WEBVTT - Bill Smead: Nesting Millenials to Power Economy, Stocks (Audio)

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<v Speaker 1>Global business news twenty four hours a day. It's Bloomberg

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<v Speaker 1>dot Com the radio plus mobile last and on your radio.

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<v Speaker 1>This is a Bloomberg Business Flash from Bloomberg World Handquarters.

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<v Speaker 1>I'm Charlie Pellett. The dial, the SMP naztack Hall declining,

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<v Speaker 1>thirteen minutes to go ahead of the close, Just thirteen

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<v Speaker 1>minutes left in the trading month of August to sell off.

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<v Speaker 1>In oil sending stock slumping SMP five hundred index erasing

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<v Speaker 1>its monthly gain as traders await jobs data to assess

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<v Speaker 1>the outlook for interest rates in the US economy. SMP

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<v Speaker 1>five hundred index down six points now to seventy. That's

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<v Speaker 1>the drop of three tents of one percent. Down in

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<v Speaker 1>dust reels down sixty two points, also a drop of

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<v Speaker 1>three tenths of one percent, as stacked down eight a

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<v Speaker 1>decline of two tents of one percent. Tenure down three

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<v Speaker 1>thirty seconds, held there one point five eight percent, Gold

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<v Speaker 1>down five ten the ounce the thirteen oh seven a

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<v Speaker 1>drop of four tenths of one percent. And crude oil

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<v Speaker 1>West Texas Intermediate down three and a half percent now

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<v Speaker 1>four seventy three For a barrel of West Texas Intermediate crude.

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<v Speaker 1>I'm Charlie Pellett, and that's a Bloomberg Business flash. This

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<v Speaker 1>is Taking Stock with Kathleen Hayes and Grim Box on

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<v Speaker 1>Bloomberg Radio. I'm Kathleen Hayes, my co host Pen Fox

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<v Speaker 1>on vacation this week. You can look forward to hearing

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<v Speaker 1>him back on the show on Monday. Meanwhile, the stock market,

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<v Speaker 1>what's going to power it ahead? If you have a

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<v Speaker 1>bullish case on stocks, people can talk about global disinflation

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<v Speaker 1>and uh lack of business spending in the United States,

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<v Speaker 1>a consumer that's spending some money but not exactly roaring

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<v Speaker 1>well if you want a bullish case. According to Bill Smeade,

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<v Speaker 1>chief executive of executive officer and chief investment officer at

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<v Speaker 1>Smead Capital Management in Seattle, let's start with housing. Bill,

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<v Speaker 1>welcome back to the show. Thank you, Kathleen. Good to

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<v Speaker 1>be with you. Well, so this is a this is

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<v Speaker 1>a thesis you've had for a while, and you would

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<v Speaker 1>argue I think that as of August seen there was

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<v Speaker 1>a shot heard round the world that is really evidence

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<v Speaker 1>that your thesis is working right. The sale of new

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<v Speaker 1>homes came in at a pace that was eighty thousand

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<v Speaker 1>above the average of the economists at a kind of

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<v Speaker 1>a shocking number. And we have been telling people that

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<v Speaker 1>you have to be patient because you're you're dealing with

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<v Speaker 1>the behavior of millions of people between the ages of

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<v Speaker 1>five and forty. So it's not like it's all going

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<v Speaker 1>to happen the same day. Uh, And it's not like

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<v Speaker 1>you're gonna yell fire in the theater. They're all going

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<v Speaker 1>to run out of by a house at the same time.

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<v Speaker 1>But when first time homebuyers show up in a big way,

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<v Speaker 1>and by the way, at age thirty five, a first

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<v Speaker 1>time HomeBuyer won't buy a first time home right, they'll

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<v Speaker 1>they'll buy a much nicer home because they've been paying

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<v Speaker 1>an exorbitant amount of rent to what we like to

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<v Speaker 1>refer to as Mr Potter like landlords. Well, I've been

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<v Speaker 1>interested in your thesis since he started espousing what too

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<v Speaker 1>three However, many years ago that was Bill because when

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<v Speaker 1>people said, oh, millennials aren't going to buy homes, Oh

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<v Speaker 1>they're going to want to rent that, you know other

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<v Speaker 1>they say, there's being burned. And in the Great Recession,

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<v Speaker 1>I keep thinking, hey, wait a minute, just let them

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<v Speaker 1>get a little bit older, let them get married, Let

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<v Speaker 1>them have a kid or two, and you know what,

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<v Speaker 1>those kids, those millennials are going to grow upen up

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<v Speaker 1>and say, no, I'd like a house. And oh, by

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<v Speaker 1>the way, instead of just looking at at things on

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<v Speaker 1>my mobile phone for TV. But I'm gonna look at

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<v Speaker 1>on my mobile phone. But I want one of those big,

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<v Speaker 1>nice flat panels to put on my living room wall. Right.

