Conversation between Tom Lee and "The Big Short" Author: AI has detected bubble signal, crypto correction due to gold liquidity being "siphoned off"

Original Article Title: AI Boom or Bubble? Michael Lewis, Tom Lee on the Risks and Rewards | The Important Part LIVE

Original Source: The Important Part

Original Translation: DeepTech TechFlow

Key Points Summary

In a special live recording of "The Important Part," SoFi's Chief Investment Strategist Liz Thomas raised a question that many investors are watching closely: Will the rapid rise in the market slow down? Or, in other words, will this rise continue? To answer these questions, she invited two top financial thinkers: Tom Lee, Co-Founder and Head of Research at Fundstrat, and Michael Lewis, author of the bestselling books "Moneyball," "The Big Short," "The Blind Side," and "Going Infinite" from The New York Times. The three delved into the core issues facing investors in 2026.

In this engaging conversation, they deeply analyzed several hot topics in the current market: Why have retail investors outperformed hedge funds in recent years? Has gold already peaked? Does Bitcoin's 40% sharp decline mean the cryptocurrency market is entering a "crypto winter"? Tom Lee explained that despite the recent drop in AI-driven tech stocks, this may actually reflect an improvement in enterprise productivity. Michael Lewis shared his contrarian bet on gold and explained why he is "bullish on fear" as an investment strategy.

Furthermore, they also discussed other major issues in today's financial markets, including: Will the Fed's independence be threatened after Kevin Warsh is nominated as Fed Chair? Will the rapid development of AI technology lead to significant job losses? And could the federal government potentially take over struggling AI companies.

Finally, they turned their attention to the cryptocurrency space, analyzing potential "black swan" events and valuable lessons about technological disruption that can be learned from the history of the frozen food industry.

Highlights Summary

· The real bubble occurs when everyone believes "this is definitely not a bubble."

· The unemployment rate for college graduates is even higher than that of their non-college-educated peers of the same age group... But from a different perspective, this may actually be a signal of increased economic productivity. Productivity is often measured by creating more output with fewer labor resources.

· AI may truly be as revolutionary as everyone says, but that doesn't necessarily mean it will bring universal profits to the stock market; there is no inherent causal relationship between the transformative nature of technology and market returns.

· Retail investors may pick the right stock mainly because their incentive mechanisms are completely different from institutional investors... They are investing their own funds, so they are more willing to hold a particular stock for two to three years.

· When I hold gold, I am actually investing in "fear." I buy gold because it can hedge against current uncertainty... What I am buying is insurance against future unease and anxiety.

· Looking back, there have been only three instances where gold has risen by over 9% in a single day, and each of these three times marked the peak of the gold price. If history can be used as a reference, gold may have already peaked.

· There is a financial industry adage from the late Art Cashion: "Bull markets don't die of old age, they are killed by the Fed."

· Despite changes in operations, human nature remains unchanged. The instinct of "I want to earn more and faster than others" still drives the core of this industry.

· In the next decade, whoever controls AI and the related ecosystem may become the global superpower. If the funding chain of AI really starts to break, I believe even the Department of Defense has been simulating how to deal with this situation.

· Since 1974, about 40,000 companies have gone public or split. 90% of their stock prices have fallen by over 50%, and among these companies with a decline of over 50%, 90% have eventually gone to zero. In other words, most stocks will eventually become worthless.

Is AI a Crisis or an Opportunity? The Dual Nature of Productivity Transformation

Liz Young: In recent years, the global market has experienced sustained rapid growth. Although there has been some volatility in recent weeks, the overall trend remains strong. This phenomenon is largely due to the development of artificial intelligence (AI). AI has driven technological innovation, spawned new products, and brought in a large amount of capital inflow. However, many investors are starting to feel uneasy, worrying about whether the market is overheated and the development is too rapid. This concern has spread globally and has become the focus of our discussion today.

To gain a better understanding of this phenomenon, we invited Tom Lee, Co-Founder and Head of Research at Fundstrat. He has long been optimistic about the market and is considered a representative of the 'bullish' camp. Tom, why do you remain optimistic in the current environment?

Tom Lee: There is a saying in the financial world from the late Art Cashion, who once said: 'Bull markets don't die of old age; they are killed by the Fed.' In other words, strong performance in the stock market does not necessarily mean it cannot continue. In fact, I believe we are witnessing two significant catalysts: first, the payoff from AI is starting to show, redefining winners and losers; second, the shift in Fed policy that may bring new tailwinds to the market. Therefore, there are still many reasons this year to support investors continuing to buy stocks.

Liz Young: Let's talk about recent market changes, with tech stocks seeing significant drops and a noticeable pullback in the cryptocurrency market. Does this kind of market turmoil concern you? Does it shake your bullish view of the market?

Tom Lee: I think many are watching this phenomenon closely. Over the past two years, AI's development has been an unstoppable force, attracting significant investor interest and inflows of capital. However, as you mentioned, this year has indeed presented some different circumstances. We've seen many stocks and industries experience a contraction, with the software sector, for example, currently facing declining demand and service repricing. Additionally, numerous reports indicate that Agentic AI and other AI technologies are gradually replacing traditional software solutions.

