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- [00:03]
A
You're listening to A Book with Legs, a podcast presented by Smead Capital Management. At Smead Capital Management, we advise investors who play the long game. You can learn more@smeedcap.com or by calling your financial advisor. Welcome to A Book with Legs podcast. I'm Cole Smead, CEO and Portfolio Manager here at Smead Capital Management. At our firm we are readers and we believe in the power of books to help shape informed investors. In this podcast we speak to great authors about their writings. The late, great Charlie Munger prescribed using multiple mental models and analysis, we analyze their work through the lens of business markets and people. Today's date is December 29, 2025. This is our quarterly book list where we talk about books, books and yes, more books. Hosting this with me is what my father Bill likes to call our crack analyst team. To my right is my colleague Seamus Sullivan, who's our senior analyst. And then to his right is also Will Keenan and Nick Garcia and they are both analysts here at our firm. So gentlemen, this is the second time having you guys all on. So thanks for joining me again I think last summer. So you guys are like my, my six month date every six months. So let's start out talking about what you guys have just read. I will say you guys had kind of a, you didn't have the same books, which I was glad to see. So maybe Seamus, I'll kick it to you first and you can talk about what you've been reading.
- [01:34]
B
No, I appreciate it. So I've two on there. So the first one is 1929 by Andrew Ross Sorkin. I'm sure a lot of viewer or listeners to this have probably already read it. It was I think kind of broadly out there. It was actually really pretty good. I enjoyed reading kind of a refresher about it. I think the backstories he gives on the people involved at the time were kind of interesting. You didn't know kind of a lot of the granular stuff or some color on what was going on back then and the personal reasons that were in play at the time. The one thing I thought was more interesting about it is it's not akin maybe to the temperament of today. I mean you have madness of crowds obviously then and you've got a little bit today. It's more how things were handled back then versus how they are now. So back then you had people have personal loss, you had companies go bankrupt, you had obviously the Great Depression. Whereas today everything is we can't have anybody falter, we can't have anybody Fall. And that dichotomy of back then versus today, I think was kind of the major theme I took away from it is, look, we need to have some ability to have people take loss and refresh the system and, and bring new ideas forward. And that was allowed back then, whereas today it's much more. We have to keep everybody safe. We have to not allow markets to feel discomfort. So those are the primary.
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A
Let's see. I was gonna hand over to Nick. Cause you got one of my favorites.
- [03:02]
C
Yeah, yeah. This is a great book. So when Genius Failed by Roger Lowenstein tells the story of long term capital management and basically how that came together. The hedge fund. And tells you the story of caution around leverage and thinking you're smarter than the next guy in the room. Right. Having all these PhDs, Robert Merton and Myron Scholes working in the hedge fund and they still blew up. Right. And it caused this big panic and how did the Fed deal with it? So I thought it was a very opportune time now to read that book. So I read that book back in college initially.
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A
That's when I ran it too. Yeah.
- [03:41]
C
So I wanted a refresh with our current environment as things are kind of getting crazy here. So like, what can happen? How does that deal with it? And they still to this day say, well, if we could have held on longer, we would have been fine. We, we underestimated the correlation between our trades.
- [03:58]
A
Sure.
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C
And you. We could see how that played out. So it was a very. I thought it was a good moment to go back and read that book again.
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A
Sure. I'll hand it over to Will, who has three, which means Will isn't going on many dates these days. Gentlemen, shout out to all you ladies, single man here.
- [04:18]
D
Too much reading these days. The first book I read was the Aspirational Investor by Ashvin Chabra. Ashvin is widely considered to be the founding father of goals based investing. He was previously the CIO of Merrill lynch in the Institute for Advanced Study at Princeton and is now, through his connection to the School of Advanced Study, is now the CIO of the late Jim Simons family office. The most interesting thing I found from this book is even though he's a physicist by tr, he writes in wonderful prose to explain complex mathematical concepts even to a lowly history major like myself. He put his allocation framework, which is quite interesting for all of our financial planning listeners, in a very simple context where you have a put option, an index exposure and a call option, you can allocate your wealth to these three buckets. That was quite interesting. The second book I read was a book called Birthright about the history of the U haul business which is one of our long term holdings in our U.S. value fund and the Schoen family. It's always a good counterpoint. We've read lots of studies about how family businesses are run for the long term and often have higher total returns. But on the flip side, family dynamics can be very messy.
- [05:36]
A
They can be deadly.
- [05:37]
D
This is a prime example of that. Just better understand our companies beyond the immediate public disclosures. Lastly, I wrote a book called Railroader about the consolidation of the US railroad industry which we see a lot of parallels between railroad capex in the 1800s and AI capex now. It's very important to note that the railroad industry up until the year 2000 more or less, when Hunter Harrison began consolidating it was a very poor return on capital business and had been for over 150 years. Just an important note of caution for capital intensive industries.
