Tom Lee: Inflation Fears Are Overblown — Crypto Could Rip Higher

0:00I think economists are fighting last year's wars. Growth creates opportunity and risk. Most people focus on the risk. I think it's going to be a really bullish period for crypto for the next 12 months. Do they want to be right or do they want to make money? Hello and welcome to Wellthana Maggi-Lague. Joining me to discuss the outlook for global markets is Tom Lee, head of research at Fundstrike Global Advisors and Chairman of BitMine. Hi, Tom. It's great to have you with us. Thank you. It's good to be here. So I think it's maybe a good idea if we just kind of level sex. I know people know you well for being bullish US equities, but talk to me a little bit as usual that's probably oversimplifies things. So give me a little bit of an idea where you're sitting in terms of the sort of macro framework you're operating out of or the expectations for markets. What's your kind of world view right now?

1:00Let's see, yeah, 2026 we were expecting this to be a challenging year because we did expect good earnings growth, but then there's a lot of speed bumps in the that would take place this year. And I think that's kind of how the years playing out that I think it's a year where fundamentals are good because stocks are most dependent on solid earnings visibility and that's being fueled by AI, but not just AI, a recovery in ISM and a broadening expansion. But there are of course things to worry about such as the amount of debt being issued by the AI hyper scalers and the amount of deficits run by the US and of course this Iran war and other political turmoil. So I think it's serving to act as a way to keep investors worried and as you know,

2:00markets climb a wall of worry. So I mean overall I'd say I'm still very constructive for the next 12 months, but there's speed bumps ahead. Yeah, I think that's a great summary and some of those speed bumps, especially when you're talking geopolitically are really hard to game out, you know, traditionally. So if we narrow the lens a little, we had a stronger than expected August jobs report. We have oil prices on the back of those geopolitical concerns in war, high once again, has that changed anything fundamentally for you for the outlook for the remainder of the year? I mean, yes and no. We started this year expecting some time later this year, so I guess now we're in the later part. For there to be a market drawdown and they were multiple drivers of that, including midterm elections, the market testing of Fed. There is a lot of leverage out there,

3:00and I think in general, you know, at some point we have to kind of adjust for sentiment. You know, markets always typically have corrections at some point during the year. And I mean, I'm probably still be sympathetic to that case. And as you know, one of the real issues at the moment is there isn't a lot of consensus about what's happening with inflation because if I looked at market measures, the bond market and investors and pundits are very impatient because inflation has been not at the Fed's target. It hasn't been at the Fed's target for more than four years. And you know, one solution of course is for the Fed to start, you know, raising interest rates. But I'm also very sympathetic to the argument that, you know, we are suffering from a series of distortions to CPI. We don't want that distortion to become the base case for the consumer. So,

4:04you know, we don't want the consumer to suddenly expect higher inflation, but that hasn't really shown up in the survey yet. And if that's the case, then I'd be willing to give a little more grace to the Fed. And I think that, you know, by the end of the year, there might be demonstrable progress on inflation. So I think there's a lot of tension in markets. But as you know, that's if markets were easy and there was all agreement, everything would be priced in and there wouldn't be opportunity. Exactly. Which is what we're all trying to mine, right? But you, I like the description of tension because it's sometimes looks like conflicting sort of narratives as well, right? Because you have everyone worried about inflation, you have everyone really concerned about some of the actions from the Fed treasury secretary, which I'm interested to hear your thoughts on that. And a lot of fear out there. But then I look at the last bank of America fund survey and the majority see no landing for the US economy. And we see stock market still really sitting close

5:05to highs. So there seems to be a lot of talk about fear, but I'm not sure that sort of playing out in what people are doing with their money. Do you see that tension and how are you kind of grappling with that? Yeah. Well, I do want to just point out a few things. I think oftentimes investors and bond markets conflate stock market going up and the Fed needs to rein in the stock market. Because as we know, the Fed's mandate is just employment and inflation. And it is a very tenuous relationship between stock market gains and inflation. You know, we could have a booming stock market like we did in the 2000s post GFC and inflation didn't go up. But I would equally note that there is not a lot of clarity actually about the real level inflation. I mean, I know people cite a lot of