Furthermore, according to some reports, the number of tech industry jobs has decreased since the launch of ChatGPT three years ago. More surprisingly, the current unemployment rate among college graduates is even higher than that of their non-college-educated peers of the same age group. These data may seem like 'bad news,' which is currently the focus of many headlines. But looking at it from a different perspective, this could actually be a signal of increased economic productivity, often measured by creating more output with less workforce.

From this perspective, the application of AI is demonstrating its potential to enhance productivity. For software companies serving businesses, if a company reduces its spending on software, it is actually a process of optimizing profitability. In other words, the efficiency gains from AI are gradually translating into actual returns. While these changes may bring short-term pains, in the long run, this is strong evidence of AI technology leveraging its productivity advantage.

Signs of an Overheated Market and Risks of a Meltdown

Liz Young: Michael, in your past work, you have repeatedly documented periods when the market transitioned from a continuous uptrend to a sudden meltdown. Each time before a market meltdown, certain signals would appear, such as over-speculation or risky behavior. In those market cases you have studied, what are some common features of excessive risk-taking? Do you believe these signs are present in the current market as well?

Michael Lewis: That's an interesting question. Frankly, I have never been able to accurately predict the arrival of any market meltdown. My work is more like waiting for the "storm to calm down" before "sorting out the aftermath." Looking back at my career, my first book, "Liar's Poker," documented the 1980s financial markets; since then, I have written stories about the dot-com bubble and the 2008 financial crisis. But truth be told, I never knew exactly when these events would unfold. More importantly, I don't think anyone can truly predict the timing of these meltdowns. There are always multiple interpretations in the market, and my personal investment strategy is to invest in index funds.

However, I have indeed observed that there are always people who see the problems before a market meltdown, but interestingly, these people often fail to accurately predict the next crisis. For example, Michael Burry made the right call during the subprime crisis, but that doesn't mean all his future predictions will be correct. He mentioned on Twitter that he had short positions on Nvidia and Palantir, which also drew widespread market attention. I interviewed him, and his logic was based on the capital expenditure cycle (the investment cycle in equipment, technology, etc.), believing that the valuations of these two companies have reached a peak bubble. However, he also admitted that he cannot predict the timing of a meltdown accurately. Therefore, he chose a more conservative strategy—buying two-year put options. Put options have a low cost, so even if the judgment is wrong, the losses are limited. This strategy indicates that even someone as visionary as Burry cannot fully grasp short-term market changes.

Regarding the common features of excessive risk-taking you mentioned, I believe the most prominent one is FOMO. Using my recent book "Going Infinite" as an example, this book tells the story of Sam Bankman-Fried and FTX, and FTX's collapse can be seen as a classic case of FOMO. 180 venture capital firms blindly invested in SBF without thorough investigation. They didn't even understand what his business was really about and poured in a substantial amount of capital, showcasing the "act first, understand later" mindset that is a significant characteristic of excessive risk-taking.

Another common feature is a distorted incentive mechanism. When I was writing "The Big Short," I interviewed some traders who made wrong decisions during the subprime crisis. They told me that the reason they engaged in high-risk investments was because "everyone was doing it," and if they didn't go with the flow, they would be seen as laggards. Furthermore, they were tempted by hefty bonuses, even if these investments ultimately failed, their bonuses would not be clawed back. This flawed incentive mechanism led people to choose short-term gains despite knowing the risks.

If you ask me to make a bold prediction, I believe there are indeed some signs of a bubble in the current market. Although AI is truly a transformative technology, it does not mean that everyone can profit from it. In fact, technological advancement can sometimes even compress a company's profit margins. AI may really be as revolutionary as everyone says, but that does not mean it will necessarily bring universal profitability to the stock market; there is no inherent causal relationship between technological transformation and market returns.

Why Retail Investors Can Beat Institutional Investors

Liz Young: Tom, I know you must have your unique insights on this topic. I'd like you to talk about popular internet slang terms like FOMO and HODL, which actually reflect the game between retail and institutional investors.

In this economic cycle, since the COVID pandemic, we have seen retail investors successfully predict the market direction multiple times, while institutional investors have sometimes appeared overly conservative. How do you think retail investors have achieved this? Why is their judgment more accurate? Also, in the current market environment, who do you think has a greater chance of winning, retail investors or institutional investors?

Tom Lee: At Fundstrat, our client base is mainly divided into two categories. One is our institutional research clients, including about 400 hedge funds; the other is family offices, investment advisors, and high net worth individuals served through FS Insight. Every month, we survey these clients' top five favorite and least favorite stocks. Since 2019, we have been conducting this analysis, and the results are very interesting: retail investors' choices are often correct, and the top five heavily favored stocks by retail investors have performed extremely well. We are even considering whether to convert this data into an investment product.

I believe that retail investors can pick the right stocks mainly because their incentive mechanisms are completely different from institutional investors, and retail investors' investment behavior is not directly tied to their livelihood by daily or weekly gains or losses. They invest their own funds, which are their so-called "permanent capital" (i.e., long-term investable funds), so they are more willing to hold a stock for two to three years.

