What’s Next After Meltdown (Uncut) 03-07-2025

S&P 500 In ‘Doomed Position’; What’s Next After Meltdown | Bill Smead

We have been arguing that the S&P 500 has been in a bit of a doomed position. Stocks are still nearing all-time highs, although just earlier this week we’ve touched the bottom to 2025. Is this a technical breakdown for you, just looking at this pattern? Stock market is continuing its sell-off on Tuesday, March 4th.

The Dow is down about 500 points. The Nasdaq is now flirting with correction territory. So what is happening? Tariffs obviously are front and center in the headlines.

Is there something else spooking investors? Is this the beginning of a bear market? We’ll find out with our next guest, Bill Smead. He is the Chairman and CIO of Smead Capital Management. Welcome back to the show, Bill.

Good to see you. Thank you for having me, David. Let’s just talk about what’s going on this week.

Trump announced that tariffs on Canada and Mexico are going to be implemented. He confirmed those. That announcement was met with swift retaliation from trading partners.

Prime Minister Trudeau from Canada announced similar tariffs on American imports, and markets are not taking it well. Meanwhile, the Atlanta Fed GDP Now index or forecast is tracking a contraction in the next quarter. Negative 2.8% real GDP growth is their latest reading.

This was a dramatic decline from just 3% or 2% two readings ago. So let me just put this CNBC article up on the screen that highlights recent volatility from the markets, and I’d like you to comment on what’s going on this week, we can comment on the broader economic growth development that’s happening in the background. Yeah, well, again, thanks for having me.

We are in a sell-off that in many ways makes sense. We have expected and predicted that the S&P would have a hard time at some point in time. And the only problem is they’re giving us as hard or harder time than the S&P in the process of giving the S&P a hard time.

So it’s, I guess you better be careful what you wish for as a portfolio manager. But what is the case is the President of the United States is violating David Ricardo’s theory of comparative advantage, which was something we learned to get our economics degree at Whitman College in Walla Walla, Washington. And the theory was he used three countries and three different products.

And he said, even if one country can make all three products better than the other two countries, the most productive thing in comparative advantage is the one that they do better than the other two. Spend all your resources doing the one that you do better than the other two and let those other two countries make those other two. Then the most total good will occur.

And that is not what we’re up to. That doesn’t seem to be what we’re up to. So if you’re not going to do Ricardo’s theory of competitive advantage, I guess somehow they think that this is going to accomplish something.

The U.S. may still have an absolute advantage over its trading partners, even with tariffs. Clearly, the market doesn’t agree with what I just said, which is why things are going down. But can you just comment on whether or not the economy is indeed going to suffer somewhat from what’s been announced this week? Yeah, well, the interest rate on the 30-year mortgage was up around 7.15 percent.

With 180 million Americans under the age of 40, there should be a steady stream of buyers over the next 10 years because first-time homebuyers are now more like 35 to 38 than they are 25 to 28. So we’ve just got a slug of people that might want a home for the next 10 years, but no one has want to touch our homebuilders because of how high the mortgage rate was. And now, obviously, a tariff on lumber is going to make building the home a little bit more expensive if you’re using Canadian lumber, which, of course, British Columbia, close to where I grew up, is a powerhouse in lumber.

And so the market isn’t doing what it would normally do when the 10-year treasury rate moves from close to 5 percent down to 4.2. Normally, that would cause a dramatic decline in a mortgage rate, and it probably will if it stays there for a week or two to offset that. But it’s just kind of bizarre. I mean, literally, macroeconomics are completely dominating the stock market right now.

Are we seeing widespread discomfort across all sectors, though? Take a look at this heat map from just today. This is Tuesday’s performance. For the exception of Nvidia and Google, most other stocks and sectors are in the red, Bill.

And this is the most positive picture you’ve had all day. I mean, if you had turned that on two and a half hours ago, it was all red. Everybody was red.

On Monday, it was consumer staples were up. Health care was up. Utilities were up.

So the defenses were holding up quite well earlier in the week. And now Tuesday, everything’s down. So that didn’t even apply anymore.