- [06:15]
A
So let's see. I got a few. You can tell I'm married. That was a joke, guys, come on. So Junk to Goal by Willis Johnson. I don't know if you guys ever heard this book, but it's the story of Copart. You guys familiar with the business at all? It effectively started out as a scrap junkyard business and turned into. When you total your car, how does the insurer get the most value for a totaled car? And that's really what Copart's done. They've taken these markets which are, you know, it's like, it's like secondary car but really bad secondary car and taken these market developed to where the insurer is getting better payouts on the total car. So it's like value additive to the customer, the insurer. But it's like an institutional business. They do all the paper, they do everything. And so he just, he teaches the story of how he got there, you know, and how that developed over time. It really started in like the pick and pull market and the pick and pull market begat these more institutionally oriented markets. I think the other crazy part is like how they, in this case they were able to adapt it to other places. So like the UK has these markets because of it, but the buyers actually, you know, as they grew they found out that there were buyers in like South America and stuff like that. So just, you know, it made me think a lot about where they have a pretty simple concept and they continue to tinker with it and play with it and it's kind of like the cumulative advantage you build up over time. Um, let's see a couple others. I won't. I won't talk about each of these. The History of Money by David McWilliams. Killer book. I think that's already out in the podcast. It was really fun book. The idea that money is like language. You know, the US dollar is the most accepted money in the world, and English is the most accepted business language. Those are, you know, that's an interesting paradigm. Taking Religion Seriously by Charles Murray. The funny part about someone calling themselves a happy agnostic is like a very, like, interesting way of putting it. And he does a kind of a life story there. Friends until the End by James Grant. I know we've talked about this. Like, Jim Grant's awesome. Anytime he writes in Barron's or anything like that, he's just very fun to read. And it's a very cerebral walk through time. And that book's really about two friends in British history that I highly recommend. The Origins Efficiency by Brian Potter. If you've ever heard things like Six Sigma and Lean Manufacturing. It didn't make any sense to me until I read Brian Potter's book because he explained, like, the whys. And I think something to take away from it is you can improve things in cost, you can improve things in time, which shows you that money and time are interchangeable. And he talked about how you can take processes, and if you can cut steps out, you're changing. You can save both time and money. And so. And a lot of that came out of Japan originally. And then the last one, and I think this is really important, is I don't think about inflation as a societal loser anymore. And that's. The book is Inflation A Guide for Users Losers by Mark Blyth and Niccolo Fracolini. All inflation does is just divide society. And you always hear from the people that lose the most. So, like we have inflation, wealth loses. Wealth tends to have a bigger power in the media. And so we're going to read in our history books about why wealth was so bad. Okay. And I think we'll come into this in our questions later. But I looked at it as, it's a way to divide people. The questions, who's the losers and who's the winners? And I think they do a good job of accounting for that. Let's pivot to what you guys are currently reading. Seamus, you have a fun book.
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B
In my mind, yeah. Have you had him on the podcast before, George? A couple times. I actually read this book because of you.
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A
I'm A big George Gilder fan.
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B
I am officially a George Gilder fan. After we went to the COSM thing and he was there and just reading through. I'm basically all the way through his book. I won't go to it much because you guys most likely already know it.
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A
But the title of the book.
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B
Oh, I'm sorry, Life After Capitalism by George Gilder. And really it kind of just flips capitalism on its head in terms of thinking about information as the power, as the incentive base for capitalism. So he talks about wealth as knowledge. You know, growth is the learning and gaining of that knowledge. Information is surprise. I thought this one was actually really great because let me say it again, information is surprise.
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A
Explain that.
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B
Yeah. So when, when, when you're doing something, the feedback that you get, if it's a complete out of the blue surprise, you actually gain more information and learning from it than you would if you say you went and did something, you tested it, it didn't.
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A
It.
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B
Nothing came out of it that was too different. And a lot of the times I think there was a reference in the book he talked about scientists would come back and they had to tell him or her when something had gone wrong, like there was an error or this went wrong. Because everything from that they learned quite a bit more than they would have. It was just confirming what they were testing. And I strongly feel like the markets today is lacking that. Right. Like there is very little information coming back that we haven't.
- [11:08]
A
Why test? Well, why test anything? I mean, like to your point, to a certain extent. I mean, if we just use the core thesis of today, it's like, if you can buy the S&P 500, why do you need to test?
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B
Yes.
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C
Yeah.
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B
And it is, I mean, I think we all agree it is dumbing down the management of money and where money goes to. Look, just take this and don't get anything, don't send anything back that is counterintuitive, that is kind of negating what I think is going to happen. And that is, that's bad in the long run. We want things that change and that challenge our ideas and perspectives. I thought that was really great. And then money is time, like you were saying.
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A
Yeah.
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B
Second one, pattern breakers by Peter Zilberman. It really kind of focuses on. It's about VC tech and he talks about Uber and Airbnb, two examples of inflection points. So Uber was able to do what it did primarily because phones had GPS's in them. Once that happened, the technology enabled Uber to basically find a car route it to you see where it goes. And that allowed that company to do what it did. Airbnb, same thing on Facebook connect. It allowed these people to see who they were dealing with that developed a trust between the two.
- [12:21]
A
Sure.
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B
So going to somebody's house or apartment, you weren't as creeped out by it. It's a great book. Both of them, I'd highly recommend.
- [12:30]
A
I'll kick it over to you, Nick. What's yours?
- [12:32]
C
So I'm reading the Fairfax Way by David Thomas. It's inside Prem Wattsa's secret to lasting Success.
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A
So did you find this on Acts like I saw it everywhere?
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C
I did.
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A
Yeah.
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C
Okay.
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A
I saw it and I saw it everywhere.
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C
It's a new book. It came out a month ago.
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A
Yeah.
