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

the outlook for interest rates in the US economy. SMP five hundred index down six points now to seventy. That's the drop of three tents of one percent. Down in dust reels down sixty two points, also a drop of three tenths of one percent, as stacked down eight a decline of two tents of one percent. Tenure down three thirty seconds, held there one point five eight percent, Gold down five ten the ounce the thirteen oh seven a

drop of four tenths of one percent. And crude oil West Texas Intermediate down three and a half percent now four seventy three For a barrel of West Texas Intermediate crude. I'm Charlie Pellett, and that's a Bloomberg Business flash. This is Taking Stock with Kathleen Hayes and Grim Box on Bloomberg Radio. I'm Kathleen Hayes, my co host Pen Fox on vacation this week. You can look forward to hearing him back on the show on Monday. Meanwhile, the stock market,

what's going to power it ahead? If you have a bullish case on stocks, people can talk about global disinflation and uh lack of business spending in the United States, a consumer that's spending some money but not exactly roaring well if you want a bullish case. According to Bill Smeade, chief executive of executive officer and chief investment officer at Smead Capital Management in Seattle, let's start with housing. Bill, welcome back to the show. Thank you, Kathleen. Good to

be with you. Well, so this is a this is a thesis you've had for a while, and you would argue I think that as of August seen there was a shot heard round the world that is really evidence that your thesis is working right. The sale of new homes came in at a pace that was eighty thousand above the average of the economists at a kind of

a shocking number. And we have been telling people that you have to be patient because you're you're dealing with the behavior of millions of people between the ages of five and forty. So it's not like it's all going to happen the same day. Uh, And it's not like you're gonna yell fire in the theater. They're all going to run out of by a house at the same time.

But when first time homebuyers show up in a big way, and by the way, at age thirty five, a first time HomeBuyer won't buy a first time home right, they'll they'll buy a much nicer home because they've been paying an exorbitant amount of rent to what we like to

refer to as Mr Potter like landlords. Well, I've been interested in your thesis since he started espousing what too three However, many years ago that was Bill because when people said, oh, millennials aren't going to buy homes, Oh they're going to want to rent that, you know other

they say, there's being burned. And in the Great Recession, I keep thinking, hey, wait a minute, just let them get a little bit older, let them get married, Let them have a kid or two, and you know what, those kids, those millennials are going to grow upen up and say, no, I'd like a house. And oh, by the way, instead of just looking at at things on my mobile phone for TV. But I'm gonna look at on my mobile phone. But I want one of those big, nice flat panels to put on my living room wall. Right.

There's a whole bunch of things mixed in with this. For example, the ten year Treasury rate is currently one point five five and that is the primary interest rate for setting mortgages because the average time it takes to be off mortgages twelve years. So if by chance six million people between forty I have about six of them uh buy homes in the next ten years to fifteen years. Uh,

there's gonna be tremendous demand for credit. So rather than focusing all the time on the Federal Reserve Board and asking how are they going to set interest rates, why don't you just watch the demand that comes from the largest population group. So if this thesis is going to hold,

what do I buy bill? Well, first of all, it will be a bifurcation, and it probably to us if we're right, the most gratifying part of this will be uh there will be a parting of the red sea between passive and active because we also wrote recently that it appears that the S and P FI index has trapped itself in large capitalization US companies that are very overpriced from a historical standpoint and very over owned by

active manager. That'd be your staples, your utilities, your your glam tech stocks with nosebleed uh PE ratios and huge capitalizations. So the index is pretty well trapped in three or four or five categories of large capitalization companies, and they don't own very many businesses that employ carpenters or plumbers or electricians, or or really have much to do at all with what happens when you go through a ten

year period of sustained and successful home building. Okay, now, what about other gettle bit broader, other kinds of companies, other kinds of industries that are on your shopping list right now. Well, the first one is the one that started to perk up the most just lately, and that is the financials. The the the lack of participation in borrowing money for cars or homes has caused the environment for bank lending to be very subdued, and therefore the

