The Smead Book List - Spring 2025

30:17Therefore, more total good would be created by this division of who was producing it, even though the one country was going to be better than at all three. And it's a follow on of like Adam Smith's idea of specialization. It's just country to country rather than person to person. Yeah. So that if you think about it, you know, this idea of of of of trying to bring back, I think there's something like a relatively low number of people that are actually employed in machine based, you know, businesses with skilled labor. I mean, you're bringing some of these businesses back into the United States.

31:02It doesn't look to have the kind of upside you'd want to have from doing it. So this is what I'm talking about is not political in the slightest. It's just thinking of it from a purely economic standpoint. We should be thrilled that there's countries that are close to us that are friendly trade partners that will gladly do something that's less productive for us to do. I agree. We got to listen to Larry Summers a few weeks – or a week ago, I want to say now. And I got to ask him the question, but obviously we were just all listeners in the room to him. And he was pointing out the numbers tied to like steel.

31:41So I think he said there's like 10 ,000 workers in America that directly make steel. And then if you go out from there and say, how many jobs are there tied to people that use steel as an input? And I think he said something like it was, what, a million people? Oh, if that. It was a hundredfold. And so he pointed out, so if the companies that use steel are such a larger component to the economy, why would you explicitly want to raise the price of that when the benefit goes to such a smaller group? And I think it was helpful because you think about the numbers that are affected. What's likely to cause a bigger economic effect?

32:23The one that does a small number of labor or a bigger number of labor, okay? And so it's like, what does that mean? Well, that means you're probably not very good in David Ricardo's theory at that small amount of labor. You're not very good at creating steel. You're better at leveraging steel in your production. And it made me think of Wilbur Ross's book, which we podcast. And Wilbur Ross made a mint out of using better balance sheet analysis and better financiering to make a lot of money from these industries that other people didn't want to be involved in. And then I played golf Sunday with a guy that sold his steel business to LTV or somebody.

33:12And it just reminded me, I think, that the Wilbur Rosses and the guy I played golf with that made some money from being involved in that but then passed it along are going to be the ones that are better off. Well, I agree. And I think there's – again, I've been talking about this idea a lot with people is how differently people act in business. And when they enter politics, things have to change. The question is how. And I mean like we've talked a lot about this on the tariff side. This is not the first time we've seen tariffs to deal with in our portfolios. We own West Fraser. They had to deal with the softwood lumber dispute in 1617, which was enacted by Wilbur Ross as Commerce Secretary, countervailing duties and anti-dumping duties.

34:01And the rationale was the crown lands or the government lands they get the trees off of was too low. Canada argued that the labor costs were high, so therefore they weren't subsidizing anything. But ultimately, if you look and said, well, who's backing the North American producers that are pushing this agenda at the government? The answer is the North American producers are represented really by one company, Weyerhaeuser. So again, trying to make it like a real cotton dry, simple measure, it's messy on either side, I would say. And I'm not criticizing Wilbur for that. In fairness, like Wilbur did, we made pretty darn good money stepping into the uncertainty at that time.

34:42And I think in many cases, it's nothing dissimilar now. Now, what company that goes back for me 40 years, what single company has been the most unproductive user of the capital of common stock owners in my career? It's been Weyerhaeuser. It's been Weyerhaeuser. The business is organized to feed dividend payments to multi-generations. And not only are they not a good cause, not only is it bad that this incredibly set of productive assets hasn't been used as wisely from an investment standpoint as possible. But on top of that, Frederick Weyerhaeuser's endowment to your and my alma mater for the spiritual support of the students sits there and isn't being used on what it it's just one thing after another we find out is not being used the way the assets ought to be used yeah because i remember we had a discussion and again uh this is how they choose to run their business we get to choose whether we want to be investors or not so take with that what you want but i remember we had a conversation with the warehouser folks this is you know maybe i don't know seven years ago oh Oh, maybe 10.

36:00Eight years ago. Anyway, our question was effectively, hey, why don't you make hay while the sun shines? And the answer was, well, because we don't want to be too cyclical. And it's like, we make too much then. And it was just one of those things where like, you just make money when you can. It's a cyclical business. It's in some cases, not that good a business. And ultimately, Weyerhaeuser, back to our REIT discussion, sits in a REIT. And it ultimately is a very capital intensive business with low returns. So they're running the business defying what we now know about the forests. The forests from northern California to southeast Alaska is the greatest farming expedition in the world.