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C
So I was like, I'm interested in it. So picked it up. It's great. It's. So far, it's telling the story of Premwatz's origin. So he got a degree in chemical engineering in India, and then he came to Canada not knowing he wanted to be in finance or investing. And he took a class. He took an MBA class. That kind of inspired him.
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A
Sure.
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C
Now, he didn't have his value methodology then. It wasn't until his first job where his boss introduced him to Ben Graham. And from there he got steeped in the value investing methodology and mindset.
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A
Sure.
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C
And it served him through his whole life. So to the listeners, I think if you're interested in that sort of thought, reading Prem Watsa's letters is a great place. But I have found this book is really well written and it tells the story in a very a way. You can understand the flow.
- [13:37]
A
Sure. Well, yeah, because I've seen a lot of the Fairfax, which is just so everybody knows when we talk about Fairfax, it's a publicly traded company. It's an insurer in Canada. They also have another company called Fairfax India, which is an offset of that. But I say it because the people that really like the stock, they're talking a lot about this book. And full disclosure, we don't own the stock. But to your point, there's a lot of chatter about this book out there on X. Yeah.
- [13:58]
C
I think it's worth it. It's worth a read for sure.
- [14:00]
A
Cool. I'll kick it over to you. Will, what are you reading right now?
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D
I'm currently reading a book called A War like no Other by one of my favorite classicists, Victor Davis Hanson. It's about the Peloponnesian War between Athens and Spartan fought in the 5th century BC or rather 6th century BC. And what's quite interesting about this book is that it did not need to be fought. It was a non existential war fought between Athens and Sparta that led to the demise of the Greek golden age. And it just reminds us how there's basically nothing new under the sun and many of the same follies had been reached between Athens and Sparta happened again in history because history doesn't repeat itself, but it rhymes. And just how fragile the current state of affairs are. Which reminds us that at SMI Capital, we want to buy businesses are antifragile in nature and durable. The book I'm reading right now is called 4 Blood and Money, which is about the biotech industry. It's just a very interesting account of how a blockbuster drug eventually gets to market. And it's been full of very interesting facts that I previously didn't know. For example, that one of our key portfolio holdings, Merck, its main blockbuster drug, currently is called Keytruda, which was actually accidentally picked up by Merck in an acquisition. Quite interesting there.
- [15:26]
A
Yeah. My book I'm, I'm currently in is called Evergreen. And the. What I found really interesting with the book. So in full disclosure, we own a lumber company called West Fraser Timber. It's the largest lumber producer in North America. They also have the largest lumber mill in the world, at least according to them. If the Russians don't have a bigger one, goes the story in Quesnel, British Columbia. If you want to gamble while you're at breakfast sometime, go up to Quinnell, you got to go to Prince George, the northern capital of British Columbia first. But it's a, it's a logging town, really a lumber town there. And so what I liked about the book was, you know, when we, when, when we were doing a lot of the work nine years ago in the business, you just, you're learning to learn. So you're, you're learning. I remember we went out to, it got bought by Ranier, but there was a, there was a publicly traded REIT out on the Olympic Peninsula. And so they took us out to this site and they call them, they usually call them stands. That's what they refer to as like kind of like a grove that they're going to cut is like a timber stand. And so we go out and this guy is taking, you know, you're figuring like you're thinking these old lumberjack pictures where there's like hundreds of men and they got these big saws and there's a big sequoia. They're cutting down and stuff like that. We you get out to like these are, this is like a, you know, Doug fir stand or you know, like what would be referred to as a spruce pine fir stand. And it's out. There's a guy on a big mechanical truck with this arm. It's got a circular hand on the arm, so it saws off the trunk. It picks it up and then it runs it through the arm, on the circular arm just to take off all the limbs. And then it runs it back through and then he takes this thing and drops it onto one of those trucks where it's got the big U shaped container holders and like stacks it with the other logs. Now you're watching this and you're like, man, these are like little straws to this, to this tractor. What was interesting about that is when you look at and I connected this up to, I think I shared Jim Tour's podcast on Tucker Carlson's show. And Jim Tour, to your point, was just at cosm to connect that up. And Jim Tour is one of the great material science minds of the United States of America today, Just a brilliant mind. And he was talking about in the podcast with Tucker, he said, you know, we can study the inside of a tree, but we can't replicate the tree. Because he explains that these are effectively like tube like strands that are as small as your hair follicles, but they're stacked and compressed so close. But these tubes, like he says in this book, Trent Pressler's book Evergreen, these are like water sucking tubes. These tiny strands would be taking a straw of your hair, sucking water a bit. Have you guys ever seen when someone does a big mechanical splitter on a tree? You should go YouTube it. I recommend that to all our listeners. When they put a mechanical splitter, it's like a big axe style head going in. And when it happens, it's compressing these tubes and what you'll see is water comes flying off of it. It's really cool. And so as I'm listening to this, it's like I have multiple things like being out that tree stand seven years ago, plus watching that YouTube video and you're kind of watching this. I'm listening to Jim Tour's podcast this week and it's like you're watching this all together. It's like the incredible, you know, ability to understand the components of the tree. And yet we aren't God. We can't actually do that. So it's interesting to