Well, you’re right about that. So, yeah, I mean, that is what we have been arguing that the S&P 500 has been in a bit of a doomed position. It got overconcentrated in very aggressive, very popular, very highly popular common stocks, and the concentration hit record levels.

You’ve got the American public is 48 percent of their Z1 Federal Reserve household assets are in common stock, led by the 60 to 80 year old age group, which is the largest 60 to 80 year old age group in the history of the United States. Baby boomers. I’m one of them.

And we own a disproportionately large part of the equities owned in the United States, even though there’s some younger billionaires from technology. So here we are as a population of 60 to 80 year olds way over owning stocks, right at 60 to 80. You know, you should have more of a balanced approach because there will be declines, there will be bear markets.

And sometimes those bear markets, you just don’t come right back from. So we have been concerned for a number of a couple of years that we were going to have a lost decade like we did from 1999 to 09. And like Buffett talked about at the Allen & Company Summit in 1999, that the lost decade was 1964 to 1981.

The Dow was the primary index in those days, David. And from 1964 to 1981, the Dow went from 875 to 875 in 17 years, which means you collected dividends and the inflation rate was averaging very high during that 17 years, peaking out at 14% at one point. So you lost money or made no money for 17 years on an inflation adjusted basis because your dividends got eaten up by inflation.

So your purchasing power declined during a 17 year stretch. So Buffett said in this Allen & Company Summit, he said, what caused that? Well, the answer is interest rates went up constantly for those 17 years, right? We ended up, I sold someone a 90 day T-bill in 1981 at 15%, 90 days T-bill 15%. So just think of the competition, what do I want to buy a stock or do I want to buy a T-bill that pays 15%? Well, the history of stocks was that counting dividends, you made nine or 10%.

If somebody wants to guarantee you that return, you’re foolish not to take it. I can remember pitching Coca-Cola at six times earnings, paying a 5% dividend back in 81. And only my dad and my cousin Gary said yes, the other 98 people said no.

And I thought, okay, you better start selling bonds, Bill, if you want to make a living as a young stockbroker. Let’s take a look at this screen now. The S&P 500 over the last couple of months.

So you were right. I mean, there were certain periods throughout history where stock markets did not yield you a good return. There were certain periods, of course, where stocks outperformed pretty much everything else.

Right now, we’re just looking at the last couple of months, though, right now, Bill, stocks are still nearing all-time highs, although just earlier this week, we’ve touched the bottom for 2025. Is this a technical breakdown for you, if you’re just looking at this pattern? Well, I’m not a technician, but I wouldn’t be surprised if it is. Okay.

And then the weirdest combination of this thing is, you know, they’re hanging on to their most popular securities like doggedly, right? I mean, are you going to want to go through a bear market and probably a multi-year bear market with 61 times earnings Costco shares, which is the equivalent of the 1972 peak in Coca-Cola at the top of the nifty-fifty, 60 times earnings. So it’s a great company. And normally a great company that’s as old, it went public in 1985 as Costco, it’ll trade, you know, consistently in the upper teens or maybe a 20 multiple.

But now to get to a normal multiple of 20, you either have to lose two-thirds of the value soon, or you basically have to spend a lost decade going nowhere. I think that markets should be fairly pricing in the trade war. And I bring this up because, Bill, last time we’ve already had a Trump first term where we saw tariffs being implemented.

Take a look at what happened over the course of the four years during Trump’s first term, 2017 to 2021, notwithstanding the pandemic, which saw this big downward move. Let’s just discount that. But 2017 was when he was elected.

2018 inauguration, big move downward. And then, of course, later on in 2018, October, the escalation of the tariffs trade war saw the S&P go down 20% before swift recovery. I mean, this is starting to look a lot like the beginning of September 2018.

It’s just deja vu, but I’ll let you comment on that. Well, Yogi said it’s deja vu all over again. So again, the this urge to right every wrong quickly is, from a political standpoint, is unusual.

