Interview with macroeconomic expert Tom Lee: A bull market rises by elevator and falls by escalator—sharp corrections are typically associated with bull markets.
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Interview with macroeconomic expert Tom Lee: A bull market rises by elevator and falls by escalator—sharp corrections are typically associated with bull markets.
Has the bull market really ended?
Navigating Web3 tides with focused insightsCompiled & Translated by: TechFlow
Guest: Tom Lee, CNBC Crypto Expert
Host: Ryan Sean Adams, Co-founder of Bankless
Podcast Source: Bankless
Original Title: What's Next For Markets? Macro Expert Tom Lee
Release Date: August 7, 2024
Key Takeaways
In this episode, we tackle a big question: Has the bull market ended following the massive sell-off earlier this week? Our guest, Tom Lee, doesn’t think so.
We aim to answer several key questions: Why was the market hit on August 5? Will there be more pain ahead?
Has the bull run truly ended? How likely is a recession? What are the arguments for both bearish and bullish scenarios? Finally, Tom shares his price predictions for the future.
Background Information
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Tom is the research head at Fundstrat and also a commentator for CNBC. He recalls first meeting Tom in 2017 when Bitcoin and cryptocurrencies were not yet popular on Wall Street, and Tom was already optimistic about crypto.
Reasons Behind the Market Drop
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Ryan raises the issue of the recent market downturn, particularly the sharp declines in Ethereum and Bitcoin.
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Tom analyzes several key factors behind the volatility. First, Friday’s U.S. jobs report showed significantly weaker hiring—only 114,000 new jobs added—which marked the biggest miss since the pandemic. This sparked investor fears of a potential recession. Second, the Bank of Japan raised its overnight interest rate, causing yen fluctuations that further rattled market sentiment.
Other Influencing Factors
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In addition to these, Ryan notes that rising tensions in the Middle East may have impacted markets. He points out that markets often sell off during pre-war tensions but rebound once conflict erupts.
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Tom acknowledges these influences, noting that market reactions to uncertainty are complex.
How Bad Is It?
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Ryan brings up the VIX index, noting that it spiked dramatically during the 2008 financial crisis and the 2020 pandemic—similar peaks are now appearing again.
(TechFlow note: The VIX Index, commonly known as the CBOE Volatility Index, is a widely used measure of the expected volatility of S&P 500 index options.)
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Tom analyzes this, pointing out that the VIX briefly surged to 60, indicating extremely high expected market volatility.
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Tom explains possible reasons for the VIX spike—market uncertainty, investor panic, and widespread margin calls. Despite extreme volatility, he notes that some high-net-worth individuals and institutions were actually buying during this period, while retail investors faced liquidations.
Potential Future Risks
Ryan asks whether large funds could face liquidation.
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Tom expresses concern. He notes that short-term volatility trading is a crowded strategy, and many investors may suffer losses during sharp market swings. He recalls how last year, even smaller volatility spikes caused failures among major hedge funds, suggesting more market turbulence and potential fund liquidations could occur in the coming days.
Is It Over?
When discussing the market’s future, Ryan presents a binary choice: Is this volatility temporary, followed by a resumption of thebull market, or will there be further declines and volatility?
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Tom shares his view that this may be a “growth scare.” He explains that if the trigger was the recent jobs report or a retreat from speculative trades, these are temporary effects.
Market Reaction
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Tom points out that although equity markets panicked, credit markets remained relatively stable—suggesting this is primarily an equity market scare. Drawing from his experience at JPMorgan, he notes bond markets usually lead stocks; thus, stable credit markets amid stock turmoil indicate investors are seeking liquidity, not reacting to fundamental deterioration.
Future Expectations
Ryan asks: If this is indeed a growth scare, what should we expect next?
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Tom believes the next jobs report—especially the September one—will be crucial. While recent employment data has been inconsistent, certain factors like extreme weather in Texas may have distorted the numbers.
Risk of Recession
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Tom references a rule: since 1949, a 50-basis-point rise in unemployment has typically signaled an impending recession. However, he notes the pandemic has distorted economic indicators, casting doubt on the rule’s reliability. He emphasizes that market performance over the next few months will hinge on upcoming economic data, especially employment reports.
What Comes Next?
Ryan asks: If the economy avoids recession and September jobs data comes in strong, what happens then?
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Tom believes the Fed could begin cutting rates. Although no one knows exactly what the Fed will do, if labor markets slow without tipping into recession, the Fed would likely be forced to act.
The Fed’s Response
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Tom stresses the Fed’s actions will depend on data—but criticizes the market’s critique of the Fed’s “data dependence,” arguing it makes the Fed inherently reactive. Hence, the market calls for more forward-looking policy. He suggests the Fed might cut rates in September and possibly cut five times this year.
Impact of Rate Cuts
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If the Fed does cut rates, how will markets react? Tom says if the Fed’s dot plot shows more cuts than expected, it could be seen as supportive of the economy, boosting equities and risk assets (like crypto). Rate cuts would directly lower borrowing costs for consumer loans, small business lending, and adjustable-rate mortgages, stimulating demand.