think about in material science how like you think of like what we're seeing now it's like, oh, AI, we're going to solve all these things, but we can't actually replicate a tree from its material perspectives. Okay. So one other thing I'll add to that is it's really like a story of the Western United States because like he points out, the Pilgrims came here. Were they put back on the boat to go back. It was timber because England was running a timber. And then when England finally ran out of timber, what they produced, they produced coal. And he argues there was others that would disagree with this, but he argues that all coal is, is just timber that sat in the ground for a very long time and it's at a point where it's ready to burn and stay for longer. We talked about that. You can create charcoal out of trees by burning it at very low levels because what it does, it gets a lot of the water and the materials like that out of it. So again, you're just like, there's a lot. There's technology paradigms. Every time a new technology came about. You guys ever seen the Spruce Goose by chance? The big, big plane that Howard Hughes built? There's the movie about it in the Aviator. That's in Oregon. That's in the state of Oregon at a museum there. And the Spruce Goose was a new technology of flying, and that came out in World War I and World War II. So every time we made a big movement in technology, it brought trees these archaic Luddite forms of energy. It brings us forward either for material use or energy use, which I thought's a really interesting. We've talked a lot about all new technologies Pull Forward past energy sources, and his book did that to a wonderful degree. Hi, I'm Cole Smead, CEO and Portfolio Manager here at Smead Capital Management and host of this podcast. If you enjoy this podcast, I'd like to invite you to check out smeedcap.com at our firm, we are stock market investors. We advise investors who play the long game with a discipline that has proven success over long periods of time. Learn more about our funds@smeecap.com past performance is not indicative of future results. Investing involves risks, including loss of principal. Please refer to the prospectus for important information about the investment company, including objectives, risks, charges and expenses. Read and consider it carefully before investing. Smead Funds distributed by Smead Funds Distributors llc. Not affiliated. Let's see books you've had recommended to you. What do you got, Seamus?
- [20:59]
B
We had against the Gods, the Remarkable Story of Risk. I've heard by Peter Bernstein. I'm Sorry. From just knowing a little bit about it. I looked up kind of the prologue on it. It's just the evolution of probability. So how that helped develop society. Insurance came through there. The people's willingness to take risk to plan things.
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A
He's got some great quot. It's funny, I've never read the book. I've stolen quotes out of the book.
- [21:29]
D
It's an excellent book. It's a really fun read and a fun panorama of the history of probability.
- [21:33]
A
Yeah. And he's pricing risk. If you don't know who Peter Bernstein is, he was incredibly well thought of and was considered a monster in terms of his quality and his thinking. Nick, I'll hand it over to you. What's your book?
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C
Sure. The next book on my list is the Caesar Palace Coup by Max Froomes and Soonji Indap, which we did in the podcast. I know you've done that on the podcast, so. But being from raised in Las Vegas, I went to unlv.
- [21:59]
A
And by the way, he goes. He goes back to Vegas a little too much. Like, I feel like it's every other weekends, like, Nick, what are you doing? There must be a girl out there.
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C
I think you never know. There's a lot of things in Vegas never know what you're going to find out.
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B
But that.
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A
Wait, no. So you went to unlv? Just so everyone knows I went to unlv. That's where he went to college and.
- [22:15]
C
Yeah, got my grad degree from unlv. So anything about Vegas, like the Strip and how that's pretty interesting to me, how that can play into Wall street and how that.
- [22:26]
A
So let me ask you this because I want to ask your take on this because. So you think about all these transactions, you know, you know what, like, without reading the book, what do you think, like, from when you went to college or what do you think has changed a lot in the model of Vegas, just in general? I know, like, we've gone through the pandemic, for example.
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C
Yeah.
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A
Just from, from. As a person who's lived there, what do you think's changed in the last five, 10 years? Because the other thing that we've talked a lot about as a group is like, oh, you know, Vegas traffic is way down. And you go and look at the data and it's like, it's down, but not in some abnormally weird year. And if you look at revenue, it's up. So how do you look at the change of Vegas, say, post pandemic?
- [23:03]
C
I think there's been almost two Paradigms. First off, they're changing to they're getting more high net worth or high value customers and those customers are staying. So they're building like the resorts world. A lot of new casinos are the Fontainebleau. They're targeted towards the higher spend per dollar or per trip customers.
- [23:27]
A
Sure.
- [23:27]
C
They've also at the same time made the shift where like Station Casinos, Red Rock, Suncoast are targeting a lot more locals. So they get the locals to actually go out there and do activities at those casinos. Which they wouldn't, they wouldn't generally go to the Strip unless like when I lived in Vegas I wouldn't go to the Strip unless I had a friend coming down.
- [23:52]
A
Yeah.
- [23:52]
C
And bring them to the Strip. You don't generally go there because that could be very dangerous.
- [23:56]
D
Right.
- [23:57]
C
But I think the shift has been, it is more for a higher income customer.
- [24:05]
A
Sure.
- [24:06]
C
So the volume could be down now. And this is something we talked about before. If you look at of course after the pandemic, there was a big rebound and big spike.
- [24:16]
A
Yeah.
- [24:16]
C
But part of that was people didn't go to Vegas for a year or.
- [24:19]
A
Two and it was like a vengeful buyer that wants to go out.
- [24:23]
C
So if you're looking at the, the change from that spike, obviously that's going to be bias your numbers.
- [24:29]
D
Right.