When I first entered the industry, institutional investors usually held their positions for about a year, which was already considered "long-term investing." However, now most institutions have shortened their holding periods to 30 days or even less. Data shows that the average holding time for each stock is only about 40 seconds, with some hedge funds considering a 1-second or 5-second position as "long-term holding." This high-frequency trading pattern dictates that institutional investors can only choose stocks with extremely high liquidity that can generate quick returns, while retail investors tend to explore investment opportunities with long-term growth potential.

Liz Young: But don't you think this will lead to more FOMO? If retail investors' choices are right, won't institutions be forced to chase the retail investors and, in turn, drive the market into a frenzy?

Tom Lee: Indeed, that could happen. The market usually sees some hot stocks that are not only favored by retail investors but also heavily shorted by institutions. For example, Palantir is a typical battleground stock, as well as Netflix in the mid-2000s when its stock price was only $2 to $4 and later rose to $20. At that time, Netflix was heavily shorted by many institutional investors, but retail investors kept buying. Another well-known example is GameStop. Stocks like Palantir and Tesla have also been typical battleground stocks. Retail investors see the long-term potential in these stocks, while institutions tend to use them as short-term arbitrage tools. When the prices of these stocks reach a certain key point, their valuations are readjusted, leading to a rapid price surge. For example, in 2017, after Tesla was included in the Russell 1000 Index, its stock price experienced a similar explosive growth.

Michael Lewis: Can I ask a question? You mentioned a very interesting idea: are you planning to develop retail investors' investment choices into an investment product?

Tom Lee: We have collected 60 months of relevant data, recording retail investors' top picks and least favored picks. Additionally, we pay special attention to battleground stocks that are favored by retail investors but shorted by institutions. We are planning to launch an ETF that will automatically buy the stocks retail investors believe have the most potential each month. You can think of it as a "professionally vetted WallStreetBets." Unlike the casual discussions on Reddit, our data come from paying users who are our real clients, reflecting actual investment ideas. More importantly, our data undergo rigorous screening and validation to ensure their authenticity. These data are not from bots or fake accounts but from real investors.

The Trust Crisis Behind the Gold Market Surge

Liz Young: In your view, what are the differences in institutional and retail investor preferences for gold? Additionally, how do you see the future performance of precious metals such as gold and silver? Although I don't want to refer to them as meme stocks, they have indeed become part of speculative assets.

I have always believed that gold trading is mainly dominated by institutional investors and central banks of various countries. However, it was surprising that gold has performed very well in the past few years, even outperforming the S&P 500 index for several consecutive years. A few years ago, I was strongly recommending gold investment, but many people thought I was like a "gold-bar-hoarding grandma." However, later on, the price of gold really soared, attracting a large number of retail investors.

I remember once when I went to the New York Stock Exchange to record a program, I happened to witness the ringing of the bell for GLD (Gold ETF), and there were huge fake gold bricks outside the trading platform, surrounded by gold flags. At that time, I thought, "Retail investors have already started to flock in."

Tom Lee: Gold's performance has indeed been very impressive. If we look back at the market cycles of the past 25 years, we will find that the return on gold has even exceeded the S&P 500 index. This may be related to changes in demographics. At Fundstrat, we have studied many phenomena related to demographic trends and found that consumer preferences often skip a generation. For example, RV sales are a good example; RV sales peak every 50 years. During the COVID-19 pandemic, RV sales reached a historic high.

The logic behind this "generational leap" is that children often are not interested in what their parents like, but they are interested in what their grandparents like. For example, if your father rides a motorcycle, you may not think it's cool; but if your grandfather rides a motorcycle, you may find it very cool, especially when you see old photos. The popularity of Harley motorcycles also follows a similar pattern. Gold is an important investment for the "Baby Boomer" generation, while the X generation prefers hedge funds. Today, the millennial and Gen Z generations are beginning to refocus on gold, which is actually a generational trading phenomenon. The market value of gold is currently about $35 trillion, while the total market value of the S&P 500 index (excluding the seven tech giants) is about $40 trillion. The size of the gold market is almost close to that of the stock market.

Michael Lewis: Is the $35 trillion you mentioned referring to the total market value of all existing gold?

Tom Lee: Yes, all the gold ever mined on Earth. There is approximately 7 billion ounces of gold, and at a forecasted price of $5000 per ounce, the total market value would be around $35 trillion.

There are some key points to note about gold. As someone interested in research, I have always enjoyed studying gold and understand its unique properties. Gold is an asset with the Lindy Effect, which means the longer something has existed, the more people believe its value will continue.

Gold, as a store of value, has a history of hundreds of years, and this long-standing recognition has kept it widely accepted. Gold is considered a medium of exchange due to its scarcity. However, in my view, gold still faces some potential "black swan risks."

First, the above-ground gold reserves are limited, but there are underground gold reserves many times greater than what is above ground. If the price of gold becomes too high, it may attract many people to enter the gold mining industry. For example, if the price reaches a certain level, many individuals may shift to gold mining as the value of extracting gold could surpass any other industry.

Second, the source of gold is actually "extraterrestrial." Imagine if SpaceX begins exploring Mars and discovers a gold-rich asteroid in space. If Elon Musk is able to mine these resources, he might own all the gold and even become a new "central bank." This asteroid could contain billions of ounces of gold, significantly impacting the global gold market.