6:05statistics. For instance, someone will point to PCE and say it's 3.3%. And then they'll look at diffusion measures and say there's quite a lot of components above 3%. However, what's important to keep in mind is the Fed's targets too. Core CPI when Friday comes around and we get the August number, it's more likely to drop to 2.3% year-to-year core. And PCE is actually almost 100 basis points higher at 3.3. I think there has been very, very poor analysis done about why is CPI and core not even in sync. This is one of the largest ever gaps between the two. And we've written about this at Fundstreet. More than almost 60% of that difference. So 0.6 of the one is due to two items. Financial services, which is a very large weight in PCE and it's a very

7:08small weight in CPI. Financial services is basically the cost of portfolio management fees. Here's the reality. The average American doesn't actually think there's inflation just because the stock market went up and they have to pay their advisor more money. In fact, as you know, only the percentage of Americans that use advisors and pay fees is actually quite small. So that should not be in PCE and the Fed has acknowledged it. You know, Waller points it out in his most recent conversation with Reuters. But the second thing that I have not seen people write about and it's a really important distinction is that there's an item in PCE called recreational services. That is the that is actually a third of all the excess inflation. Actually compared to CPI, it's like 40% of the excess inflation. Recreational goods includes a light and item called memory and accessories under computers. The Fed wrote a paper in May about this. Flash memory

8:09prices have gone up and it's actually included in PCE but not in CPI. It's up to nine standard deviations. But here's another question. Is the average American saying inflation went up on me because flash memory prices are going through the roof? The answer of course is no. Nobody really cares that flash memory's gotten more expensive. I mean the iPhone's gotten more expensive but that's you know already measured as a CPI item. So the reality is is that core PCE is up because the stock market and flash memory compared to CPI. And in fact, if people accepted that and they looked at core CPI at two three versus two, I think wireless correct. It's not that far from the Fed's target and it's moving in the right direction. And by the way, Volker was cutting when inflation was around 4% not when inflation was at two. So it sounds like you think it would be a mistake for them to go. They need more time. I think people as Winston Churchill said, the war department

9:13always fights last year's wars. And I think economists are fighting last year's wars. Interesting. So if the worry has been inflation overblown, are the worries that we're on the cusp of some sort of recession or crisis? Are they overstated as well? Do you think the U.S. economy looks healthy here? I think it looks really good. Now I'm going to point to something that has been a really good predictor of recessions. Much more in terms of time-littance than the yield curve. You know, people cite the yield curve as if when it inverts, it's a great predictive recessions. But as we know, it's predicted actually if we measured it by intraday, I think something like 24 of the last nine recessions. It's not a great predictor. But high yield credit spreads are in high yield. OAS or options of adjusted spreads are really behaving. So to me, I think there is a little consternation because rates are rising and of course inflation is elevated and we have large deficits.

10:17But the market that is very good at sensing trouble, which is high yield, has not said corporate credit or credit quality is really deteriorating. That's interesting. What is underpinning that growth? Is it very dependent on the AI build out? I mean, it's, that explains part of it. Just I think one thing that the viewers have to kind of keep in mind is a post-GFC. Okay, and so I'm actually rewinding clock 18 years, you know. Business confidence crashed. And that's because there were a lot of people in pundits saying that there was a new normal and growth would be very slow. And guess what? When economists and Goldman Sachs and JP Morgan say the economy is going to grow slow, boards do not become expansionary. So private investment as a percentage of GDP was actually below depreciation for more than a decade.

11:18So in other words, capital stock was depleted in the US. We can all notice it. You probably like notice like buildings got really old or roads got really old or companies were what they called sweating their equipment. And of course, it made a labor intensive. That's why productivity didn't really pick up because if you don't have cap ex, you don't have productivity. And then COVID happened and there was stimulus and that kind of distorted what was happening because there was now a government funded investment spending. But it was in fact a lot of necessary infrastructure building. And that's coming at a time when there's globally labor growth is actually slow. It's not just the US, it's around the world. So AI is actually filling a lot of empty jobs or it's going to help fill this gap in jobs. So to me, AI is a big factor for sure. But we have to think about that era that preceded AI, which was investment