Let’s just put it that way. You know, usually somebody’s got a list and they say, OK, here’s the three things I’d really like to get done right now. And then you’d go to the next three, you know, maybe three or four months later.

And then three or four months after that, you’d get to the next three or four things. These folks seem that they want to do everything at once and they want to do it fast. I think somebody calls it just act swiftly and break things.

And so they’re breaking things. The problem is when you’re at record highs in the market, the problem is when you’ve got record participation, it just begs the question, how are you going to feel when the investment markets react like you’re showing there? I remember 18 was a good year for us because how little we lost. How did you manage that? Well, we were, let’s see, in 2018, but first off, of course, we haven’t been big in tech all along and we were not participating in the energy business at all.

And of course, the drill baby drill thing put a nice curse on the energy business, which ironically, now we’re overweight in energy and we’re getting clobbered, even though there’s almost no chance that the industry is going to drill baby drill. And we now have a TV show called Landman, which the artistic people always make a movie or a TV show about an industry when that particular arena is about to decline. And what’s going to decline is over the next 10 years, production from the Permian Basin is going to decline.

And the weirdest thing is that our neighbors in Canada, in one case of stock, we own Oventive, that’s in the Montney, and the other case, Synovus, have 25-year life wells that are going to come in really handy to everybody once the Permian starts to run out. So when you frack wells, you get 60 or 70% of the production the first three or four years. And it’s almost all fracked wells in the Permian.

So therefore, the Permian Basin, the last 10 years, when Trump succeeded in drill baby drill, the production the last 10 years in the Permian Basin was the swing supply that kept oil prices down. That was the swing supply. And what you’re going to have happen is the swing supplier is going to dramatically peter out over the next 10 years.

And then what’s going to happen is oil is going to get scarce. And of course, gas is a product of drilling oil. So you can’t get these companies that were punished for drill baby drill to drill baby drill.

They’re not going to do that. It’s much easier for a large U.S. oil company to buy a smaller U.S. oil company to expand the oil that they own in the ground. Okay, let’s talk about that then.

So what incentives do Scott Pescent and his associates have now at their disposal to encourage these companies to drill baby drill? Remember, he wants three million additional barrels of oil produced per day. Yeah, I don’t know. I really don’t know.

The Arctic Reserve is untapped. And there might be an animal up there, though. I’m not sure.

I don’t know if there’s an animal that can survive. Maybe a polar bear lives up there. And the reality is most of the really good ways of getting oil in the ground are being used.

And therefore, we like our Canadians. We like Apache, which has been getting kicked around, which has large production in Suriname. So basically, this resource will get very scarce over the next 10 years.

Prices will rise, and you won’t even have to sell more to make really good money. You’ll just have to sell the same amount. Now, the truth of it is we won’t use the same amount because as around the world, oil and gas is the least expensive energy.

And in places like Africa and India and places like that, they’re using it. The Chinese and the Japanese get all their electricity from coal fired plants. And in the United States, we get 40 percent from natural gas.

So we’re not shocked at all to see natural gas today is I think it’s up in the like 440 or 450 $4.50 range. And it was $1.80 a year ago, if you’re if you’re wondering. So when you read that Amazon or Microsoft is going to start up a nuclear reactor, and then you watch investors bid the price of that electric utility up, that might be the dumbest thing I’ve ever seen, because electric utilities are highly regulated and the returns that they can get are highly controlled by the regulatory agency.

So if you want to make a lot of money from electricity, you’ve got to invest in natural gas because the price of it will go up with the demand. OK, so then what’s your outlook for the energy price? I’m sensing you’re bullish given the the supply boost that we’ve seen in the past for your prognosis may not be there in the 22 end of the year. And then we’ve had a dead wrong, which we’ve been going through a correction now for two straight years.

Now, oil keeps seeming to hold its ground in the mid 60s on US. OK, and Brent seems to hold its ground at about 70 bucks. This idea that the Russians are going to snap their fingers and start producing a lot more oil.