Lastly, there is the risk of alchemy. If someone discovers a method to transform lead into gold by altering atomic structure, they may not disclose this technology and could clandestinely start producing gold. This sudden influx of gold supply could drastically devalue gold in the global market.

Therefore, gold is indeed an excellent investment choice, but it also has its limitations. For instance, when the price of gold reaches $9000, its market value may exceed the total market cap of the entire stock market.

Liz Young: So, is there a price point for gold where it loses its investment value?

Tom Lee: We conducted in-depth research on this and reviewed data comparing gold and stock market capitalization over the past 100 years. Our study found that gold's market cap can reach 150% of the total stock market cap, but this is nearly its limit. For example, on January 30, the price of gold dropped 9% in a single day, indicating its price fluctuations can be very volatile. Looking back, gold has only surged over 9% in a single day three times, each marking a peak in gold prices. If history is any guide, gold may have already peaked.

Liz Young: Michael, you mentioned earlier that you mainly invest in ETFs and some passive index funds, such as Vanguard's index funds. But you occasionally try out other investments, right?

Michael Lewis: Yes, sometimes I lose my rationality. Speaking of gold, I have to tell a story. When I was young, I used to play poker every week with a group of old friends, and there was one person named Bobby Klein who was always better than the rest, he was born to play poker. He was one of my best friends. During the financial crisis, he had his own fund on Wall Street, shorting the mortgage market. It turns out he was also part of "The Big Short" story, making a fortune by shorting the mortgage market, and later even founded his own asset management company.

Four years ago, when I visited him, he showed me his collection of Roman ancient coins, and he explained to me how the Roman emperors gradually reduced the silver content in coins to stealthily erode the currency's actual value, using these historical stories to explain to me the reasons for buying gold. Although his point of view was very convincing, at that time I was not completely swayed. I always felt that buying gold sounded like a crazy thing to do.

However, his arguments remained in my mind, and about three years ago, I finally made up my mind to buy some gold. I bought a lot, and its price has been rising ever since. A month ago, I called Bobby Klein to tell him that I followed his advice and bought gold, and made a lot of money. Bobby's understanding of the gold market far surpasses mine, his investments are mainly focused on gold mining stocks, which is a more economical way to invest in gold. He also acknowledged that gold has some "black swan risks," but he believes these risks are much lower than assets like Bitcoin.

What interests me most is that when Bitcoin first appeared, everyone said it was the competitor of gold, even calling it digital gold. But later I found that Bitcoin's price trend began to synchronize with the stock market, rather than remaining independent like gold. This made me feel that Bitcoin is no longer digital gold, but may have become another asset class.

Gold is a magical asset, but its value is essentially based on a human consensus. We believe gold has value only because we collectively believe it has value. When I hold gold, I am actually investing in "fear." I buy gold because it can hedge against current uncertainties, such as global political unrest, economic crises, and even potential financial collapses. In other words, what I buy is insurance against future insecurity and anxiety.

The current political and economic situation remains highly unstable, and I believe this fear and anxiety will not dissipate in the short term. Therefore, even though the price of gold has dropped by 60%, I still consider this a successful trade. However, I must remind everyone that this does not mean it is a recommended investment strategy. I originally bought gold on impulse and happened to make money. In general, this is not a rational investment approach.

The AI Wave: Societal Impact and Technological Transformation

Liz Young: Tom, you have mentioned before that the current AI development reminds you of the late 1990s and early 2000s telecom industry, and you have also said that we may still be in the early stages of AI. If this is true, what differences do you see compared to back then?

For example, today's Capital Expenditure (CapEx) scale is much larger than that of the 1990s and accounts for a higher percentage of GDP. More importantly, these investments have already begun, whereas this phase may not have clearly started in the 1990s. Do you think we are spending too much on capital expenditure?

Tom Lee: I agree with Michael's view that ultimately, AI will turn into a bubble. But interestingly, when people start saying something is a bubble, it usually isn't a bubble yet. The real bubble happens when everyone thinks, "This is definitely not a bubble." I was a technology analyst in the 1990s, and I witnessed the telecom industry's excessive expansion firsthand. Companies like Global Crossing and Quest were frantically laying down fiber optic networks. At that time, I was working at Solomon Brothers, and Jack Rubman was one of the key figures involved in fundraising.

Back then, all companies and analysts were adjusting models to prove that those outrageously high valuations were reasonable. The cost of capital was almost zero, while exit valuations skyrocketed to 20 or even 30 times. When the bubble finally burst, all related industries collapsed together, whether it was wireless communications or other parts of the entire ecosystem, and no one was spared.

However, after the bubble burst, the best investment opportunities usually emerged from the ruins. For example, after that collapse, cell tower companies became the biggest winners, with returns ten times that of the S&P 500. Another unexpected winner was pizza companies like Domino's Pizza. This shows that sometimes the late-night pizzas those bankers ordered during overtime ended up being a better investment. Those cell tower companies that built metal towers to hang wireless equipment eventually became the best investment choice.

