Stock Market About To Get ‘Robbed’: Mania Is Breaking | Bill Smead

Bill Smead (0:00)

They cut rates 200 basis points. That's what will happen, that's what will happen when the mania breaks. We're in the point of the market now. All anybody wants is AI related stocks, or space stocks. They tightened credit, and the market peaked October 25, 87

And then it fell until the 19th of October, and then it went down 22% in one day.

David Lin (0:29)

What else do you not like right now? Bill Smead, founder and CIO of Smead Capital Management is back. When rates rise at this kind of a pace, to this kind of a level, history has shown that something usually breaks. We're going to find out what that thing is today, and how investors can prepare. Importantly, we're going to find out where oil is headed next. We all want, by we I mean, regular consumers, not oil investors. We want lower gas prices, not higher.

But will we get that anytime soon? Spoiler alert, no, we won't. And this is why.

Bill's also going to talk about why the tech sector is going to blow up any minute now. And I like to thank US. GoldMining for disseminating this video, but more on that later. Bill, welcome back. Good to see you.

Bill Smead (1:14)

Thanks very much for having me.

David Lin (1:17)

Appreciate your, yeah, appreciate your attendance today, and thank you for enlightening us on what's going on. A lot of people are wondering why the global bond sell-off has been happening even now. And I think this is a separate question, whether or not the Treasury has been successful in their intervention.

Clearly, the bond yields have kept going up since August 19th, but to Scott Besson's point during the House Financial Committee testimony, the counterfactual is, had they done nothing, yields would have been higher. Now, that's a separate issue. Let's just talk about why you think bonds are selling off right now. I've shown this chart, and I'll leave this on the screen as I get your answer. I've shown this chart to a lot of people, which is the 10-year yield, the US 10-year versus the oil price. Now, I will stress that this correlation that we're about to see here has been stronger in recent months versus historically like many years before, but it still stands to reason there is a correlation. Some people said this is nothing more than a coincidence. What do you think?

Bill Smead (2:23)

Well, I love the way you've postured the question.

It's a great way to posture the question. First of all, the biggest mistake that I think most people make in investing is they forget about the fact that there are four main academic disciplines. History, economics, math and psychology.

And so, what you have to look at when it comes to interest rates, first of all, is the economics. The economics are that the federal government of the United States is borrowing money like drunken sailors on leave. Okay. The hyperscalers are borrowing money like drunken sailors on leave. And capital is being demanded intensely to fund a CapEx mania associated with AI.

So, the demand for money is coming from those sources, and that's why it's going up, and that is going to crowd out other borrowers in the process who are competing for that money. So, there's way more demand for money than there is money.

And that problem always relieves itself the way a fever relieves itself.

I remember one of my high school buddies, his dad was a teacher and our football coach, he served in the engine room of a ship in the Pacific in World War II, and he said it would get really hot down there. So, what did they do to cool off when it got really hot down there? They drank hot coffee. And why did they drink hot coffee? Because it caused you to sweat. If you drank cold water, it actually reduces the sweating that your body does. But if you drank hot water, it would cool things off, because you'd sweat like a Comanche.

So, here's the deal. The deal is, this has pushed us way into the same kind of circumstances that all other CapEx phases have pushed us. Which is, there's not enough money to go around for everything that people want to do. And it's going to have to come out of somewhere. And historically, the first place it comes out of is the common stock market, because most of the money, Willie Sutton robbed banks because that's where the money was. Most of the money in the United States is in 20 companies that make up 45 percent of the S&P 500 So when it comes time to rob the bank, that's what's going to get robbed. Now, the backdrop of all this is, normally 55 to 80 year old investors usually provide a lot of the money to people that want to borrow, right? Because they're older, they want income, normally. But they've trained to love stocks since the bottom in 9 They've completely been trained to own stocks. So, for example, Bank of America shows that in the entire history of owning Merrill Lynch and having investment customers, that their customers own the most equity as a percentage of their portfolio they've ever had. Which is incredibly odd because their best customers, for the most part, are 55 to 80 year old people, either getting ready to retire or already retired. Okay, so what does that mean? That means that these interest rates are going to go up until the fever breaks and the two places, the two things that will happen is they will go get money from where it is. And that is the 20 largest stocks in the S&P 500, which will ruin the S&P index trade and it will ruin the trade in those stocks.