since 1998.

Prior to co-founding Fund Strat, he

served as JP Morgan's chief equity

strategist from 2007 to 2014. Tom, I I

wish we could do this for 3 hours. Maybe

next time we will. Uh really appreciate

your time. Thank you.

>> Thanks, Tom. Good to see you.

>> Yeah, next time.

>> Scott, what' you think? Yeah, I I have a

lot of respect for Tom. Um, not just

because I think he's a great analyst and

does the work. Uh, but I just appreciate

how measured he is. Uh, he's he

basically says, "Yeah, that's a good

point. You could be right." When these

guys go on CNBC and sort of talk their

own book and say, "No, the market's

going up 20% next year and this is why."

He's he's very measured around this is

what I this is what I I think but I

don't know and he acknowledges he

acknowledges the other side. He just

strikes me as very reasonable and

tempered and you know I can kind of see

why institutions like his research

because I think he's I think he's

probably got a track record of sort of

you know I hope most of this is right

but I know some of it's wrong and buyer

beware. He just strikes me as the adult

in the room when he's making these

recommendations.

>> Look, I think it's good that we had the

bull uh come on before the end of the

year. We've had a lot of bears on um and

I think all of them have presented

really

>> he and Josh Brown Josh Brown's a kind of

a bull.

>> We'll definitely get him on in in 2026.

Um but

yeah, I think I love his analysis of

frozen foods. I think that was a great

example, wasn't it? of a technology that

had real impacts on the labor force but

ultimately freed up time and it left us

with more productive things to do. I

don't think that that means that we're

not going to see an impact on on

individuals lives. I mean he talked

about how you know frozen foods happened

everyone thought that farmers would go

out of business and then we were fine.

It's like some of those farmers did go

out of business and some of those

farmers were not fine. uh but long-term

as an investor, yes, the idea of these

technologies creating short-term um

destruction in the labor market

shouldn't worry you too much. I think

the question is, you know, he was

talking about his uh younger his

children using AI and and young people

using AI, which I think is a fantastic

point. We should be really looking at

how are young people using it. I think

the question is what exactly is the

market pricing in because it's hard to

tell if the market is underestimating

the potential or overestimating the

potential and it seems that we haven't

really reached a consensus on this and

perhaps that's just the way markets

work. We can't know. Um but I think that

is sort of my big question. And it's

like, you know, just how optimistic or

pessimistic or neutral on AI is the

market really based on current prices.

Um, and then I think the final point

that I think was a good point to end on

for the end of the year is he says, you

know, yes, he he expects or he could

easily see a 10 to 15% correction next

year. And I think that was a little bit

scary hearing that. But then he also

points out it's a long time, a year, 52

weeks. So he expects there actually

we'll see uh a rally after then. So I

think it was a good way to end the year.

Appreciate his perspective uh and we'll

definitely want to talk to him again.

Thank you for listening to Propy Markets

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