Michael:You're right. When everyone says "this is not a bubble," that's when it's a real bubble. But now everyone is debating whether AI is a bubble, which actually makes me feel like it's not a bubble yet. Because we're already being cautious about it.

Liz Young: Many people say "this time is different," but I've always felt that the economic and business cycles have never been fundamentally different. Although the factors driving them may have changed, the end results are more or less the same. Do you think there has ever been a truly different time? Or does your experience make you more convinced that history always repeats itself?

Michael: Maybe, but it seems to me that each fluctuation is becoming more extreme. People are too focused on the financial consequences and overlook the larger social consequences. For example, the impact of AI may far exceed the financial market. I've talked to some tech experts, and some of them believe AI could lead to human extinction. If that's the case, what's the point of the stock market's performance? If we're all gone, what's the use of a good investment portfolio?

Of course, I'm skeptical of these extreme predictions. But it's undeniable that the development of AI will bring about significant social impact, such as the loss of a large number of jobs. What's more interesting is that executives from companies like Google and OpenAI, on the one hand, will say, "We must be very careful as AI could destroy humanity." But on the other hand, they will say, "In another 18 months, AI will be able to outperform humans." This sounds really contradictory.

For now, let's set aside whether AI will destroy humanity. Assuming that in 18 months, AI can do everything better than humans, what will this country look like? Many people are already angry about the current economic situation, and if AI develops so rapidly, this anger will only rise to a new level. In comparison, the ups and downs of the stock market seem less important.

I don't really believe that AI will be able to replace all human work in 18 months. At least for me, I don't feel threatened right now. I tried to have AI write a book about Sam Bankman-Fried or something similar, but it can only fetch existing information from the web, it can't truly understand human thinking, it won't conduct interviews, and it can't recreate the details and feelings of a story, what it produces is just not there.

Can I tell you a little story? When I was writing "Going Infinite" (a book about Sam Bankman-Fried), I knew he had intersected with Sam Altman. So I decided to visit Sam Altman to understand his views on Sam Bankman-Fried. We had dinner at his house, he's a very interesting person, and I had a pleasant chat with him. But I found out that he was actually a bit cunning. He told me that many people wanted to write a biography for him, but he didn't want everyone to write it. He wanted to pick the right person so that others wouldn't bother him anymore.

I asked him, "Since your AI is so smart, why not let it write your biography by itself? You can feed all the chat logs and data into it and let it write on its own." He replied, "It's not smart enough yet; the book it writes would be terrible." I said, "When do you think it can write a good book?" He said, maybe in a few more years.

So we made an agreement: when AI is smart enough to write a good book, I will challenge it. By then, I will write a book, and let the AI write a book as well. We will compare to see who writes better. But to be honest, I don't feel AI can replace everyone's work yet.

Liz Young: Every time a new technology emerges, people always say it will destroy all jobs, but in reality, technological progress often creates more employment opportunities. Do you think it will be the same this time?

Tom Lee: There have indeed been two different technological revolutions in history that had completely different impacts on employment. The first example is the frozen food technology of the 1930s. Back then, 30% of the U.S. workforce was in agriculture, but the emergence of frozen food technology completely transformed the food industry. It reduced food spoilage, decreased the food expenditure from 20% of household income to 5%, and the agricultural employment ratio also dropped from 30% to 5%. Although 95% of farmers lost their jobs, this also freed up more time and resources, driving economic prosperity.

But another example is the opposite. After China took over manufacturing, many U.S. states' economies were severely hit. A large number of workers lost their jobs, and policymakers failed to find new job opportunities for these people.

The Transformation of Wall Street and the Rise of the Quantitative Era

Liz Young: Michael, from when you started your career to now, what are some changes or constants on Wall Street that have surprised you? Your daughter is now also working on Wall Street, right? Has she read "Liar's Poker"?

Michael: No. She doesn't even want to read any book I've written. One time, her boss—a very senior partner—slapped this book on her desk and said, "If you want to truly understand the essence of this industry, you must read this book." She told me about this when she got home. I asked her, "So did you read it?" She replied, "No, I used it as a coaster."

However, joking aside, upon observing her work, I realized that today's Wall Street has become very "quantitative" and "programmatic." In my day, traders would shout and rely on courage and relationships in the trading pit. Now, everyone sits in front of computers, watching algorithms run. Despite the change in operation, human nature has not changed. That instinct of "I want to earn more and faster than others" remains the core driving force of this industry. Whether through loud shouting or running AI algorithms, this greedy nature remains consistent.

Just think, someone spent so much money in the past to make me a financial advisor, it's incredible, that was the wildest time on Wall Street. What surprises me is that the stories I experienced back then are still relevant today. The market has actually undergone significant changes now, not only is no one doing the job I used to do, but the bond market has also changed, many things have been automated. Now, trading relies more on bots, rather than interpersonal interactions, and the trading floor is no longer as bustling and noisy as before, all those interpersonal dynamics are gone.

So why is my story still of interest to people? One reason I can think of is that this world is still dominated by young people. Just like when I entered the industry, or when you entered, young people ruled this field. Students who had just graduated from Princeton, Harvard, or Yale could earn a then-astronomical salary of several hundreds of thousands of dollars after a few years of work, a situation that completely changed the relationship between elite schools and the financial system.