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C
So if I'm looking at year over year numbers, it's going to be down. But to your point, revenue is not.
- [24:37]
A
Will, what do you got for books that you've had recommended to you?
- [24:40]
D
First one would be Odd Man. In Smeat Capital, we're always trying to triangulate around business values to figure out what they're worth and buy at a big discount. One of the ways we back into that valuation is what a private buyer, typically an industrialist or a strategic acquirer, would pay for the entire business. Norton Simon is one such industrialist. This biography is about his life. He was a well known industrialist, investor, industrialist and also a well known art collector. So there's a museum that he has in Los Angeles that I plan to visit sometime. So that sounds quite interesting. The other one is effectively an earlier one man version of the Futures Exchange in Chicago. A man named Kaluskolbankian who was Armenian living in Turkey.
- [25:27]
A
And what's the name of the book?
- [25:28]
D
It's called Mr. 5%. Given that he would take 5% of all transactions that went through him.
- [25:34]
A
He's like a real estate agent, but he likes a bigger number.
- [25:36]
D
Exactly. His heyday was in the early 20th century and notably also an art Collector when the Soviets were selling the prime art collection of the tsarist regime in the early 1930s. The two main bidders were Andrew Mellon, who was Secretary of the treasury at the time, and also Cole lose. Cool banking. So sounds like quite an interesting read there.
- [26:02]
A
Awesome. Let's see, the three that I have sitting out ready for me and actually came up during Evergreen, I would say, obviously, the President says a lot of things every day, but it's interesting me where you run into stuff that comes up later and you're like, oh, he said that. So it's like, okay, that wasn't so crazy. So one of the things that Trump talked a lot about is like, our forestry management and how we need to maintain our forestry much better than we have. That came up in Evergreen, funny enough. And the other thing that Trump's pushed on now that he's president again has been this idea of Greenland. Okay. And so the book that came up is called Polar War by Ken Rosen, and I have a copy on my desk. I'm interested to see that. And I think he's going to touch it a lot of, like, are the poles going to be a much more strategic place in the future? And so I'm interested to read that book, the Land Trap, which is really the story of kind of like land and from what I understand would be like Housing in a way, by Mike Bird, is another book I have out there. And then the last one is. I mean, this is controversial. There's a right and wrong to this. We'll see how it all plays out. But it's called the Age of Extraction by Tim Wu. And. And Tim worked in both the Obama administration, if I remember correctly, and the Biden administration. He was with the ftc. In fact, I think he advised the ftc. Tim Wu is who coined the term net neutrality. Okay. And so his book is really about Big Tech's dominance. I'm interested to see it. Read it because it's weird in that, you know, like, I think the last time I had this discussion with someone, they argued, oh, you know, the free market will deal with it. Well, like, if I go back to your discussion on 1829, markets can fail pretty often. Like, more often you'd expect, and it causes. Can cause perverse things to happen. And I think the question I always ask out of these discussions is like, did the market fail to address things? You know, for what it's worth. So, for example, like, you know, the fact we've got our privacy, is that an example of market failure? And therefore these. There's these large excess profits from market failure. I don't know. But that's where I think where that that book will likely kind of have fun with. And so, so we always do a couple questions at the end. I'll throw this to you guys and whoever like to jump in first. So, you know, it's like we're three years removed from, or I say three to four years removed from one of the fastest rate tightening cycles, you know, at least in my lifetime. Okay. Which in my lifetime I usually watch like hastening rate cuts. So you know, can you, can you guys kind of give your view of where we're at in rates? What do you like, I think each of you, I want you to tell me, like where do you think the tenure is going to be in a year and where do you think maybe short term rates are going to go? And kind of the whys of that. And then I think the other question would be like, what do you think that creates in winners and losers, if you will?
- [29:11]
B
I don't know. I could say the 10 year, I think it's going to be higher. My guess, the reasoning, I guess I would say it's going to be higher is I feel like fundamentally the bond markets are not trusting what is going on. Typically you have what they come out and say and the markets react in a positive manner. I think in this instance you're actually seeing somewhat of the opposite. You're seeing it in gold, you're seeing it in some of the other things. And so there's a good interview Gundluk did, I think on a podcast about a couple weeks ago. And people extrapolate patterns going forward as if it's going to happen forever. If they come out cutting rates, bond yields come down. That's not necessarily following. That's not always going to happen. Right.
- [30:02]
A
Well, no question on that because it's funny, someone mentioned that the day and I remember back when we would, when the Fed would do things and it's like what you'd expect is what's supposed to happen. Yeah, it was the exact opposite reaction. And I think maybe it was, maybe it was Joe Weisenthal or I can't remember who it was. I, you know, I heard someone from Bloomberg, they said, you know, the initial reaction is fairly, you know, random and unexpected usually isn't the right reaction. So I say that because like I remember be like, oh, hey, we're going to buy bonds. And it's like, what happened? The yields went up for a period of time and then it's like we're not going to. We're going to. So I just. The initial reaction to your point, like hey, we're going to cut. And it's like the initial reaction is the tenure rises. So you think that has to do mainly with trust?
- [30:45]
B
I think so. I mean I'm obviously not as smart as Gundlick or a Bond person, but I really feel like for the most part the markets are not responding in the typical fashion with everything that's going on, government spending and kind of where we're headed. I just don't think they trust as much as they used to.