12:23spending was actually quite weak. Everything we do on this channel has one goal to make you a sharper, better informed investor. Someone who understands the macro forces shaping your money before the mainstream catches on. But information is only half of it. The other half is acting on it. And that's what wealthy on membership is for. It's how you go from watching these conversations to putting them to work in your own portfolio. Membership opens three doors, access to advisors, helping build real assets into your portfolio. And for accredited investors, access to specialized funds to learn more the link to become a member is in the description box below. So it's interesting because like in many other areas, this sort of AI, there's a lot of opinion forming around the narrative around AI or sort of binary choices. It's going to save us. It's going to kill a whole thing. And I think that what people were skeptical and see bubbles and concerns around the AI boom

13:25say, well, okay, it's great for efficiency for filling those empty jobs that you just talked about. But ultimately, it's going to depress the labor market. It's going to sort of eliminate some jobs or make certain areas redundant, gut the tax base and ultimately hurt spending. So even though we see short term benefits from efficiency, ultimately will be a result in a sort of negative, it'll be a negative force for the economy. Do you, do you, do you, do you worry about that? Do you see another path? Well, yeah, I think you've stated it correctly. That's just people's opinions. I mean, I'm going to just rewind the clock a few times, but do you remember many economists had predictions about the internet. Some said it was just a fad and others, you know, didn't think it was going to change anything or maybe more importantly, if you go back to the era before Flash Frozen came along and 38% of Americans were farmers. But Flash Frozen was a huge innovation

14:28in the supply chain and it brought employment from farming down from 38% to 5. I'm sure there were a lot of, if there was CNBC in 1929, a lot of CNBC people would have predicted, look, when farmers lose their jobs and you go from 38% to 5%, the economy is going to collapse because what's going to happen to all these farmers? Well, guess what? The economy moved in a different direction. I think it's really a two, it's too early to know how this plays out, but I'm going to say, what is the countercase to lost tax income or wage income? One, I think robots and agents are in agentegea, they'll pay taxes. They're going to be tax generating units. Really? 100%. You know, especially if these payments occur on blockchain, it's all traceable. There won't,

15:32you know, I'd say if robots are 50% of economic activity in AI, then half of all tax receipts, you might even tax it at a higher rate because you're like, there's a human penalty tax. And the second thing is AI, we don't really know the fully loaded cost of AI. If AI was profitable, then hyper scalers wouldn't have to borrow money. So you have to divide the cost by like actual users. Maybe the price is a lot higher. I don't know. And the third, of course, is, you know, what is the real cost of human work? You know, there's many studies, Asa and Hubstaff and McKinsey. There's multiple studies. And I, in some of our work, we've published them that show that two facts. One, it's much as 75% of all jobs today are not work, work that is being productive. It's work for works sake. In other words, most jobs are just jobs

16:38in title. They don't really do anything. And the second is when they look at people who are actually employed within an organization, only about 20% or 25% of their actual week is spent doing work. The rest of the time is like preparing to work, responding to emails, you know, biological functions. So could AI replace a lot of the work, but we still have jobs? Probably the answers. Yeah. I mean, that's because at the end of the day, we have to be intellectually honest. None of us really spend 40 hours really working. You know, there's moments of inspiration and moments of not. And so if AI fills in those voids, everyone still has a job. That's so interesting, because I know people are going to be listening to this and sort of laughing and thinking about their day. And the email thing comes up all the time. The email of emails that people spend time spent in emails and in conferences, talking about the emails that were sent. This is a, I think this is a very sort of, I don't think it's fair to say it's optimistic,

17:42but this is looking at the sort of potential, right? The positive potential, which is I know what you're trying to quantify and make investment decisions on. What's the biggest, what's the pushback that annoys you the most when people sort of see this as this sort of tech optimist sort of polyant of view of where tech is going to come, because that's the sort of opposition to that is that's sort of a pipe dream, right? This idea that you're what part of that either do you just intellectually grade at or do you just think that people are really missing when they are so skeptical about the positive potential around technology? I think most people are terrible growth investors. You know, that's why that's it's if everybody was a good growth investor, then growth stocks wouldn't work. I've been a growth investor basically from my from inception, because I started off in the early 90s as a tech analyst and