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<v Speaker 1>There's a whole bunch of things mixed in with this.

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<v Speaker 1>For example, the ten year Treasury rate is currently one

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<v Speaker 1>point five five and that is the primary interest rate

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<v Speaker 1>for setting mortgages because the average time it takes to

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<v Speaker 1>be off mortgages twelve years. So if by chance six

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<v Speaker 1>million people between forty I have about six of them

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<v Speaker 1>uh buy homes in the next ten years to fifteen years. Uh,

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<v Speaker 1>there's gonna be tremendous demand for credit. So rather than

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<v Speaker 1>focusing all the time on the Federal Reserve Board and

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<v Speaker 1>asking how are they going to set interest rates, why

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<v Speaker 1>don't you just watch the demand that comes from the

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<v Speaker 1>largest population group. So if this thesis is going to hold,

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<v Speaker 1>what do I buy bill? Well, first of all, it

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<v Speaker 1>will be a bifurcation, and it probably to us if

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<v Speaker 1>we're right, the most gratifying part of this will be

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<v Speaker 1>uh there will be a parting of the red sea

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<v Speaker 1>between passive and active because we also wrote recently that

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<v Speaker 1>it appears that the S and P FI index has

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<v Speaker 1>trapped itself in large capitalization US companies that are very

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<v Speaker 1>overpriced from a historical standpoint and very over owned by

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<v Speaker 1>active manager. That'd be your staples, your utilities, your your

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<v Speaker 1>glam tech stocks with nosebleed uh PE ratios and huge capitalizations.

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<v Speaker 1>So the index is pretty well trapped in three or

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<v Speaker 1>four or five categories of large capitalization companies, and they

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<v Speaker 1>don't own very many businesses that employ carpenters or plumbers

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<v Speaker 1>or electricians, or or really have much to do at

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<v Speaker 1>all with what happens when you go through a ten

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<v Speaker 1>year period of sustained and successful home building. Okay, now,

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<v Speaker 1>what about other gettle bit broader, other kinds of companies,

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<v Speaker 1>other kinds of industries that are on your shopping list

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<v Speaker 1>right now. Well, the first one is the one that

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<v Speaker 1>started to perk up the most just lately, and that

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<v Speaker 1>is the financials. The the the lack of participation in

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<v Speaker 1>borrowing money for cars or homes has caused the environment

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<v Speaker 1>for bank lending to be very subdued, and therefore the

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<v Speaker 1>velocity of money has been low. So even though the

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<v Speaker 1>Federal Reserve has created a lot of money, as they've

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<v Speaker 1>created at the velocity has slowed down. So if you

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<v Speaker 1>see a pickup in velocity. And by the way, we

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<v Speaker 1>know that demographically and mathematically, it's a certain the spending

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<v Speaker 1>between age and thirty five goes up six in the

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<v Speaker 1>United States on average, So we know that just the

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<v Speaker 1>aging of this group is going to cause a rise

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<v Speaker 1>in spinning. So not only is borrowing going up, but

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<v Speaker 1>velocities going up. So we like you know, we like

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<v Speaker 1>Wallas far Ago, we like Bank America, we like JP

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<v Speaker 1>Morgan and a number of other financials that we own

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<v Speaker 1>that that would enjoy better interest rate spreads. But also,

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<v Speaker 1>far more important, a lot of main street activity, right,

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<v Speaker 1>a lot of little nicks out of assisting clients with

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<v Speaker 1>the financial services they need from living life and getting married,

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<v Speaker 1>having kids and doing those kind of things. Afflack is

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<v Speaker 1>the largest seller of supplemental health insurance in the United

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<v Speaker 1>States America. And we ask a lot of people who

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<v Speaker 1>number two is. And I've never met anybody besides us

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<v Speaker 1>that could tell us, And and so when you get

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<v Speaker 1>a child is the first time that you really seriously

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<v Speaker 1>consider supplemental health insurance. So we're having a baby boom

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<v Speaker 1>between the ages of thirty and forty five in the

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<v Speaker 1>United States right now. Wall Street Journal had a piece,

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<v Speaker 1>uh like it was about two months ago, and it

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<v Speaker 1>showed that last year's birthing was flat. But birthing is

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<v Speaker 1>flat because we've had a monumental drop off in the

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<v Speaker 1>last twenty years, reduction in teenage pregnancy and a drastic

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<v Speaker 1>reduction in births for women twenty five. So to be

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<v Speaker 1>flat and you've got a big drop off in the

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<v Speaker 1>people that we're having kids over the last twenty years.