Are you are people kidding me? You don’t think they had to pump a lot of oil and sell a lot of oil to the Chinese to afford attacking Ukraine like they did and keep attacking and keep, you know, killing people and letting their own people get killed? They’re not going to pump more when there’s peace. They were pumping more to get the money to fight. So that’s a urban myth that floats around out there that the Russians.

Wait a minute. This run up in oil in 2022, how much of that was actually due to Ukraine? How much of that was due to Ukraine? Yeah, the run up of oil from 70 bucks to 123 in 2022. Well, some of it was.

There’s no question about that. But here’s what’s more important. That low on the far left hand side of the chart in 2020.

Yeah. At that point in time, commodities as a group and oil certainly and oil stocks as a percentage of the S&P, it was a 220 year United States low. In other words, commodities had never been cheaper relative to common stocks in U.S. history.

Depression of 1825, depression of 1875, depression of 1930. Commodities had never been cheaper than common stocks, that much cheaper than common stocks in the entire history of the United States of America. So we have this huge rally, first burst.

And, you know, if people are technical in nature, right, what do you get? You get that first huge burst. And when you start a major bull market, then what do you get? You get a correction that’s designed to scare everybody out of that market. And boy, have we ever done that.

Right. Now, part of that is because half the people that participate in the stock market and a lot of people that participate in the stock market would still like to have Nirvana, ESG and environmental wonderfulness. Now, even though they’ve all lost their butts on terrible investments that were heavily government subsidized from the Inflation Creation Act in the environmental area, right, people have just lost, they’ve done nothing but lose money for four or five years and all that money, especially Americans poured into the ESG funds and ETFs.

The so half of the investors still hate the oil and gas business and still think it’s the ruin of our society. OK, well, is it the ruin of our society? No, it’s not. It’s not.

In fact, what assumptions are they making that’s wrong, Bill? Well, first of all, all you have to do is read into the verbiage, right? So 10 years ago, we’re sitting here. What would the ESG people have said? Global warming. Global warming.

Now, quick question, David, what does a criminal do when they get out of prison? I guess that depends on which criminal you ask. I don’t know, Bill, what do they do? They go to an alias. Interesting.

OK, OK. So what’s the alias? Climate change. Climate change, because there wasn’t the demonstrable warming in that prior five or six or seven years.

They thought, well, wait a second, we’re going to get busted for bad advertising. We got to change this and we got to get backed up about the hurricane in Florida. And because the temperature really isn’t rising, even though it gets hotter than hell once a while here in Phoenix.

OK, so what’s the point of that? They went to an alias because their original thesis wasn’t playing out like they said. So if you couldn’t believe them the first time, why should you believe them the second time? Is it random? Is it random? I don’t know. There’s some pretty good science out there that says if the globe heats up a couple of percent, a couple of degrees, that agriculture will flourish and you’ll feed the masses, which is matters to people in Africa.

But it doesn’t matter to people in the United States of America. Yeah, because the masses are already fed. OK, so then turning.

Yeah, let’s let’s let’s turn back to broad markets. We can finish off an energy later and the interview broad markets then. So, I mean, we talked about this widespread discomfort across all sectors.

What about growth versus value? Are we seeing a rotation from one style of investing into another or not so much? We have the weirdest dichotomy right now, David. We’re not big technical analysis people. Yeah, but I am an observer of what’s gone on for the last 45 years in the United States.

OK, the weirdest thing is the people that are members of the American Association of Individual Investors, AAII, has been pulling their their subscribers for decades. And this most recent week, we got one of the five or six most bearish outlooks from that group in mass, 60.6 bears, 19.5 bulls. There’s only been five readings that negative in the last like seven, eight years.

OK, but the investor’s intelligence poll of newsletter writers, which I think is thinned out a lot, so might not be as useful, is a lot less bearish than that. So what we know is people that pay to be part of that poll pay membership who are likely do it yourself investors, many of them probably 60 to 80 years old, are as bearish as you ever get. And maybe it’s because they’ve been around a block a few times.

But that would indicate that the things that they’re likely to want to own are cheap, which would be value and better dividend paying stocks. That’s what that group of people prefer to own, but have been get in it. They’ve been in a torture chamber, getting beat up like crazy, owning those things in the last couple of years.

