We’re in a “classical economic recovery” says Cole Smead, president of Smead Capital Management. However, he’s worried that “young, dumb” investors could lose everything when the market comes crashing down.
He says the current economic recovery from the coronavirus pandemic involves two major areas, autos and housing. He adds that this bodes well for the overall recovery. This comes due to said sectors not seeing a recovery during the 2009 Great Financial Crisis.
“We’re having a classical economic recovery in the United States led by autos and housing, and that bodes incredibly well for the economy and I think people are underwhelming how important that is to the recovery,” said Smead.
He added, “If you look back to the ‘09 recovery, autos and homes never recovered. So I say it’s classical because if you look at the recession in the early 1980’s, you had autos and homes move in the 1980’s coming out of that. We never saw that in ‘09. We never threw money at this problem like we are now in ‘09. Never did it. We are going to do more stimulus post World War II than anything we’ve ever seen, and yet we had a deeper recession in ‘09.”
He was asked why we need more stimulus if the recovery is as strong as he says it is. To this, Smead said the amount of stimulus today is a “pittance” compared to 2009. That year, American households were in their worst shape in history.
“If you compare this to ‘09, this is a pittance relative to ‘09. The households of America were in the worst position in the history of the United States of America, and in that case they had the highest debt service ratio in the history of the data. If you look at that same data point right now, we are at the lowest debt service ratios among households in the 40 years the Fed has tracked the data.”
He is worried, however, that when the stock market comes crashing down, there will be plenty of younger investors that get wiped out. He says despite all the stimulus money, even the Federal Reserve “can’t save a stock market.”
A “Total Nightmare”?
Additionally, he said “young and dumb” investors are creating a “total nightmare” in the markets. These investors end up buying up everything in sight at ever-higher valuations and gambling on short-term options.
“The buying that went on in August and September is a 10-year phenomenon the likes of which we have never seen, among millennials and in the risk-taking among people that don’t want to own bonds and want to own overpriced U.S. quality businesses, it is of record proportions.”
“They are buying bullish call options that expire inside two weeks. There was ($500 billion) of bullish call options bought in a four-week stretch by small retail traders,” Smead said. “In ’99 it was $100 billion, in ’07, it was $100 billion,” Smead added.
He points to Microsoft as a stock that at today’s prices won’t provide a return for investors over the next 10 years.
“Microsoft is a wonderful company. But at 40 times earnings, there is a 0% chance of that producing wealth for someone over the next 10 years that will meet their needs.”
“We spend half our time right now telling people how dangerous things are.”