00:04:23 · Ed Elson
[00:04:23] S4: Why does this... And we'll return to your expectation and your prediction. But why does this keep happening? I mean, it's true. We... Like, this does feel like deja vu. And then in the other sense that it that it feels like we're repeating history is, you know, you've got the Nasdaq down 10% in the past month, and then you've got this rotation into all of these non AI stocks, which is why the equal weight is up more than 4%. And so you look at the overall stock market, and, you know, if you were to just look at the AI names, you'd think that it's chaos. But the S and P has not been hit that hard. We're still up, you know, more than 10% year to date. So it almost feels like we keep on thinking that a correction is about to occur. It does occur, but then it seems to be a lot less problematic than a lot of people expected. Why do you think this is happening? What are some of the dynamics that go into that?
00:05:18 · Tom Lee
[00:05:18] S5: I think a lot of this is behavioral economics at work as well as mechanical. Let me just start with the mechanical. I I think that there, as you know, has been a... An explosion of zero day trading options, so short term uses of leverage. I mean, that's basically the same as margin trading. It's, you know, it's a highly levered bet, and therefore, investors are employing a very myopic time frame. They are not thinking about the next twelve months. They're probably thinking about the next month, really probably the next two weeks. And for the professional investor, the institutional investment world, which is still half of trading volumes, they have to respond to that. So I think the market has now become very short term oriented. That's why quarterly earnings seem like long term because someone's gonna be like, woah, that's not for another ninety days. But the behavioral economics at work, I think, is that the world has faced seven black swans in just the last six years. COVID, the inflation cycle, the fastest Fed hikes in history, The US bombing Iran, declaring war in Iran, these tariff wars, on top of the GFC, which wasn't that long ago, and the Internet bubble. And so I think there's a lot of pattern matching that people say, oh, well, we have another bubble in the making. This time it's AI, and a lot of people miss the AI trade. The ones who've missed it are the ones that are most declarative that this is a bubble.
00:06:50 · Ed Elson
[00:06:50] S4: What do you make of of the AI bubble concerns? Because, I mean, the way I look at it, there are some pretty clear signs of bubbleicious behavior like circular financing. Yeah. I think that's probably the most important one. A lot of the sort of reinvestment in other companies, We're seeing some of those signs and of course just, you know, a lot of expectation riding out into the future about the AI build out, which we're not really certain of. But at the same time, investors do seem to be quite cautious, which is why we're seeing it reflected in the multiples and reflected in this correction right now. I mean, what do you make of the AI bubble at this point? Do you think that it is... Do you think that it exists? If not, why not? And and if so, what are the dynamics going into it?
00:07:43 · Tom Lee
[00:07:43] S5: I've witnessed several bubbles, you know, because I've been covering markets since the early nineties. And the two that people would describe as bona fide bubbles are the Internet bubble and the housing bubble. I mean, those are genuine bubbles. And it's hard to compare the current cycle to either at this moment because, you know, the Internet bubble was apparent because the the type of innovation that was taking place was simply cost savings. The Internet in... Into 1999 was not a revenue story. It was a brick and mortar to etailer model. It was trying to basically say, this is a new way to do it, but you could save money. And the housing bubble, of course, brought leverage and capital into the hands of unqualified holders. So it was basically a bubble where money was... Debt was given to people, and then a lot of people borrowed a lot of money. This AI story so far is one of pretty remarkable innovation taking place, like otherworldly innovation. And so I think as long as that pace of innovation is happening, and then we're seeing it as productivity for businesses because revenue per worker is going up. There was no productivity metric in the Internet we could point to at all at any time into '99. I think AI becomes a bubble when we start making up use cases that don't actually have end markets yet. As far as circular financing goes, and I know people are making claims that that's the reason it's a bubble, I think it's a people do need to be students of history. There are many cases where circular financing is not called circular financing. It's really ecosystem development. Some examples are, of course, the energy industry is... Then would be notorious for circular financing, but that is the nature of resources. Another example is the early days of of radio. RCA made radios, Then they had to actually create radio stations across the country. Then they had to invest in programming across the country. And imagine if someone said radio was a bubble because RCA is investing in radio stations and in in radio programming, they were creating an industry. And that was not... It would have been a huge mistake because RCA was probably the biggest stock of its time until the nineteen twenty nine crash, which was not a a radio bubble. It was just basically a stock market bubble. So I think, you know, it was more than a 100 x move.
00:10:33 · Tom Lee
Cisco was a 100 x move. NVIDIA has been about a 10 x, you know, from its, the start of ChatGPT. So to me, it's, of course, has all the makings eventually to create a bubble, but I I think it's very early. I mean, I would just say during the Internet period, and I covered it from '93 to '99. Oh, well, I covered it all the way through the crash and recovery. No one even called it a bubble until after 2000.
00:11:03 · Ed Elson
[00:11:03] S4: In terms of the circular financing, I think one of the concerns, even if we would call it ecosystem development, is that it is implying that demand might be stronger than it than it than it would have been if the demand were organic. Like, if you didn't have these circular relationships, then you wouldn't see as large of a business, and therefore, the argument is that this is artificial growth that we're seeing. I think the same thing would be said about token maxing as an example. Businesses tell their employees, you have to use as many tokens as possible. And the reason that we wanna do that is because we wanna be part of this revolution and we we feel very strongly about this. Then suddenly they say, actually, this is too expensive. Let's pull back on the on the token spend. And as a result, it does seem at least that the growth of the token use is beginning to slow. Whether that's directly a result of token maxing, I'm not sure. But it does seem in those cases that there are these dynamics that point to an ecosystem where the signals that we're getting aren't maybe the purest signals of organic growth that are completely dependable. Do you disagree with that, or do you not worry about that?