- [31:06]
C
Sure.
- [31:06]
A
Okay.
- [31:07]
C
I would say 10 year will be potentially up or I would more caution it to be like flat. And I think short term rates will be down. Right. So short term rates down, long term rates sort of neutral, which creates a good environment for banks particularly.
- [31:26]
A
So I think if volumes are there.
- [31:28]
C
If volumes are there. Right. Regional banks that can take advantage of that spread I think is a good winner for this sort of environment. And I think rates are going to keep going down. I think we have some structural things that will push us that way.
- [31:43]
A
Sure.
- [31:44]
B
Right.
- [31:44]
C
So that's where I think the outcome will be. We'll see in a year if we're right.
- [31:50]
A
But sure. Well, what about you?
- [31:52]
D
As Charlie Munger would say, nothing, dad.
- [31:55]
A
So I'm going to give.
- [31:57]
B
That's a non answer.
- [32:02]
A
He does that on dates too. He's like, I have nothing to add.
- [32:05]
B
He's put money on the table.
- [32:07]
A
So it's funny, I've been thinking a lot about this not from the perspective of it doesn't necessarily matter for stocks because it's not like we buy aggregate markets.
- [32:17]
D
Right.
- [32:18]
A
And most people would say, oh, if rates go down on the short end, they're likely to affect the long end. And the idea is like, oh, with liquidity risk assets all go up. Okay. Well I actually think there might be a game of winners and losers that push asset prices around. So what do we know in this market? We know that this market is heavily. The trading right now is retail dominated. It's very heavily retail dominated and via.
- [32:49]
B
Passive vehicles for the most part or.
- [32:50]
A
Pass or just outright stock trading in some cases. So it's with a retail dominated market. I think a lot about like, you know, like Bill will always say like the Janet Jackson, what have you done for me lately?
- [32:59]
B
Yeah.
- [33:00]
A
And so I say that because like we could, we could see where assets move for you know, what would not be the theoretical reasons. Right. So it's like great. The cost of Money is going down. Oh, all stocks will go up. Well, we might find something more perverse than that. For example, I think the other thing, and this kind of touches on what Nick said, is that if you look at lumber markets, if you look at places like multifamily builds over the next three years, if you look at a lot of credit sensitive parts of the economy, we're in a recession. I mean look at the housing numbers. We're in recession of some form now. Why is it not manifesting itself in the wider economy? Well, some would argue that we're less credit sensitive as economy because we're more service oriented. Okay, that's a plausible theory. The other theory is that we're pumping so much dang money into the system via government spending that that's another part of the theory is that you can't really get a recession. I think I'd fall into that. So here's where I think we're going is, I think the question is like we'll go to three, can we get to two and a half? I don't know, but I think we're going to trend there on the tenure. So my negative head says like we're going to five. That's what my negative head says, go with it. So that the devil behind my head's like going to five. And then the angel comes over and he's like, oh, that guy's mean.
- [34:20]
B
Think positive.
- [34:21]
A
Yeah, so the angel in my head says, okay, the government is a very self serving animal, okay? And so is it in the government's interest to get high, to have the long term of the bond market, you know, high end of the bond market go higher. And the answer is no. So I would always think like, you know, it's like back to 0809. Did we want a bunch of failures? Did we want deflation? No. And we decided that outright we didn't want that. So we solved for the variables we wanted to solve for, which was how do we not get deflation in defaults? And we did that. Now there's like physics. For every action there's an equal and opposite reaction. So the flip side is that every asset generally went up, okay? And we didn't have much inflation, oddly enough, unlike the textbooks would say if you looked at the velocity of money, it didn't change. And so that's maybe the main reason why the demographics weren't good. Things like that. Okay? But as I think about it now it's like, okay, the government doesn't want high long term rates and they Want to push the short end down. The only thing that makes it hard for me to understand how the government's going to pull this off is if you look at inflation, it just staying stickier now. Nothing crazy, 2.5%, 2.7. You know, most people think it's running between two and a half and three. It's not anything crazy, but it's like, okay, what would cause the government to win in this objective? You know, Besant said the 10 year is our benchmark. Okay, so let's just say that's your benchmark. I think the real question would be like, would the government sacrifice their cost of capital for assets if short term rates go down, I think the credit sensitive places will pick up. You know, we've been looking at like the underwriting of multifamily loans and things like that. Look at the mortgage market. We've talked about how we've come out of the sixes and a lot of product down to the fives, 30 year fixed is still sitting at, you know, call it six and a quarter, six and a half. But it's like I could see a reality where the devil in my head loses because ultimately the government seeks out what they want and it just so happens that the market gives them that in some way, shape or form. But I do think that no matter what, I think the shorter of the curve is coming down. And again how that might affect bank spreads might cause the economy to actually pick up. And so far that's been the leaning is the economy's picking up off of this easing.
- [36:42]
B
On top of that. One of the thing, I think the hubris that's involved in the Fed and just the government in general is that we can actually control these things.
- [36:50]
A
They're just an omnipotent ship captain.
- [36:51]
B
Yeah. I mean they treat the economy like we're going to be tightening or loosening. It's like it's a car. I mean this is a complex system with a lot of efficient frontiers of people that are doing all kinds of things based on their personal preference. Not I see this in the future, so I do this. So to your point, I think people should be very cautious of thinking we actually control a lot of the things that we think we control. And to your point, it could go up or down, I don't know.