36:47But I'd say the southern U.S. is the greatest farming because it's actually farmed. Yeah, but that renewable resource, yes, you cut the trees down. So my favorite story that comes out of this is about 10 years after Mount St. Helens blew up, Cole's mom and I drove down through Mount Rainier into the backside of the Mount St. Helens National Recreational Area. And we're driving through the forest and all of a sudden we get to where the eruption had completely cleaned off all the trees. So you're driving through a thick forest and you pop out into no trees whatsoever. And you drive forward and you notice as you're driving into the national scenic area that surrounds Mount St.

37:39Helens now that on the left-hand side, it looks like the moon. And this is 10 years after the mountain blew up. And the right-hand side has got vegetation and it's thriving on the right-hand side. So we go down to the ranger station and they said, hey, what's the deal? The left side looks like the moon and the right side looks like it's restoring itself. He says, oh, that's simple. We allowed the wood products companies to come in and salvage whatever salvageable wood there was on the left-hand side of the road. And we decided to leave the other side completely untouched and allow nature. And what was being proven out is nature was doing a great job of restoring what nature cost, which was the mountain blew up.

38:21That was a natural thing. Whereas Mann mucked it up. And so in effect, Weyerhaeuser has defied those facts by not cutting down and selling more wood when the prices are high and then blessing their shareholders with some of the results of that instead of just wanting to annuitize the business for the benefit of the future generations. When to come back to the tariff idea, the other thing that had been hit in my mind and again in our earlier discussion about bubble in the sun is again, you think about the fresco that you can look at the breakers is, OK, would anyone do this again if it wasn't in a euphoria?

39:09And the answer is no. Just explicitly it's no. OK. So we were having this discussion the other day on – obviously in this tariff discussion is the Canadian oil and gas companies. And just so everyone knows, the only thing that's really made in Canada is tar sands assets. That's what makes everything in Canada from an oil perspective. There's a very little portion that is non-tar sands. But let's just talk about tar sands. Heavy crude. So it's like, okay, would someone come in today and build these tar sands assets from scratch? And the answer is no. The cost of replacement is way too high to do that from scratch.

39:42But like the Fresco and the Breakers Hotel, luckily, someone already did that. And now that you know that the cost to replace that is way too high, the question is, are you interested in walking in that day to be an investor and pay the maintenance costs to ultimately make the returns on capital going forward? And I think that's what I think a lot about. It's like someone said, well, yeah, this costs a lot of money. Well, no, it costs someone else a lot of money. I like to say they had better dinosaurs up in Canada. We hope you're enjoying the podcast. You know, we work hard putting together this show, but we work even harder for our investors at Smead Capital Management.

40:23At Smead, we believe in disciplined investing, which is why the Smead funds have a proven track record of long-term outperformance. If you're an investor who fears stock market failure like I do and want to invest in wonderful companies to build wealth, we invite you to visit SmeadCap.com. Past performance is not indicative of future results. Investing involves risks, including loss of principle. 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 UMB Distribution Services, LLC, not affiliated.

40:59the other thing off off trump and i want to get your kind of take on this is um we i was thinking about this is like i mean i don't know about you but it's like you're just like drowned in ideas and hyperbole in the last what 60 days yeah and i kind of think of it from a someone said um what what does analogously it make you think of it makes you think you're playing quarterback and there's nine guys in the box. Yeah. And you just don't know who's actually going to blitz. Yeah. That's what it kind of seems like, which if you think about it from a political perspective, let's say you're the Republican Party, you're the party in power right now.

41:39Is that a great tactic? I mean, it seems to be working because the question is like, what do you really need to go at and defend from? You just don't kind of know if you're on the other side of politics. My main thing in this is I know what the sentiment was immediately following the election, number one. Number two, there are an enormous number of forces at work right now that spell that inflation is going to be a persistent problem at higher levels. Sure. We know that labor unions are getting 8.5 % wage increases regularly. we know that people that weren't unionized are going unionized we know that the united states postal service is going to charge 60 more for last mile deliveries and ups has cut their amazon deliveries in half there's just a tremendous number of signs every every fast food place every every restaurant business you interact with you're looking and you're seeing you're paying way more for your for your food than you used to be and that's all inflation so this idea that you're going to jawbone the oil companies to get lower inflation numbers to make people think you're defeating this problem, I just – it's too much of a stretch.