velocity of money has been low. So even though the Federal Reserve has created a lot of money, as they've created at the velocity has slowed down. So if you see a pickup in velocity. And by the way, we know that demographically and mathematically, it's a certain the spending between age and thirty five goes up six in the United States on average, So we know that just the aging of this group is going to cause a rise in spinning. So not only is borrowing going up, but

velocities going up. So we like you know, we like Wallas far Ago, we like Bank America, we like JP Morgan and a number of other financials that we own that that would enjoy better interest rate spreads. But also, far more important, a lot of main street activity, right, a lot of little nicks out of assisting clients with the financial services they need from living life and getting married,

having kids and doing those kind of things. Afflack is the largest seller of supplemental health insurance in the United States America. And we ask a lot of people who number two is. And I've never met anybody besides us that could tell us, And and so when you get a child is the first time that you really seriously consider supplemental health insurance. So we're having a baby boom between the ages of thirty and forty five in the

United States right now. Wall Street Journal had a piece, uh like it was about two months ago, and it showed that last year's birthing was flat. But birthing is flat because we've had a monumental drop off in the last twenty years, reduction in teenage pregnancy and a drastic reduction in births for women twenty five. So to be flat and you've got a big drop off in the people that we're having kids over the last twenty years. Guess who had to pick up the pace, and that

is Uh. Women are waiting later in life, get going to college, great in a career, getting married, and then having their children in the thirties. There's an explosion of birth rate between thirty and forty five. Sounds like a good,

solid trend to me. That really lays the groundwork for stronger fundamentals across the country right the culture, the economy, the productivity, even burst your half away, uh one that you feel go ahead, no, no, uh, let me, let me just caution everybody though, remember in our thesis, Yeah, it's great for Main Street, but it's gonna be a lot tougher on Wall Street. Now. First of all, the as the interest rates rise, the history would be that

that compacts price rze ratios. So for people that have been way over paying for four or five year out earnings estimates, when those interest rates rise, what people are willing to pay for money that comes a long way down the road goes down. So we're very positive about what we're positive on, but we're also very negative about the way that people that have bought stocks just for the dividend or or others. So Berkshire Hathaway is unusually

well positioned for almost any environment. They have seventy billion dollars sitting in cash to make their next acquisition. Uh they are a huge holder of financial instruments a lender, but fit would love for capital get more dear right, he would love for interest rates to go up and for price owners ratios to go down. He's the largest

owner of Bank America American Express, while Spargo. He just recently asked for permission to exceed ten percent ownership of Walla Spargo and uh so he you know he owns the second largest residents of real estate brokerage. Uh. He owns the Shock carpet, the Benjamin Moore paint, he owns the railroad. I was near my hometown in southern Washington a couple of a couple of days ago, and the train went by and about six of the cars were finished wood, heading west on the Burlington Northern Santa Fe.

And I promise you five years ago the train didn't have finished wood. It had logs, and it was headed east to China. Well, that's an interesting trend to just really quickly south Washington. Which town is your hometown, wash Google? And I just ran into one of your high school friends, Glenn, at the talk I did in Everett, Washington yesterday, and she said to say, Hi, all righty, Well you know what's Sugle? I know that very well. Right across the

Columbia River from Portland's really quickly. Wells Fargo is another company you like. Was interesting when the odds jumped of an interest rate increase, the regionals outperform, and so did Wells Fargo. Among all the big banks. People are positive. Remember that the three big banks that we own, they probably hold deposits the United States, and there's lots of fantasies out there about how the fintech companies and these kind of side sideways lenders coming from the outside are

going to do all the mortgages. The problem is you've got to have deposits to make mortgages, right you. You can't just make a mortgage. Somebody has to have the deposits to make the mortgage. So once these young people, and when I say young, I mean below forty start buying houses and cars and large volumes, the banks are are in a position to get alliance share of that business. Bill Smeat, thank you so much for joining US. Chief

executive officer, Chief investment officers. S Meet Capital Management were the two point three billion dollars under man in Chaman. He's located in Seattle. Millennials, they're having families, they're having kids, they're building homes. That's going to be the behind a nice move up in stocks for some time. On Kathleen Hayes, this is Bloomberg