Therefore, they got really bearish from doing that. Whereas if they owned Nvidia and and the Mags, you know, the Magnificent Seven, they’d have made a ton of money and they’d be very excited about life. What’s interesting to me is what other markets are doing.

Take a look at my screen here. The TLT has been holding up quite well year to date. So maybe this is just rotation from equities into bonds.

Is that what’s going on right now? Should we should we just be long bonds for the rest of the year? Is that a safety play for you? Well, look, we believe that if you make 4% a year in a treasury bond over the next 10 years, you will wipe the floor with the S&P 500 index. So therefore, if you’re 60 to 80 years old and you’re living out of your besides your pension and or Social Security, you’re living out of your investment income. I mean, it’s a no brainer to have a substantial amount of money paying you a guaranteed rate of interest.

Well, where’s the yield headed, though, the 10 year yield? Let’s take a look at the 10 year. Yeah, well, that’s a that’s a argument between my son and myself. Look at look at how much that’s dropped.

Yeah. And it’s breaking to a new low. Right.

So Cole thinks the economy is going to be stronger than people think. And I think it’s going to be weaker than people think. And and so there is a very high spread between mortgage rates and the 10 year treasury.

Historical is maybe 150 to 180 basis points spread. So as you can see, where are we at the moment? 421, 421, 180 basis points would be a six percent mortgage in the United States. And I think that I see on TV this morning, it’s like 660.

What the heck is that? Why is that the case? And the answer is that people are scared. Right, they’re scared. And therefore, to us, that spells opportunity.

That’s one of the things we’re positive about the home builders, despite the fact that a lot of psychological circumstances are working against them currently. Wait, they’re scared in the sense that they think the economy is not going to do well. And so therefore, they’re not selling their homes now.

No, no, no, no, no, no, no. The the baby boomers won’t sell their house because they want to die in their house. OK, nobody wants to go to the nursing homes that caused trouble during covid-19.

OK, that’s just you can put that in the bank. They’re going to resist going into a nursing home like no generation before them ever resisted. So so so repeat your question for me.

What what what what what what are people scared of right now? And how does that translate to a higher mortgage rate that you might expect in today’s economy? Well, you know, I I wish I had to answer that. I’m betting that the that the the scare will get reduced. Right, in other words, over time, that will return to a more normal spread.

I mean, I mean, just take a look at the 30 year mortgage rate. It hasn’t been tracking the 10 year for sure. It hasn’t been tracking the Fed funds rate.

I mean, it’s come down a little bit off its top, but it’s more or less just stabilized. And the question is. When’s it coming down? Yeah, yeah.

And the answer is somebody asked me like three weeks ago, I said, look, first, the Federal Reserve brought interest rates down to a quarter percent. So the source of liquidity for the stock market or for the economy was coming from the Fed. The second thing that happened is long rates came down.

And despite the fact that the federal government was borrowing money like drunken sailors on leave, that federal government monetized debt, that twelve trillion dollars of federal government monetized debt has been out there sloshing around for the last three or four years. So so in the reason that tightening credit from a quarter percent on Fed funds to five and a quarter in a year did not. It caused a bear market for one year, but didn’t permanently damage the market.

It’s made new highs since then is because that federal government monetized debt is still out there sloshing around. Well, that’s now getting used up. And Elon Musk is psychologically breaking the back of that as a source of liquidity.

So if the liquidity doesn’t come from the Fed and the liquidity doesn’t come from from the federal government, where is the liquidity going to come from? Because you will have to have liquidity come from somewhere. And the answer to the question has been being answered in the stock market. That’s where liquidity will be created.

Selling stocks will create liquidity. That’s exactly how it works. In fact, David, it’s so funny.

You know, I’ve been in this business for forty five years and in my first ten years, the hardest thing to explain to novice investors was that when the economy’s lousy, the Fed is friendly and they bring rates down and increase the money supply. That money has no place to go first into bonds as the money market rate goes down. And then once the bond rates go down into stocks.