42:57I agree. And I'll use – and I think you saw this because I shared it out with our group. But so in the US oil and gas space, the person that I think I admire and I think you do as well the most in the space because he's the greatest capital caterer in the history of the oil and gas industry is Harold Hamm, plain and simple. His Canadian counterparts, in my opinion, I know there's some debate on this, but it's Adam Watrous, who I think the world of, and I think he's doing something incredible. That's my theory, because no one can prove me wrong to a certain extent. But so it's like, all right, you got Harold Hamm.

43:35He wrote a book called Game Changer, which was really what politics could do through the oil and gas business, and a lot of stories of of what he thought was right. I think we are on page 215 of the book, if you want to, you know, jump, jump our interest in the book. But I say it because, you know, he has been a longtime Trump supporter. And I would say like, if someone could bend his ear in the oil and gas space, it'd be Harold Hamm. And it just so happens last week, we see out that there's a press release that Harold Hamm is in Turkey looking to do some exploration. Okay, now, if this is such a dang good place to go drill right now at these prices, why is a red-blooded Harold Hamm starting exploration in Turkey?

44:28Big Trump supporter. Okay. Yeah. So it's funny, not only Hamm, but Scott Sheffield, who sold his business - To Exxon, pioneer to Exxon. pioneer to Exxon, about three or four of the most respected people that we would think would be the right people to listen to are all saying the same thing, which is the idea that you can go poke holes in the ground on land that is controlled by the United States federal government and create the kind of gusher that the Permian Basin through fracking developed between 2012 and 2022 is a pipe dream. It's not out there. It doesn't exist. Therefore, the economics of the oil and gas business is going to be governed by scarcity in the same way that tobacco companies made a lot of money because of the scarcity, creating dramatically higher prices for the addictive legal drug, tobacco.

45:36Well, energy is an addictive legal drug, in our opinion. Yeah. And we've talked about this. So I think of two dates, like very focal in my mind as investors in the energy space. Those two dates are Saudi Sunday, which was the day the Saudis chopped the legs off the market during the pandemic, which was bizarre and crazy, but just - You had to pay to get rid of your oil for one day. But part of the game, okay? And then the other day that now very focal in my mind, I will refer to this the rest of my life, but it's Ash Wednesday two, it would be as of this podcast release date, but like three weeks ago, okay?

46:15And I say that because this is, in our opinion, the second best buying opportunity in the energy business of the last 20 years. Yeah. Now, the first one off of what was going on at the time, you had to stare into the abyss, not know whether oil prices were going to cover if and or when. And you had to believe, have the faith, let's call it, to perceive that the balance sheets will improve because the industry would change from what it had done in the past. Yeah, because oil was the cheapest relative to common stocks in 220 years. And that was a seminal event and what I would argue was a generational opportunity in the oil and gas business.

46:53Fast forward to today. Balance sheets, almost debt-free, very unlevered, nothing like the past. It's not a risky industry anymore. You're making returns. The question is just what's level of returns because there's so much free cash flow. And to your point, drilling is not in vogue. The energy vigilantes scream bloody murder anytime you raise your CapEx. And so it's different because of how the businesses and industries change from a capital allocation balance sheet perspective and ultimately where the oil price sits. But as we've talked about, people looked over the edge. They looked over the edge and said, I've lost a lot of money in this industry before and I don't know if I want to go there again.

47:34Yeah. No, literally, what is left of the stock picking world in hedge funds and mutual funds and ETFs? Or the hedge fund pods like we talked about earlier. What's left, they got to two weeks ago. And just like I was sitting here and I commented to our team, I said, is this the hill we want to die on? and many professional investors decided two weeks ago that they did not want to die on that hill. And boy, if you can buy regional banks when they don't want to die on that hill in 2023, if you can buy oil companies in April and May and June and July of 2020, and when you can buy when most of the professionals are afraid to die on that hill, you're in pretty good shape.

48:29When I agree, and the rhetoric coming from the president was confounding people. So to your point, the best day was Trump coming to power, right? The market's been following ever since Trump came to power. And it's interesting that markets are highly elastic. Oh, hey, Trump wins, great. We're gonna bid this sucker up, okay? But it's like a buy the rumor, sell the news. We're seeing that constantly right now. It's like, oh, Trump's in power. Great markets run up. He's in power. Markets are coming down. And so it's like this highly elastic reaction with the repercussion 60 or 90 days later, not being nearly as good as the excitement to begin with.