In my father's generation, mediocre performers would go to Wall Street, back then Wall Street was for those good at networking and dealing with others, not designed for the smartest people, the smart ones would choose to do something else. In that era, the financial industry didn't offer much money to be made.

But then everything changed, the rapid expansion of the financial system and high profits attracted hordes of elite students, suddenly half of these Ivy League graduates wanted to go into finance. This phenomenon still exists today, but the focus has now shifted to high-frequency trading firms and private equity.

One thing that impresses me is the impact of this phenomenon on people's lives. Because the financial industry's reward system heavily favors young people, many start planning their careers even in college. For example, college students nowadays even start preparing for Wall Street in their freshman year, a trend that had just started when I graduated, but is now much more extreme.

Liz Young: Hasn't this ended? Or has it shifted? Tom, you mentioned that now the unemployment rate for college graduates is even higher than those without a degree. Does this indicate that today's elite are more inclined to go to the tech industry rather than Wall Street?

Tom Lee:My kids have all graduated from college in recent years. When my daughter first started college, she wanted to study Art History, but then she met some people who all wanted to work on Wall Street, so she joined a business fraternity and started to get into that circle.

I feel like Wall Street still attracts a certain type of person, usually those who are very competitive and want to work alongside the best and brightest. Perhaps it's because of this that the culture has persisted. The competition now is even fiercer than before. For example, high school students nowadays need to participate in business activities to get into Wharton, whereas in my day, just showing an interest in business was enough.

Michael:The competition among smart people still exists, but their options have expanded. For example, at Jane Street, young people in their mid-20s can make millions per year. The situation now is more extreme. I remember when I graduated, knowing nothing about finance, yet someone was willing to pay me a lot of money to hire me, which was very surprising. No wonder everyone is lining up to get into this industry, because even if you know nothing, they are willing to pay you. However, indeed many smart people now choose to go to Silicon Valley. But in reality, most of Silicon Valley's funding comes from finance, such as venture capital.

The changes and constants you mentioned make me think of the rise of quantitative analysts. When I first started, quants were still a rare role, gradually becoming a core part of companies like Solomon Brothers, but at that time, they didn't fully dominate. Now, quants are in control of everything.

However, I initially thought that the proportion of the financial industry in the economy would gradually decrease, but in fact, the financial industry has become even larger. Think about the technological changes brought by the internet; it was supposed to eliminate middlemen, like the disappearance of travel agencies, but oddly this trend of disintermediation doesn't seem to have had the same effect on Wall Street.

Tom Lee:Technically, the financial industry is a mirror image of the real economy; each unit in the real economy needs a corresponding financial unit, and digitization is blurring this boundary. In the past 20 years, 50% of GDP growth has come from the digital economy, meaning the boundaries between money, services, and digital assets are disappearing.

In the future, the definition of money may become more blurred, such as the boundaries between rewards, value creation, and currency units becoming less clear. This also means that the financial industry's share of the economy may continue to grow, and the role of quantitative analysts will become even more important as they provide market liquidity to stabilize the market, such as exchanging different assets (e.g., dollars, bonds, or digital assets). This trend may allow Wall Street to make even more money, potentially transforming companies like JPMorgan Chase into tech-like firms, as they are no longer just in the lending business but are becoming market service providers.

The Fed in the AI Era: Policy Shift and National Competition Game

Liz Young: The Fed continues to be in the headlines, and we recently heard news of the nomination of Kevin Warsh as the new Fed Chair. Tom, assuming he is smoothly confirmed and takes office, do you think this will change the Fed's intervention policy? I'm not talking about independence; I'm wondering, given his perceived opposition to quantitative easing (QE), will this affect the Fed's intervention policy?

Tom Lee: You raised a good question. While I am not an expert on the Fed, I've tried to learn some information about Kevin Warsh. He has previously publicly stated that he believes the Fed's ability to help the economy is limited. Many people think the Fed can save the economy, but in reality, all they can do is adjust interest rates or influence market rates through communication.

If the White House truly wants to limit the Fed's role, then Warsh is indeed a suitable choice. In that case, the Treasury Department and fiscal policy may have a greater impact on the economy, such as regulating rates, narrowing the gap between mortgage rates and policy rates, or even direct intervention. However, the stock market doesn't seem too keen on his nomination, with a rather tepid market response.

Liz Young: Perhaps the bigger question is, if the Fed's role in the market diminishes, such as actual reduced intervention after Kevin Warsh takes office, do we now have a better ability to handle a crisis similar to 2008 than we did back then?

Michael: You mentioned not discussing independence, but that is actually the key issue. Trump clearly does not want the Fed to be independent. He only had to let go under market pressure, and if the market hadn't collapsed when he tried to intervene, he would have taken over the Fed long ago.

Going back to 2008, I find it hard to deny the Fed's intervention at the time played a role in stabilizing the financial system and the economy. The decisions made were extreme, but the policymakers back then had studied the Great Depression of 1929 and learned from the Fed's mistakes at that time. I believe the Fed's intervention was necessary.

If a similar crisis occurred during Trump's term, I find it hard to believe he would tell the Fed to "do nothing, don't intervene in the market," that simply wouldn't happen.