- [37:20]
C
That's kind of the cool thing about finance and economics.
- [37:23]
A
Right.
- [37:23]
C
You change your variable, that's not the same outcome every time in that way. It's not like physics where if you throw this pen, you know, where it's going to go based off a mathematical equation.
- [37:33]
A
Yeah.
- [37:34]
D
Where.
- [37:35]
A
Well and kind of what will touched on earlier, like you know, history never repeats itself, but it rhymes.
- [37:39]
C
Yeah.
- [37:40]
A
So when you marry that together with what you just said, we're a complex, a complex adaptive organism in aggregate. And when you, when you, when you provide a stimuli to something, you might get a different reaction than you did five minutes ago, 10 minutes ago, 20 minutes ago. There might be other parts of it that are similar, but the stimuli is different. So for example, you would have assumed with the short end of the curve coming down that some of these things would thaw quicker, but they actually haven't thought as quicker. You would have thought that with inflation coming down that the 10 year might have crept lower already. And the answer is no. It's giving you like 1.5% of premium over inflation longer term. So to your point, it's funny to watch that the organism's request from the system to slowly change.
- [38:31]
B
Yeah. It's like referring to the better analogy is looking at the economy as kind of like, I don't know, an ecosystem. Right. So you have an issue with an animal. Let's just remove that animal. It's like, well, you're going to have all kinds of, you're going to have.
- [38:48]
A
Three other animals that either die or live.
- [38:50]
B
We're not thinking about coincidence.
- [38:54]
A
Let's see our second and last question and we're going to show a couple of charts here. I think we show. Yeah, so this is household equities as a percentage of financial assets is the blue line here in this slide that we're showing. And then the orange or gold line is the forward 10 year returns of stocks. And this is something that I think we've shown before, we've talked a lot about as a firm. It's an interesting data point this week. There's a new picture of this that I think is a different way. This is looking at what's ownership of stocks relative to full returns. Can we show the next slide? This is looking at household allocations to equities which is just like what we were looking at prior. That's the red line. And then the blue line is the household allocation of their net worth sitting in real estate. Now if you go back in the real estate line, there have been pickups in that real estate line in like the 70s and then in the 2000s for example. But we all know how that 2000s game ended. And you'll see it's mean reverted to what traditionally roughly been about 30% versus stocks have climbed above real estate and the other junctures it did. It was the late 1960s. It did it in, let's see, I'm trying to see that correctly. It did it in the early 90s, in the late 90s, I should say, and then it's done it today. So when you looked at that, I've shared that to the team. And when you guys looked at that, how did you interpret that and how do you think about that?
- [40:31]
D
I would say anecdotally, when the subject of main subject of conversation at cocktail parties is people's 401 portfolios, that's a red flag. They also get very nervous when CNBC is played alongside ESPN at the sports bar. I think we're approaching that level in the markets today. It's an imprecise barometer, but I feel like we're getting there.
- [40:55]
A
What else?
- [40:56]
B
I would say, just looking at it, when people think they can't lose money in their homes, buy a lot of home, right. You can't lose money there. They go down. You can't lose money in the markets. Again, this goes back to. This is becoming a safety net for everyone. And that's not the way it's supposed to work or going to probably work in the long term.
- [41:14]
A
So. Sure.
- [41:15]
C
And we can see from the first chart that we've kept up with for a couple years, right. The correlation is inverse partially because of what is the limit of that. Right. How far can that relationship get? And then the inverse correlations. Right. Because the second chart or second line on that is the inverse of the S, P of the S and P. So you can see that's it's inversely correlated.
- [41:42]
A
Yeah, because the other thing I thought about this is, so we play a relative game. We have to pick what's the relative attractiveness of securities in the stock market or stock markets of the world relative to each other. But we obviously do that as an opportunity cost exercise all the time. So it's like if, you know, we expect now back to like the organism. The organism. Is this supposedly based on economics? Logical? And so they talk about like the wisdom of crowds, for example, has been a topic that people talked about. And it's like, okay, but they're assuming that we're fairly logical. There are a lot of periods of times I say they're generally logical. At extremes they tend to be fairly illogical. Right. And I don't think that's a crazy idea for people, but as I look at this, it's the relative attraction. Attractiveness is kind of what it's asking. And so it, you know, it's like you just bought a house. Okay. And it's like, okay, if you.
- [42:35]
B
Perfect timing.
- [42:36]
A
Well, if you bought a house relative to, you know, going into the S&P 500. Yeah, I would buy a house. I'd argue that if you had those two as your opportunity cost against each other, that you'll, you'll win on the house.
- [42:50]
B
I think so. I agree. I would agree. I mean, I would agree.
- [42:52]
A
Okay. Yeah. So I say that because it's okay. So now let's just say we agree to that for one second. We go down that path because my mind thinks in paths. So we go down that path and it's like, okay, what would be the things that come on the backside of this that cause that to be a winning opportunity for you? The house.
- [43:06]
B
You mean the house.
- [43:07]
D
Yeah.
- [43:07]
A
Well, so the primary thing that would cause the house to win. And by the way, if you go back to that chart that, you know, one of the dominant features of real estate winning was the 1970s inflation.
- [43:15]
C
Yeah.