And that’s the way bull markets are born, right? People are scared to death of the economy, but the liquidity floods in. It’s got no place to go. It goes in bonds and then it goes in stocks.

What’s the opposite of that? The economy is gangbusters, right? The economy is strong. And when the economy is strong, Main Street uses the money. NVIDIA is causing massive capital spending, right? The AI thing is massive capital spending.

The economy is using the money. Where is the liquidity going to come from if the Fed’s not doing it? And if the if the Treasury is not providing liquidity, where is it going to come from? And the answer is when the economy is strong and the Fed and the federal government are not providing liquidity, the liquidity comes out of common stocks to do what happens on Main Street. Are you implying then, Bill, that right now the economy is strong, which is why we’re seeing a sell-off? Well, it has been strong.

It has been strong. But once you get, if you do enough damage through the lack of liquidity, again, you know, investors are like Pavlov’s dog. You know, people my age for 40 years, they get up in the morning and they go check their screen and see they’re getting rich in the stock market off and on for the last 40 years.

So they wake up and they get in line. Or as we used to say, dogs chase cars and people chase stocks. Well, guess what? If that’s the way it works, guess what happens when stocks go down? Yeah, makes sense.

Bill, I put this chart up. I’ve overlaid the 30 year mortgage with the Fed funds rate over over the longer term. You can see that there is a relationship, you know, notwithstanding some gyrations here and there.

The question is, then, what do you see the Fed funds rate going this year? Well, here’s what’s going to be interesting. Yeah. As as the federal budget gets cut and that liquidity gets pulled away.

Right. The the for example, the environmental money gets pulled away and quits feeding and subsidizing the green, the green technology and the green energy type stuff. That will that will hurt that stuff very badly, because if you’re uneconomic, I mean, if you aren’t making a lot of money from what you are doing with those fat subsidies, you know, when are you going to make money? I mean, look at Tesla stock.

Does it look like people don’t expect to get a seventy five hundred dollar tax credit for buying one? Where would they be without the tax credit? So so again, we think at some point in time here, what’s going to happen is the I believe the economy will slow. And at that point, I don’t even know if the Fed will have to lower interest rates. What will happen is that mortgage spread will come in and we’ll have an economic recovery from the next recession led by housing, which is traditional.

Right. That’s that’s work like that for a hundred years. OK.

Another aspect of the economy, which is something else that the Fed looks at is the labor market. That has a dual mandate, inflation and unemployment. We talked about the inflation front, unemployment.

What do you see happening this this year? The unemployment rate currently is hovering around. What’s the latest number about four percent? Yeah, four ish. And it’s been steadily rising since twenty twenty three.

But, you know, it hasn’t caused a major concern for the Fed yet. Labor market evaluation. What is your assessment given immigration policies from the Trump administration, given the doge layoffs that may or may not have an effect on the private sector? There’s a lot going on.

Well, it looks like a lot of people that live and work in Washington, D.C., are going to need to go someplace else in the country because it doesn’t look like the spendy restaurants in Washington, D.C. are going to have as many customers as they used to have. So, again, the the world kind of got upside down in a to a certain extent. For example, we know that in most of the restaurants and fast food entities that we frequent in our day to day life, they’ve been they’ve been offering twenty dollars as a starting hourly wage here in Phoenix.

And Phoenix isn’t one of the most spendy places in the country. It’s not New York. It’s not San Francisco.

It’s not Seattle. It’s worse there. So what’s been happening is to find people that want to do basic, relatively unskilled work.

The price just goes up. Now, the truth of is our society is better off. The lowest paid people are getting a lot better piece of the pie, right? That there’s nothing wrong with that.

But but the fact is that that is raising costs and that cost gets passed through. I mean, I haven’t tracked it exactly, but I’m guessing I’m paying 30 percent more for the same thing that I would have been paying for two years ago at those restaurants and at that at that drive through window. All right.