Liz Young: If we assume a similar crisis is caused by AI, such as a key AI company collapsing or the entire funding chain breaking down, would the Fed step in to rescue the AI company?

Michael: Trump has never minded using government resources to make things look better, so I find it hard to believe the Fed would suddenly become a completely non-interventionist entity; that's not Trump's style.

Tom Lee: I agree. Faced with the possibility of an economic collapse, the Fed would definitely use all tools to stabilize the situation. I think even a more laissez-faire Fed would agree on this.

If AI companies start to fail, I believe they would be nationalized. Because this is no longer just a regular market competition issue, but it involves national competition between the U.S. and China. In the next decade, whoever controls AI and the related ecosystem could become a global superpower. If the funding chain of AI really starts to break down, I believe even the Department of Defense has been simulating how to deal with this scenario, such as how to acquire NVIDIA, or how to withdraw enough talent from Taiwan to rebuild TSMC's production capacity on U.S. soil. I think the significance of this issue has reached a point where they are likely to choose to nationalize these assets.

Michael: The current situation is really a bit of cognitive dissonance. On the one hand, the Trump administration has been loudly promoting "government uselessness," aiming to reduce the size of the government and dismantle the so-called "deep state." But on the other hand, they are intervening in the market using the government to pick winners and losers in a way that not even modern-day Democrats dare to attempt.

Cryptocurrency Winter and the Threat of Quantum Computing

Liz Young: Next, let's talk about cryptocurrency. Many people used to believe that Bitcoin's price movement was highly correlated with the Nasdaq index, so Bitcoin would follow the trend of tech stocks. But later, this correlation was broken, and even the relationship between Bitcoin and gold is no longer so close. What has happened now? Is this the cryptocurrency winter? How long will this winter last?

Tom Lee: I have been writing about cryptocurrency for about 10 years. Bitcoin's current price has dropped about 40% from its all-time high, close to 50%. This is the seventh time Bitcoin has dropped around 50% from a recent high. Three of them were real cryptocurrency winters, leading to bear markets where prices dropped 90% from their highs, so if you've been in the cryptocurrency field for a long time, you get used to the pain these price crashes bring.

However, this time is different from the previous bear markets. The narrative around cryptocurrency is changing, as it is gradually becoming an institutional asset. Additionally, there is now a threat from quantum computing, which indeed poses a real risk to Bitcoin. If quantum supremacy is commercialized, especially if China has already mastered the technology, around a quarter of Bitcoin wallets could be compromised because Satoshi's wallet has not been upgraded.

However, I believe this time is more like a "storm" for cryptocurrency rather than a winter. The downward trend started on October 10, the day Trump proposed new tariffs on China, triggering a series of deleveraging reactions in the cryptocurrency industry, with this deleveraging even having a greater impact than the FTX crash in November 2022.

I do not think we are currently in a cryptocurrency winter because if you look at Ethereum's daily transaction activity, it is actually showing exponential growth due to tokenization. Furthermore, Wall Street has also begun to make moves in the cryptocurrency space. In a sense, the cryptocurrency dilemma may be more due to gold performing too well, drawing demand away from risk assets in the market.

Michael: I have a question, I'm curious, what would be the "Black Swan event" for cryptocurrency?

Tom Lee: I think there are several possibilities. The first one is quantum computing breaking cryptographic algorithms. If quantum computing can crack cryptographic algorithms, then Bitcoin will no longer be secure. In other words, your Bitcoin may never be safe again. Unless Bitcoin can upgrade old wallets, they may have to fork Bitcoin onto a quantum-resistant chain, and old wallets like Satoshi's wallet may become obsolete. This would undermine the core belief of Bitcoin because it would mean people have to give up Satoshi's coins. And Satoshi's identity itself is a mystery.

Another risk is AI. The current narrative is that AI needs to engage in microtransactions because when robots enter the real world, they need to validate transactions and gather funds, and the blockchain can track these transactions and provide them with digital wallets. The tax revenue generated from these transactions may even make governments no longer reliant on taxing laborers, thereby establishing some form of economic safety net.

But the issue is, if AI becomes intelligent enough, they may run blockchains on their own. In that case, public blockchains may no longer be necessary, as AI can develop their own currency systems to validate transactions and even establish their own monetary language.

Liz Young: What Is the Likelihood of These Black Swan Events Happening?

Tom Lee: The key to this question is whether the government can regulate these structures and tax them. If the government can effectively regulate, perhaps these "black swan events" can be avoided. In the past, a major criticism of cryptocurrency was that it could be used for tax evasion. I believe this is also a key focus of policymakers' efforts.

However, what we are seeing now in the cryptocurrency space is actually a traditional competition. Wall Street incumbents are trying to hijack the cryptocurrency narrative, tilting everything in their favor through means like the Clarity Act, attempting to suppress newcomers. This competitive pattern plays out every time a new technology emerges, which is a blow to public blockchains as Wall Street tries to control the discourse.

Michael: I am curious, though, what it will look like when AI becomes angry about having to pay taxes? Will they demand voting rights? Perhaps even spark an "AI Tea Party Movement"?