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<v Speaker 1>Guess who had to pick up the pace, and that

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<v Speaker 1>is Uh. Women are waiting later in life, get going

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<v Speaker 1>to college, great in a career, getting married, and then

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<v Speaker 1>having their children in the thirties. There's an explosion of

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<v Speaker 1>birth rate between thirty and forty five. Sounds like a good,

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<v Speaker 1>solid trend to me. That really lays the groundwork for

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<v Speaker 1>stronger fundamentals across the country right the culture, the economy,

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<v Speaker 1>the productivity, even burst your half away, uh one that

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<v Speaker 1>you feel go ahead, no, no, uh, let me, let

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<v Speaker 1>me just caution everybody though, remember in our thesis, Yeah,

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<v Speaker 1>it's great for Main Street, but it's gonna be a

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<v Speaker 1>lot tougher on Wall Street. Now. First of all, the

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<v Speaker 1>as the interest rates rise, the history would be that

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<v Speaker 1>that compacts price rze ratios. So for people that have

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<v Speaker 1>been way over paying for four or five year out

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<v Speaker 1>earnings estimates, when those interest rates rise, what people are

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<v Speaker 1>willing to pay for money that comes a long way

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<v Speaker 1>down the road goes down. So we're very positive about

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<v Speaker 1>what we're positive on, but we're also very negative about

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<v Speaker 1>the way that people that have bought stocks just for

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<v Speaker 1>the dividend or or others. So Berkshire Hathaway is unusually

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<v Speaker 1>well positioned for almost any environment. They have seventy billion

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<v Speaker 1>dollars sitting in cash to make their next acquisition. Uh

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<v Speaker 1>they are a huge holder of financial instruments a lender,

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<v Speaker 1>but fit would love for capital get more dear right,

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<v Speaker 1>he would love for interest rates to go up and

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<v Speaker 1>for price owners ratios to go down. He's the largest

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<v Speaker 1>owner of Bank America American Express, while Spargo. He just

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<v Speaker 1>recently asked for permission to exceed ten percent ownership of

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<v Speaker 1>Walla Spargo and uh so he you know he owns

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<v Speaker 1>the second largest residents of real estate brokerage. Uh. He

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<v Speaker 1>owns the Shock carpet, the Benjamin Moore paint, he owns

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<v Speaker 1>the railroad. I was near my hometown in southern Washington

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<v Speaker 1>a couple of a couple of days ago, and the

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<v Speaker 1>train went by and about six of the cars were

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<v Speaker 1>finished wood, heading west on the Burlington Northern Santa Fe.

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<v Speaker 1>And I promise you five years ago the train didn't

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<v Speaker 1>have finished wood. It had logs, and it was headed

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<v Speaker 1>east to China. Well, that's an interesting trend to just

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<v Speaker 1>really quickly south Washington. Which town is your hometown, wash Google?

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<v Speaker 1>And I just ran into one of your high school friends, Glenn,

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<v Speaker 1>at the talk I did in Everett, Washington yesterday, and

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<v Speaker 1>she said to say, Hi, all righty, Well you know

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<v Speaker 1>what's Sugle? I know that very well. Right across the

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<v Speaker 1>Columbia River from Portland's really quickly. Wells Fargo is another

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<v Speaker 1>company you like. Was interesting when the odds jumped of

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<v Speaker 1>an interest rate increase, the regionals outperform, and so did

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<v Speaker 1>Wells Fargo. Among all the big banks. People are positive.

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<v Speaker 1>Remember that the three big banks that we own, they

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<v Speaker 1>probably hold deposits the United States, and there's lots of

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<v Speaker 1>fantasies out there about how the fintech companies and these

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<v Speaker 1>kind of side sideways lenders coming from the outside are

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<v Speaker 1>going to do all the mortgages. The problem is you've

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<v Speaker 1>got to have deposits to make mortgages, right you. You

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<v Speaker 1>can't just make a mortgage. Somebody has to have the

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<v Speaker 1>deposits to make the mortgage. So once these young people,

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<v Speaker 1>and when I say young, I mean below forty start

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<v Speaker 1>buying houses and cars and large volumes, the banks are

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<v Speaker 1>are in a position to get alliance share of that business.

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<v Speaker 1>Bill Smeat, thank you so much for joining US. Chief

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<v Speaker 1>executive officer, Chief investment officers. S Meet Capital Management were

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<v Speaker 1>the two point three billion dollars under man in Chaman.

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<v Speaker 1>He's located in Seattle. Millennials, they're having families, they're having kids,

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<v Speaker 1>they're building homes. That's going to be the behind a

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<v Speaker 1>nice move up in stocks for some time. On Kathleen Hayes,

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<v Speaker 1>this is Bloomberg