49:09And the rhetoric on oil did the inverse. It's producing the low. So it's like, here we've been the last couple of days. It's just the oddest thing. This is middle, you know, we're like the, you know, middle of March right now. And it's like, oil's like up a little bit. What's happening? The stocks are rallying because the elasticity of the stock market was showing far more danger than the actual inelasticity of the underlying commodity market. Because again, you can change things over time, but just not overnight. And the commodity hadn't moved nearly as much as the politics and the rhetoric. Yeah, you want to buy from people who are scared to death of the downside, and you want to sell to people that are euphoric to the upside.

49:53I mean, it's just this business isn't that complicated. it's just the time in between those two extremes that make the human condition hard to deal with it's the time so i want to i want to end on kind of uh two things i want to ask the question of where do you think we're at you know we're not we're not um we're not bond people but our brains work luckily um so you know where do you think we are in the bond market um where do you think we are in the treasury market. You mentioned you don't think inflation's in the bag as some people do. Where do you think we're just at kind of from a fixed income and risk-free perspective?

50:34Well, I think we're in the 1970s is where we are. And if the Fed capitulates and cut rates, they're going to run into the same phenomena they ran into the last time, which was - Why do you think they would capitulate and cut rates? Oh, because as soon as there's significant signs of an economic slowdown, they'll cut rates, even in the face of the fact that it will probably re-trigger the next leg of the inflation. Well, sure, because your point, we're sitting short enough on the treasury market. I think someone had a number out there where it's like, in the next four years, we're going to fund like half of the treasury market.

51:16Yeah. Okay. Yeah. And so to your point, would it be shocking to see the Fed lower short-term rates, at least somewhat? Why? It's good for the govy. Yeah. Yeah. It just is. Yeah. It's good to lower their borrowing costs. The question is, can you maintain that level of funding? And this all goes back to what we wrote about right after the election, which was Reagan and Volcker did the psychological and economic thing the next year and a half after being elected to kill inflation. Volcker with 18 percent short term rates and Reagan by standing down the air traffic controllers and breaking that psychology of union power.

52:00and but they started out with record low equity participation no one was in the stock market in 1980 there was no participation only a few coupon clippers on bonds and and it was just a moribund tiny industry the investment industry was tiny and and and so there was nothing but upside even And then there was a 22 % bear market for the first 21 months. This time we had record participation, multiple financial euphoria episodes that just recently played out in the last three, four, five, six years. Everything from meme trades and Bitcoin and growth stocks and just insanity and now Magnificent Seven after FAANG, et cetera.

52:49So we are just the opposite. and it would not shock us at all if there's a great deal of punishment handed out to people that have chased these fads. Let's see, really quickly, remind me of the gentleman that you've always brought up over the years from Lord Abbott, who you'd read the tapes. McCarthy. Yeah, tell that story because you have a good mic that you can actually do it here. Yeah. So in 81, the long-term treasuries peaked at 15 % because the inflation that year topped out at 14%. And so to buy those bonds at 15%, you had to bet that what Volcker and Reagan did would break the inflation.

53:32You had to bet on the come. You didn't know that was going to happen. You had to hope it would happen. So what happened was the inflation broke. Tell people what Jack McCarthy would say and how you'd get his information because I just think this is like awesome, classic, old school Wall Street. We got cassette tapes once every 90 days, and we'd put that cassette tape into the tape player and listen to what McCarthy had to say. And so do your best Jack McCarthy rendition. So in 84, in like May or June of 84, what had happened is the economy got so strong during 82, 83, 84, 5%, 6 % real growth in the economy, they were afraid that inflation was going to get reborn.

54:14So the bond rates, which had moved from 15 % on long bonds down to 11 in 83, moved up to 14%. Because they feared that with the economy strength, the inflation would roar back. 14 % in May, June. And McCarthy sent out this tape and he said, all I want to say is B-O-N-D-S bonds. And he just screamed into this tape player. And the trailing inflation rate was 4%. So you're collecting like 10 plus percent relative to inflation. So here is Cole Smead sitting here with an expensive four-year degree from Whitman College in Walla Walla that his mother and I paid cash for. And that was funded by buying zero-coupon treasuries, 10-year treasuries at 14 % compounded.