- [43:16]
A
Because you. Would you, would you borrow at what was your.
- [43:20]
B
Six? Well, I bought down, so it was 675. And I think I bought down to 620 something. 625.
- [43:25]
A
So when it gets low enough, if you're a mortgage broker, you know who to call.
- [43:28]
B
Yes, yes, please.
- [43:29]
A
So I say that because. Okay, so if inflation rears its ugly head, your 6% is going to look like tiddlywinks compared to what that could be. That would cause replacement costs as an analysis to be a main tool. And that could do really well. That's not good for businesses because everyone acts like stocks do well. But if you look at those periods, there was high inflation during the 70s, for example. So I think of like that path on a relative basis. The only other thing I could think about is like, as kind of like path. You know, creating that path like that is like, well, there is a chance in a path where let's say stocks do really poorly and real estate just holds its value because it's a relative game. Right. So it doesn't mean real estate's going to go up, but if it just holds value and stocks do poorly, relatively.
- [44:15]
B
1.
- [44:15]
A
Correct. And if you go back to the percentage net worth chart as real estate was losing its value off the 2000s, that would naturally bring stocks higher in net worth. And you know, I kind of think a lot about that of that chart is like, what is your relative capital allocation?
- [44:36]
B
The utility, sorry, the utility part of the home, too, is an interesting thing. Like my wife.
- [44:40]
A
You can't live in a stock.
- [44:41]
B
I have. I have. I have my wife and three kids. I get more out of the house. Probably them being able to do stuff, making memories, et cetera, over the value of it, too.
- [44:51]
C
There's external benefits to the homeownership.
- [44:54]
A
That's my rationale. So since we're bringing that up, when you guys saw that chart, did you guys think about. It's like growing up in America for the last 40 years. It's like, okay, did you guys think about wealth inequality or income brackets? That's stuff that I think of when I see that. Do you guys think about that?
- [45:13]
B
For the second one.
- [45:14]
A
Yeah, for the second one. Because it's like, who owns stocks?
- [45:17]
B
Yeah, no, that's a good point. I didn't think about it, but that's right. Yeah.
- [45:20]
A
Who owns real estate? Everyone else. Yeah, yeah, right. Okay. And so I know we've talked about this is like the idea of like Main street beating Wall street. That argues that. Yeah, right. Because as we know, the lowest income quintile in America owns they. Of those people that 47% own a home. So someone said, what's their net asset base? It's going to be dominated by real estate versus what's the net assets of the wealthy people? It's going to be dominated by stocks.
- [45:48]
C
The percentage goes up and that gap.
- [45:50]
B
You can, I mean, to your point, I didn't see it until you were saying it, but the gap, the kind of when they spread 1% gap is. Yeah.
- [45:57]
A
When that spreads, it's like, wow, the average person did really well. And so back to your home. So you own a home now and it's like, well, what if you wake up in five years and your home depreciated, I don't know, 4% and the stock market's done terrible.
- [46:12]
B
I win.
- [46:13]
A
You win, right. You win.
- [46:17]
B
That and investing in speed capital management.
- [46:23]
A
Here's another way I think about this too, is what's better for the economy in some ways. Buffett's Sun Valley talk that he gave, he talked about 17 year cycles. And so he talked about 64 to 81. Right. Okay, 81 to 98 and 98 to 15 is what he was arguing. And he was talking about 64 to 81 were great. We're not very good for the stock market. 81 to 98 were great. And then you're gonna go on to this, like, subdued period. And in many respects he was fairly right about that. Now, I say that because he argued that from 64 to 81 money was pulled away from the stock market by the economy. Okay, so use, use real estate. It is a capital intensive business. It needs money. What are we seeing in the stock market? The stock market's starting to consume some money but the ones, the ones that have won the most are actually like non capital intensive. So the, the other thing I was thinking about in that is that what if the economy is actually stronger because it's pulling more of the liquidity away. So like in this next liquidity let go that the Fed is going to put out into the market if we are picking up multifamily housing and let's say some new commercial office that are really nice, that have amenities and stuff like that that aren't currently in the market or mortgage activity picks up that doesn't get anywhere near the stock market outside of the businesses that are credit sensitive. And we know that those have been doing really poorly like we said. So I've had multiple things go running through my mind off that chart which I think I got that from. I want to say it was either Tom Lee or anyway someone like that posted it but I think that's a really interesting chart of looking at. It's a long range chart. You can't use it for next year but looking over a 10 year period, what are the great odds out there? Let's see. I guess because you guys joined us, you'll have to come back in six months.
- [48:12]
C
Yeah.
- [48:12]
B
Make it our.
- [48:13]
A
This will be a regular scheduled tour. We'll look forward to it. Yeah. Gentlemen, thank you for joining. To share with the podcast listeners what is on the Smead Book list for our listeners. If you have a great book that you'd like to recommend, email podcastmeadcap.com that's podcastmeadcap.com you can also send your suggestions to us on X. Our handle is meedcap. We will give you a shout out next quarter when we do this Again, thank you for joining us for the Smead Book list on A Book with Legs podcast. We look forward to the next episode. Thank you for listening to A Book with Legs, a podcast brought to you by Smead Capital Management. The material provided in this podcast is for informational use only and should not be construed as investment advice. You can learn more about Smead Capital Management and its products@smeedcap.com or by calling your financial advisor.