So you’re not concerned about the unemployment going much higher this year, Bill? Oh, I think it will go higher. It will go higher. And that’ll put a lot of pressure on the Fed and that will put a lot of pressure on on the administration as well.

See, see, Trump thinks if he can just get inflation down, right, if he can jawbone oil prices down, that that that will get inflation down and that people will love him for that. And there’s nothing wrong that cutting out government waste. We’re all in favor of that.

It’s just that, you know, things that you could do in six months, he’s trying to do in six days. So the pace at which he’s doing it is troubling. But but I think he’s trying to take full advantage of his popularity and political capital that he got from.

Well, maybe these government workers that will get laid off would just be absorbed by the private sector. What do you think? Well, I mean, eventually they’re they’re probably well-educated people. But again, what what what what we what we need is carpenters and plumbers and electricians and machinists and welders.

And we need skilled skilled labor that that’s what there’s a shortage of skilled labor. And then there’s a shortage of entry level, unskilled labor. And I don’t think those people getting laid off in government qualify for either one of those.

All right. So let’s sum up the investment theme for 2025 and 2026. We’ve talked about energy.

We’ve talked about this. This is worry across all sectors. I mean, is it just one of those things where you put your money and in a hot trend like AI and just ride the wave and forget about all this noise happening in politics, geopolitics and doge and stuff like that? Well, Charlie Munger at the ninety nine annual meeting said that if you have a financial euphoria episode and by the way, he he felt already at the end of twenty one that we were in one.

So just imagine where we got to in the last year compared to twenty twenty one. So he says if you get in a financial euphoria episode, he says it’s like a Ponzi scheme or a chain letter. And if you add a legitimate development, it’s like mixing raisins with turds and you end up with turds.

So what does he mean? So AI is a completely legitimate development, but the worst bear markets in US history came after the two or three year surge on the most important legitimate developments of the last hundred years. Radio in nineteen twenty nine, the semiconductor and walking on the moon in nineteen sixty nine, that the Internet will change our life in nineteen ninety nine and AI in two thousand and twenty three or twenty four. So what people are doing is they’re playing with fire.

Investors right now are like they’re at the ball and the clock strikes twelve, it’s all going to turn to pumpkins and mice and there’s no clock on the wall. They’re riding this excitement and what’s going to happen is when it breaks, there will be no liquidity, right? There won’t be a federal government to provide liquidity. There won’t be a Fed to provide liquidity.

The only liquidity will come from selling. And if that deep thing wasn’t the warning shot across the bow, people need. I’ve just about never seen one before.

So my question is, all right, so they’re raising this liquidity, they’re selling. What are they buying with that money that they’re raising? Or maybe they’re just parking this extra liquidity on the sidelines in cash. Well, obviously, they’ve been buying the 10 year treasury.

Yeah. With the money and parking it in money market funds, which still pay probably four percent, even on a treasury money market fund. So that’s which, by the way, is beating inflation.

Can you expect still positive real returns for the money market funds going into the twenty twenty six? Well, I know. But but but again, it beats it beats losing money. So most people will own a portfolio that is susceptible to the worst that this thing can hand out if it unwinds.

And again, they’re pretty good at beating up value stocks in this market, but they haven’t been as good at beating up growth stocks. Until just lately. Yeah.

So that’s next. Then what’s going to get harder in the coming weeks? The Russell or the S&P? Oh, ultimately the S&P. Really? That that trade has to unwind.

It just because, see, it wasn’t just tech. It was wide moat, high quality. That’s the other just total that I mean, wide moat, high quality just went gaga.

That’s why Costco trades at sixty one times earnings. You know, look, I mean, Coca-Cola stock has done poorly ever since Buffett bragged about it. Nineteen ninety seven.

And it trades at a high multiple. It’s like I don’t understand it because but it’s high quality wide moat. So they’re paying up for that.

Like it’s oh, this is a staple I can crawl into to get out of the weather. Well, if it’s 30 times earnings, it’s not going to be any protection. I bought the stock in for my dad and my cousin in 1981 at six times earnings, paying a five percent dividend.