55:10You are guaranteed a quadruple in 14 years. So we put his custodial account in those bonds. And so just think there was a 10 % spread between the inflation rate and the interest rates you got. And so it just – it was crazy. Now, the only thing that comes close to that was the guy from Dan Fuss, brilliant guy from Luma Sales Bond Fund, who came out in the fall of 08, back when Buffett was saying, buy American I Am. He said, hey, corporate, high quality corporate bonds offered equity like returns. Yeah. And we had some legacy separate accounts. Yeah, but the thing too is Munger was saying that at the time, he said, listen, equities won't heal until the credit markets heal.

56:03And so that was – by the way, so like I was sitting here thinking about this. I was like – I was like – I know there's no cassette tape out there, but it's like I want to get on our podcast and just be like O-I-L oil. Yeah, yeah, yeah. Because again, it's like here we sit through these couple of days where it's like, all right, markets look choppy and ugly. And at the same time, like what is going on with the oil price not rising? Those stocks are going up right now. But in the inside money book, the problem for a great house like Alex Brown and Sons is leverage. And as we wrote in our piece, in our missive, I have no personal leverage and our business uses no leverage.

56:57Therefore, we don't have to worry about the main problem that occurs to make your way through these difficult circumstances is always leverage. Yeah. I don't have any good leverage. I wish I could borrow a few billion. Maybe it would be a good thing. Oh, your 2.65 mortgage isn't quite enough for it. No, it's a 5.1 bill. Oh, is it really? Yeah, I had to upgrade a couple of years ago. In full disclosure, since we're burying our souls to our investors, I only own a personal residence at this point. That's my only, my technical mortgage outside of some small car loans.

57:30So where do we, I know we've spent a lot of time on this before, so I don't want to like spend too much time, but just to be brief, you know, we're kind of touching around, we talked about the bond market. We talked a little bit of oil. Where do you think we are in the stock market? You know, we keep – we've been talking about this for a few years, stock market failure. We advise investors who fear stock market failure. Where do you think we are on the stock market? You mentioned kind of what's begun to happen a little bit in the Magnificent Seven. I guess my question would be how bad do you think it could be for those magnificent names, if you will?

58:05Well, you're probably going above my pay grade. Or am I feeding your red meat? Well, so I'll answer this question over a 10-year time period. Okay. Okay. So the chances are from the week after the election of Donald J. Trump to 10 years later, the S &P 500 is highly likely to not make any money. Okay. Including dividends reinvested? Including dividends reinvested. And therefore, we're going to try to carve out a way to make good money relative to the 4 % treasury rates that people could accept in that difficult environment. And also, would you argue the inflation rate too, whatever that is? Yeah, and the inflation rate, whatever that is, could have an impact.

58:55Okay. Yeah, because I think we're – in many respects, we're just as worried about the risk-free rate as anything. Yeah. Because again, when people wake up saying, wait a second, if the government will guarantee me a rate, even if it doesn't beat inflation, and I can make that money compared to my opportunity costs, which are less attractive on a trailing basis, that becomes a very dangerous thing for risk capital. I think 54 % of the Comet stock is owned by people over the age of 60. Correct. And those are people that can't afford to take the risk. And they've been happy to – for the last 15 years, the market opened and they lined up at the trough like Pavlov's dog.

59:32And the bell rang. And the bell rang, and they started making money. And so as I mentioned in the missive, the declines have been so short in duration that Buffett says when the tide goes out, you find out who's swimming naked. and the tide has only gone out far enough or in such a short duration that we've only got down to people's belly buttons. So we really haven't found out who's swimming naked for a long time. Totally, yeah. And to your point about John Kenneth Galbraith's book, A Short History of Financial Euphoria, I think he talks about it as there's bezel out there and then when it's exposed, we call it embezzlement.

1:00:24So it's like, there's always bezel. The question, has it been exposed? And when you find out who's swimming naked, you tend to find embezzlement. Bill, thank you for joining me 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 podcast.smeadcap.com. That's podcast at Smeadcap.com. You can also send your suggestions to us on X. Our handle is at Smeadcap. We'll give you a shout out in the next quarter when we do this again, as we usually do. Thank you for joining us for the Smead book list on A Book With Legs podcast.

1:00:55We 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 at SmeadCap.com or by calling your financial advisor.

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