18:42I can assure you growth investing is hard because the most important thing to do is you have to know what you have to have a base case, they call it total addressable market or whatever they want. Tam and then someone might in their minds be very constrained because they'll say, hey, the opportunity set of a company is to replace what the whole world is doing today, so that's all you can achieve. Let's say for instance, when someone looked at Amazon, they'd say, okay, well, they're a bookseller. So the biggest thing that they can do is like do books and I mean, Amazon's overvalued because all they sell is books. What they don't, what you have to do as a growth investor is to understand that there's now a huge amount of uncertainty created because we are, it's deterministic, right? When there's a new technology, then it creates speculation, which is what people worry about, but then it creates innovation. I don't think most people are good at innovating if they were, everybody would have patents. So I think if people understood that

19:47growth, it creates opportunity and risk. Most people focus on the risk and I think that's why they're not good growth investors. And I can just speak to it because I've been a growth investor for a long time and we've written about so many things and years before they happened, we were more than 10 years writing about Bitcoin when it was under a thousand and people thought it was a silly notion on our part and now Bitcoin's around 80,000. So do I think people who are skeptical of new technology, they do have some points. I mean, of course, you know, I know I want to see AI companies borrow tons of money and then because we already know what the risks are of any company that has balance sheet risk, right? It reduces your flexibility. But if someone says that that's a sign that the AI bubble is going to end badly, I think that they're not really good students history because every industry, every growth industry since the creation of time was never solely

20:52funded with equity. I think that's a really wonderful way to put it. My experience with that is when the first iPhone came out and everyone said, well, like, why would you need that? You don't need a phone. You know, you don't need something that you already have a phone. You don't need another phone. I mean, there was so much pushback. We don't remember that because we tend not to remember those periods of all the sort of naysayers because then we adopted and understand it and are off to the races. So we're, what are you, what are you most, and where do you see the best opportunity right now in terms of where we are in the cycle? And is your interest in the growth area? Is it around AI or are you looking at other aspects of technology that you think look really promising whether it be biotech that's AI adjacent or, you know, fueled by AI? How are you thinking about the landscape? Well, definitely one of the biggest levers for the global economy the next few years is AI because it is, it's a new vector of economic innovation, right? Because you have workers and

21:56you have productivity in the past. So it's just people in capital, but now you have AI which could be costless innovation, right? So you have a third vector of growth. So I think it makes sense to say, hey, I want to own bottlenecks. I want to own things that grow with AI, which is, you know, units. We want to, of course, when I say bottlenecks, that's Nvidia and the SEMEs and memory and energy and power. But I think, and, you know, at FundStrat, we've been really pushing the idea that you need to look at downstream ideas. And that's software companies. It's the Mag 7. You know, they're going to be really big beneficiaries of AI. And I think that the industry that is about to be the most innovated by AI is financial services. So I, you know, we like the banks. And of course, that's also why we like small caps because I think financial banks are a big weight

22:57in the Russell 2000. But I think technology and AI are going to transform financial services into a business that looks less cyclical and they're for multiples to go up. And by the way, by adjacency, that means crypto, because crypto is probably one of the big tools and leverage for the financial services industry. And that's why we're really bullish on Ethereum as well. Yeah, just going to, just going to get into that. I mean, Ethereum has broke out in the last month. Is this the beginning of a sort of new wave of momentum? Is it in it? And do you feel like it's kind of liquidity and investment driven? Or is this now operating on this idea of disruption in the financial services sector or both? Yeah, I mean, it's probably all the above. I think what's very different today compared to, you know, four years ago is that only in the last year and a half, have we seen Wall Street embrace blockchain tokenized securities, stablecoins,

24:04and the idea that you're rebuilding entire rails on crypto, you know, Vlad Teniv has made that very unequivocal statement. He thinks the entire financial system is going to be built on blockchain rails. Larry Fink at BlackRock had said the same thing. And that unleashes a lot of efficiency. So I think the crypto fundamental like, addressable market has really changed, because no other era for the last 15 years of the history of blockchain has the financial system actually viewed it as a tool. Now it does. And entering, we're entering a period where crypto has a lot of talents, you know, one is a lot of crypto investors follow this thing called the four-year cycle. And they wouldn't turn bullish until October of this year, because that's the bottom of the four-year cycle. Well, guess what? We're only a few weeks before we touch the bottom of the four-year cycle. And there has been a massive amount of leverage that has been extinguished in crypto since