Potential for Economic Recovery
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Tom believes the current economy faces high-cost pressures, and rate cuts could alleviate them, reviving consumer demand. He notes consumers still have borrowing capacity, so rate cuts could catalyze real economic activity.
Risks of Carry Trades
Ryan asks whether Fed rate cuts could worsencarry traderisk—particularly with theyenand strong dollar—potentially making market conditions worse.
The Fed’s Focus
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Tom says the Fed doesn’t want financial instability, but a 20% rise in stock prices isn’t its main concern. He emphasizes the Fed cares more about capital misallocation. If capital flows into financial markets because companies avoid capital expenditures (Capex), rate cuts could redirect capital back into the real economy.
Corporate Investment Environment
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He notes many CEOs currently hesitate to make Capex investments due to Fed tightening, inflation concerns, and economic uncertainty—making investment unattractive. This environment hinders growth and exacerbates carry trade risks, as investors seek yield in a high-cost funding environment.
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Tom believes Fed policy profoundly impacts not just financial markets but also the real economy. Rate cuts could shift corporate investment decisions and influence broader economic recovery.
The Case for Recession
Ryan asks Tom to present the counter-argument—that the economy may already be entering a recession, with a more pessimistic outlook ahead.
Expansion vs. Recession
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Tom stresses expansions don’t end due to “aging” but typically because the Fed tightens policy too much. He warns that prolonged tight policy can damage the economy. External shocks can also trigger recessions.
Current Economic Weaknesses
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Tom identifies three areas showing early signs of recession:
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Auto Industry: Car sales are declining, used car prices are crashing, automakers inflated prices due to “greedflation,” leading to inventory buildup and rising delinquencies.
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Durable Goods: Demand for appliances and other durables is falling, partly due to high installment and credit card debt costs (e.g., 25% interest), discouraging purchases.
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Housing Market: Housing activity is in recession due to high mortgage costs and rising home prices. Though supply constraints may explain price gains, high prices and borrowing costs make homeownership difficult.
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Recession Likelihood
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Tom believes weakness in these three sectors could indeed trigger a recession, especially durable goods and housing. Still, he remains relatively optimistic about housing, citing pent-up demand. Once the Fed starts cutting rates, mortgage rates could fall and stimulate demand.
Impact of External Shocks
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Tom adds that external shocks—such as drastic oil price swings—could also cause a recession. If oil spikes to $250 per barrel, household spending on gasoline would consume a larger share of income, potentially triggering a downturn.
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Despite multiple challenges, Tom believes Fed policy adjustments and latent market demand still offer opportunities for recovery. A recession is possible—but not inevitable.
Historical Comparisons
Ryan asks whether the current growth scare resembles past periods. He notes that looking at theVIXindex, similar spikes occurred in 2008, 2000, and 2020—each followed by severe events. He senses unusual fragility and tension, wondering if this feels similar to thedot-com bubbleera.
Tom’s Perspective
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Tom shares insights from over 31 years of market observation:
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Bull vs. Bear Markets: Bull markets typically rise"in elevators, descend via escalators"—sharp corrections are common within bull markets, not bear markets. At the 2000 peak, markets weakened gradually, ending in a "get me out" sell-off.
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Market Volatility: The current correction unfolded in just three days—an intense panic sell-off not uncommon historically. Examples include the 2018 "volmageddon" triggered by Fed hikes and the rapid 2020 pandemic-driven drop.
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Speed of Recovery: In 2020, after a ~45% plunge, markets rebounded rapidly—showing resilience even amid deep uncertainty. The bottom formed six months before vaccines were rolled out.
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Role of the Fed: Tom believes the Fed can easily manage current volatility—even acting at upcoming meetings. Though markets enjoyed low volatility, its return may simply be part of normal bull market maturation.
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Tom believes current market fragility and volatility don’t necessarily signal recession—but reflect a bull market undergoing adjustment and growth. He trusts the Fed can effectively respond, and markets may stabilize going forward.
Why Tom Was Right
Ryan notes Tom was bullish on Bitcoin back in 2017 and asks about his views and reasoning at the time.
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Tom recalls his analytical process in 2017—here are his key points:
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Price Signals: Tom emphasized treating price as a signal—not merely judging whether an asset is in a bubble. They focused on whether price rises reflected underlying trends.
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Model Building: In 2017, they spent significant time building a model to explain Bitcoin’s price history. Their research identified two primary variables explaining most of Bitcoin’s price movements:
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Network Effects: The exponential benefit from growing wallet count—a well-known concept akin to Metcalfe’s Law.
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Transaction Activity per Wallet: A secondary explanatory variable.
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Data Analysis: Their model explained 87% of Bitcoin’s price increases since 2010 or 2011. Based on this, they predicted that with 30% annual wallet growth, Bitcoin could reach $25,000 by 2022.