After it was 60 times earnings in 1972. So we’re not going to get that today? Probably not. It takes love, takes time.

And yes, it’s hard to find. I think the song says these things all play out over the next three to five years and we don’t get to know exactly the timing of it. But again, if you’re in the military and you’re in the Navy and you see a warning shot set across your bow, you pay real close attention.

If I was on a Navy ship off of Taiwan right now and somebody fired a shot across my bow, I’d pay real close attention. Yeah, absolutely. All right.

Well, final question. So you by the way, you mentioned your son, Coltsby, who’s been on the show. Cole’s great.

There’s a difference of opinion over whether or not the economy is growing faster or slower than expected. What is the fundamental difference here between you yourself and maybe an economic bull like perhaps Cole? What assumptions are you making differently here? Yeah, well, first of all, Cole is he’s a great thinker and he is what is he? Forty two this year. You know, I noticed a lot of younger people I’ve interviewed.

Thirty five. Forty five are a little more bullish. A lot of older people are a little more bearish.

It’s just a generational thing. You know, he’s got more time on his hands. I mean, it’s just you know, it’s easy to think about 10 year time frames when and I think more in five year time frames.

And that would be the biggest disagreement. By the way, if he’s right and the economy stronger, inflation is going to be a huge problem. You know, it’s too much money.

Federal government monetized debt, 12 trillion in the hands of too many. One hundred and eighty million people under 40 chasing too few goods. That’s the classic definition of inflation.

The last big episode from 66 to 82 was too much Vietnam War monetized debt in the hands of too many baby boomers chasing too few goods. So it’s just the difference between the two groups is the baby boomers got married between 23 and 33 and the millennials get married between 28 and 41. All right.

Excellent show. Yeah. David, one last thing I want me to mention that we’d like to do something up in Canada.

So if somebody would like to entertain us, in other words, have a Canadian version of our funds, we’d love to hear from them. OK. All right.

Can you tell us more about that right now? We’re still in. Well, ironically, years ago, when we first started our fund, we actually talked to some people up in Vancouver about doing just that. And it wouldn’t have been a good time to do it.

But now it’s probably a better time. By the way, we I grew up loving Canada fishing trout in B.C. as a 10 year old up near Hope, B.C. And it’s very frustrating for me to watch our country give our dear friends such a hard time. Yeah.

You’re right up in my neck of the woods. I well, I’m not currently in B.C. I’m traveling, but I’m based in B.C. So, yeah, beautiful place. Yeah.

And so you’re so you’re probably gonna be looking at a lot of resource sector stocks then. Right. If you’re going up to Canada for.

No, no, not not not to not to do a Canadian fund to do a version of our existing funds in Canada. I understand somebody that would like to to be a partner on doing something like that. You know, the Bank of Canada, by the way, since let’s finish off the Bank of Canada has projected that the Canadian economy is most definitely going to go into recession following the tariffs.

So, yeah, I think it’s going to hurt Canada more than the US. But that’s my opinion. What do you think? It’s very possible.

And again, it’s you know, I’m 66 years old. We’ve got the greatest friend and the largest landmass north of us oceans on both sides. I mean, this country is so blessed.

It’s like I can’t imagine shaking your fist at such a blessing. We’ll see how this plays out. Maybe it’s all just a negotiating tactic.

We’ll see. Could be a bluff. I mean, the guy likes to bluff.

Yeah. Well, I’m going to put those bluffing back. Twenty five percent tariffs on U.S. exports right away.

So we’ll see. Good to good to see you again, Bill. Where can we follow you? I know you have your own show.

Well, we have the Book With Legs podcast. I write regular missives at Bill at Smeadcap.com. You can find all of our stuff at Smeadcap.com. Just go to Smeadcap.com and you can you get there’s a wide menu of writing and podcasts and all of our all of our stuff is there. OK, we’ll put the links down below.

So make sure to follow Bill and and book a book with legs there. Thanks very much, Bill. Thank you.

Yeah. Blessings. Blessings to you.

We’ll see you again soon. Thank you for watching. Don’t forget to like and subscribe.