25:10October. So a year ago, crypto had a huge liquidation. And actually the amount of debt in the system has actually essentially vaporized. And we're seeing already in Korea the beginnings of people beginning to borrow money again to buy crypto out of from AI. So we have leverage coming back. And then I think there's a big formal element because in the third quarter so far, when you look at the Russell 1000, four of the top 21 best performing stocks are crypto stocks. It is the single biggest attribution to our performance in the Russell. So the Russell's up three percent, bit mine for instance, which is and the Russell 1000 is up 99%. And as you know, we still have one month left in the third quarter, plus we have the four-year cycle ending and we have, you know, leverage increasing, plus potentially the clarity act. And of course, Wall Street building on blockchain. I think it's going to be a really bullish period for crypto for the next 12 months.

26:14So does the clarity act need to pass in order for that momentum to continue? Or do you think it'll continue to move forward regardless of whether the regulators? It's a good question. The clarity acts mean purposes to deem a single entity to be sort of the regulatory arm of crypto. And in this case, the clarity act would have deemed the CFTC. And if clarity fails, the CFTC and the SCC are really the only two entities anyways that govern crypto. So there's not really like a street fight that would happen. There would of course be state by state potential opposition. But CFTC is already dealing with that with state level opposition to things even like prediction markets. So I think if clarity act fails, then crypto's position is just like prediction markets today or sports

27:17markets, which they've actually done, they've boomed anyways because people actually want to use it. You know, so I think it's ultimately fine. It would be much better to have the clarity act pass because then it's like enacted into law. But the CFTC is already operating in this manner anyways. Yeah. I mean, if real life tends to outrun the regulators one way or the other, right? So if you see such huge opportunity in financial services and all of it moving onto the rail, this kind of rail, on to blockchain rails, does the opportunity lie in the newcomers or at the expense of the legacy big financial centers or do they do they move now with speed and go into acquisition mode and dominate once again? It's it's probably all the above. You know, financial a lot of there is

28:22something that everybody who works at a large financial services company knows, which is there are massive, massive stacks of legacy systems to deal with. Okay. For instance, to do a credit card process transaction between a customer and the issuer, there's seven people that sit in the middle, like different roles, you know, the point of sale, the, you know, the network, you know, valid, whatever, different steps. And but each of those seven steps is represented by, you know, maybe seven or eight different companies. And then within a company, even like a capital one, which, you know, represents one step in that hop, they might already have a hundred legacy systems. So that's probably why Robin Hood can move so nimbly because it was built and stood up without 20 years of legacy systems to deal with, you know, and 20 years of murders. And they

29:26can move with a lot of alacrity. And that's also why BlackRock, which has really been essentially a monoline company right in asset manager, they can move with such alacrity to tokenize because they're not dealing with a lot of disparate legacy systems. So I think there's opportunities for incumbents. And there's a lot of opportunities for new entrants. And do I think if crypto, as they, like, let's use these numbers from Robin Hood and BlackRock, if it's a hundred trillion dollars, that's going to be tokenized. You know, just one percent of that is a one point, one trillion dollar net income opportunity of money that can be made. Well, that is a lot of, that would create a lot of companies and a lot of billionaires, right? Because a trillion dollar of income is at 20 times, you know, it's a 20 trillion dollar equity opportunity. And that's a lot of opportunity. So when we're talking about back to sort of the places where

30:32there's opportunity, if you're AI bullish, you're all, are you also, do you see also that as being default by default energy bullish? You mentioned energy as part of the area that you see opportunity. Yeah. I think you have to, you know, energy is a very big space. There's many different kinds of companies. So I think it's in that that you think is a good fit. It has the best potential to you. You know, my advice would be I think if someone's listening to this, they should just keep it simple and, you know, and stick with XLE. There's too many instances of energy having hopes of re-rating or commodity prices, exerting a bigger influence than anyone expected. So I would say that they should just not view that as a growth sector in the same way. And how are you feeling about the sort of US tech sector? How does it stack up globally?