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Understanding Traditional Markets: Tom notes traditional investors tend to be older and may not grasp how younger generations drive economic change. He recalls recognizing mobile phones’ utility early, despite widespread skepticism. He sees similar resistance toward crypto today.
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Bias Against Crypto: Tom believes traditional finance holds negative biases against crypto, partly because it threatens existing banking systems. He argues this bias persists today.
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Tom’s successful prediction stemmed from deep understanding of market dynamics and keen insight into emerging technologies. By analyzing data and recognizing youth-driven economic shifts, he maintained a bullish stance on Bitcoin. This forward-thinking mindset allowed him to seize opportunities early in crypto’s development.
Assessing Wall Street’s Current State
Ryan asks about Wall Street’s current attitude toward crypto and seeks Tom’s views on this evolution.
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Tom’s key points:
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Market Shift: From 2017 to 2024, Wall Street has undergone significant change in crypto. Bitcoin and Ethereum ETFs now exist, and financial giants like BlackRock’s Larry Fink openly discuss Bitcoin’s merits and tokenization’s potential.
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Still Early Days: Despite progress, Tom stresses six years is short in traditional finance. Crypto remains in its early stages, with the financial industry gradually adopting new products and technologies.
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Telecom Analogy: Tom compares crypto’s evolution to telecom history. Initially, telecom relied on landlines and long-distance calls; wireless was minor in 1999. But as mobile users grew, all innovation shifted to mobile. Similarly, financial innovation may increasingly move to blockchain.
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Banking Conservatism: Tom notes banks still profit handsomely from traditional businesses, reducing their incentive to innovate. He believes financial innovation must proceed cautiously to prevent fraud.
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Youth Adoption: He observes EV adoption is led by younger people, while older demographics favor internal combustion vehicles. This mirrors crypto adoption—youth embrace new tech faster, while older investors remain skeptical.
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Not Yet at the “Smartphone Moment”: While crypto price moves remain eye-catching, the market hasn’t reached its “smartphone moment”—a phase of broad-based innovation and application. Tom believes crypto needs more innovation to achieve wider adoption.
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Tom offers a deep analysis of Wall Street’s current crypto stance, noting progress but emphasizing the industry remains in early stages. Innovation and adoption still need to grow. Using the telecom analogy, he highlights crypto’s future potential while acknowledging traditional finance’s transformation challenges.
BTC and ETH Price Predictions
When discussing crypto price forecasts, Ryan asks Tom about Bitcoin (BTC) and Ethereum (ETH) outlooks.
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Tom’s key points:
Bitcoin Price Forecast:
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Tom acknowledges recent sell-offs and liquidations impacted markets, but remains bullish on risk assets in H2—especially post-election. He cautions that August through October may not be ideal investment windows.
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If the S&P 500 rises 20% by year-end, Bitcoin could easily surpass $100,000. He emphasizes Bitcoin’s price moves aren’t linear but stair-step higher.
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Tom notes past research shows that removing Bitcoin’s 10 best performing days each year nearly turns returns negative—highlighting that gains are concentrated in just a few explosive days.
Ethereum and Other Crypto Assets:
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Tom views Ethereum as a core crypto asset—innovative initially due to smart contracts, now strengthened by strong community support.
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He mentions Solana as another asset worth watching, similarly backed by a loyal and wealthy community.
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Tom emphasizes that innovation potential in these assets is still unfolding, and more breakthroughs may emerge.
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Tom remains optimistic about Bitcoin and Ethereum price forecasts, seeing substantial upside. He underscores Bitcoin’s non-linear price behavior and highlights community strength as key to Ethereum and Solana’s success. Overall, he expresses strong confidence in crypto’s future, believing innovation and development continue.
Election Impact
When discussing the upcoming election and its potential market impact, Ryan poses related questions to Tom.
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Tom’s key points:
Election’s Market Impact:
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Tom notes elections significantly affect markets because voters emotionally connect with issues like abortion, transgender rights, family values, and crypto ownership.
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He believes whichever party wins, short-term equity returns may not differ much—but sectoral performances could vary greatly.
Trump’s Policy Impact:
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Tom notes Trump has been very supportive of Bitcoin, stating the U.S. should not take a hostile stance toward it.
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Trump advocates deregulation and reduced government intervention—benefiting both small and large businesses—and likely boosting M&A activity.
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He believes Trump’s policies could positively impact real estate, helping protect commercial property.
Harris’s Policy Impact:
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If Vice President Harris wins, Tom believes it would be favorable for Silicon Valley—being from California, she’d support tech stocks (like FANG).
Outlook for Small Caps:
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Tom emphasizes that a Trump victory would strongly benefit small-cap stocks, as his policies would aid small business growth.
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Tom offers a deep analysis of the election’s market implications, noting differing policy directions will greatly shape market outcomes—especially for Bitcoin and small caps. He concludes that regardless of the result, investors should monitor sector-specific shifts to make informed decisions.
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