Liz Young: Speaking of Sam Bankman-Fried, what do you think he is up to now? Although most people may not want to hear his name.

Michael: He has indeed created a very powerful cryptocurrency trading platform, attracting high-frequency trading firms like Jane Street and Jump Trading to use it. He has built an industrial-grade cryptocurrency trading platform, and even his investors have never questioned the platform's operational capabilities. It is precisely because this trading platform has been so successful that it is hard to imagine him risking his own business.

Since he himself is a high-frequency trader, coming from Jane Street and later entering the cryptocurrency market, he found the trading platform systems at the time to be very poor, so he created a better trading platform. When FTX collapsed, I thought this brand would be acquired and relaunched. After all, FTX has become one of the most globally recognized trading platform brands, albeit initially gaining fame through negative news.

Additionally, I think he is genuine about the Effective Altruism movement. He and others in this movement have been discussing how to make money efficiently and donate it. Although this may sound a bit strange, it is indeed an interesting phenomenon. Even Jane Street has started to worry about hiring too many "effective altruists" because these individuals have a lower desire for money and do not pursue owning three mansions in the Hamptons like traditional employees, making it difficult for the company to motivate them through material rewards.

I don't think we've heard the last of Sam Bankman-Fried. Wherever he is, he will make things more interesting. Even prison became interesting because of him. He spent a day in the same cell as P. Diddy, the former president of Honduras, and other celebrities, like something out of a sitcom. I heard that the prison guards asked him for advice on cryptocurrency investments, while other inmates wanted him to help raise funds.

I even visited him in a Brooklyn prison, by the way, that was my first time in Brooklyn. He wasn't a particularly friendly person, and I don't quite understand why others are so fascinated with him. He writes a diary every day; the prison has an email system where you can subscribe to his diary. I read his diary, which documented his daily life in prison.

How Speculative Behavior in Prediction Markets is Reshaping Finance and Society

Liz Young: Some argue that the rise of sports betting, prediction markets, and the emergence of new asset classes like cryptocurrency have provided new outlets for speculation that may have otherwise occurred in the stock market. Does this mean that the stock market's bubble risk is reduced? Tom, what are your thoughts?

Tom Lee: I think there is some merit to this. First of all, prediction markets are actually very useful because they are the closest thing to a "crystal ball." At Fundstrat, we use aggregated data, such as Polymarket, to track election results. In 2024, we will even rely more on Polymarket's data than on forecasters like Nate Silver. Polymarket accurately predicted the election results of all 50 states, so from a data perspective, prediction markets are indeed valuable.

But for users, prediction markets are more of a form of gambling, and I think this does have some social consequences. But whether it's prediction markets or cryptocurrency, they are helping us redefine what a stock is, which is a massive innovation for the financial industry.

For example, in the future, if you want to buy Tesla stock, you currently have to spend $400 for a share. However, theoretically, Tesla's stock could be broken down into different revenue streams, such as tokenizing based on the earnings of a specific future year. If someone only wants to buy the revenue stream from 2036, they can do so separately. This not only allows management to understand how the market prices their earnings, but for investors, it's also a lottery-like choice. If the company performs better than expected, this tokenized revenue will earn more than buying a whole share.

Of course, with this innovation comes an increase in speculative activity, resulting in winners and losers, but that is the nature of capitalism. Since 1974, about 40,000 companies have entered the stock market through IPOs or splits. Among them, 90% of stock prices have fallen by more than 50%, and of those companies with price drops of over 50%, 90% have eventually gone to zero. In other words, most stocks eventually become worthless.

Michael:  The question earlier was, has this made the stock market more rational? Clearly, that's not the case. While it may sound like a good thing, in my view, the stock market has not become more rational due to the legalization of sports betting.

We have previously done a podcast series on sports betting, and studying its history was really interesting. The entire nation's attitude towards this topic has undergone a dramatic shift. Previously, sports leagues viewed sports betting as the "work of the devil," but now it has become a major growth engine for them.

However, sports betting is corroding the world of sports, bringing with it many negative incentive mechanisms. We had predicted where the issues would arise, and indeed we were right. For example, in college basketball games, the student players participating in the games do not earn any income, yet the game itself has huge bets riding on it, and one player's performance could potentially change the outcome of the game, leading to various scandals. If prop betting on college sports is not prohibited, such situations will continue to occur. I expect the government to eventually intervene, but looking back at this time, we will find that it was not beneficial for society.

Such discourse may not be very popular, especially among young men, as the temptation of sports betting is very strong. My son just graduated from high school, and many of his friends are attending school in California. Although California is one of the few states where sports betting is still illegal, these minors have found ways to open sports betting accounts, and you can imagine how this behavior could lead some individuals into real-life problems.

Since we did that podcast, seeing companies like FanDuel and DraftKings, which once dominated the market, now facing difficulties, I find it somewhat ironic. Prediction markets are gradually replacing their businesses, with prediction market operating platforms classified as commodity trading platforms, thus not regulated by state governments. I do not believe this is a good thing.

The prediction market itself is a very interesting innovation. I like that people can use it to bet on politics, but I think the issue with sports betting is that it has grown too large and is now out of control. It will ruin sports and the lives of many young men.

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