31:37There's been a lot of discussion about the advances the Chinese are making. Do you see equal opportunity globally when it comes to these trends or do you think the US is the best positioned? I mean, you know, before AI, if someone said, you know, who's good in tech, it's pretty much China and the US. You know, I mean, of course, there's Taiwan and, you know, there's some companies in Japan and of course, Korea. And then if we said, okay, well, who's really good in AI? It's the same group of companies. I mean, US and China, Taiwan, Korea, some Japan. I mean, it's not really different. And last question when it gets back to crypto, I think that we've, I think you move beyond the original stage where there were so much skepticism and so much concern. When we do still see some reports of hacks happening, there was just one. But when you said there was a lot of leverage that left last October, what we heard some people in the industry say is, okay, some of the original

32:43wells got out, but that just opened up space for new buyers and new holders and sort of new entrance in the market. Is that the way you see it? Is this now sort of a fresh group of of an wider group of ownership in the crypto space? Well, you know, I could do just a little back filling, I think. So Bitcoin was created in 2009 and there have been, this is the fourth crypto winter, crypto winners like a bear market. So, um, and a characterization of every crypto winter, there's several, but one of course one is that price declines a lot. And second is leverage gets wiped out. I mean, that's also what a stock market bear market is, right? Like you have to make sure the last seller sold and therefore then stocks can start to go up. And in crypto,

33:44um, there was a huge deliveraging that happened in October. Um, and then of course the start of the iron war created another deliveraging event. But the third thing that has happened in every crypto winter is something they call rage quitting. Okay, now rage quitting is that some people lose so much money that they get angry and they quit. And every crypto winter has had rage quitting. Now, it doesn't mean like a whole new class of people come in because you know at the end of the day, a lot of people hold Bitcoin without leverage so they don't even get affected and they ride this out. Um, so I'd say there was a lot of high profile people saying there's, they lost faith and Bitcoin. That's exactly what happens at the bottom of every cycle. So, um, reality is those people can have a guy in their face because you know what, I could tell you since crypto started rallying six weeks ago, a lot of people said this was all a head fake and that crypto was going to make new lows. And instead now, technically, it looks like the bottom has already been put in.

34:45Hmm. And if you're in this space, should our targets, do they matter? Is it something that people should fixate on because you know, that tends to be the conversation? Or what is the, what is the sign to you that we are in? We are truly in another bowl leg of, of this sector, this, this industry? What are you tracking? Is it, is it the tar, price target? Or is it something else? Um, I mean, I see that the, I think most people, and I'm sure like your viewers, the vast majority, I'm going to say like 80% have no exposure to crypto. Might even be 90%. And so, when, when like, which you're asking very valid question, you know, if, if only 10% of people of your audience has exposure, but it's the best performing macro asset already in the third quarter, and maybe it might double again in the fourth quarter, and then it could double again

35:46next year. And they have no exposure, but they, but 80% of your viewers have gold. I might just say the real question that people need to ask is, do they want to be right or do they want to make money? Because there's going to be a lot of people say, look, I don't want to own crypto because I don't understand it. I don't think most people could explain to me how electric cars work, but plenty of people own Teslas, you know, can someone really explain to me how LLMs work, but they buy all these AI bottlenecks stocks. So, I think the answer is, if they don't have any crypto, and we've been advocating a 2% position for more than a decade, our original recommendation for a 2% position, okay, for the average account for Fundstret that actually took our advice, it is now over 85% of their portfolio. So, they, so even though the stock market went up a lot, they own a lot of Bitcoin, and not because they bought more Bitcoin, they bought 2%

36:50and Bitcoin's gone up a lot in price. So, my advice would be, here's a chance that in the next 10 years, if you put 2% of your assets into something that's uncorrelated to everything else that's happening, and it's a downstream play to AI and probably the biggest way for the financial services industry to retool itself, is it worth putting some allocation in there, and that would be my recommendation. Fantastic, Seth. Tom, thank you so much for joining us today. Great.