Top Podcasts 2019 - Replay: Bill Smead, Cam Harvey, Raoul Pal | #195

Episode Summary

Executive Summary: The mashup centers on three big themes: Bill Smead’s deep-value, quality-first stock selection framework; Cam Harvey’s evidence that yield-curve inversions reliably signal recessions and favor defensive positioning/value after the turn; and Raoul Pal’s macro view that slowing global growth, dollar strength, and collapsing yields make bonds and dollars the highest-quality trades. Across all segments, the guests argue that expensive growth, financial engineering, and misread risk are the main threats, while demographics, balance sheets, and disciplined timing matter most.

Main Topics: Bill Smead’s eight-part stock-picking framework (Priority: 5/5): Smead describes a disciplined checklist built around economic need, long profitability, wide moats, high free cash flow, bargain pricing, shareholder friendliness, strong balance sheets, and insider ownership. He stresses that the criteria, not intuition, drive selection. Value investing versus expensive growth/manias (Priority: 5/5): Smead argues that the market has undergone a late-stage mania in e-commerce and other high-multiple growth names, echoing dot-com and housing bubbles. He sees cheap value stocks as deeply misunderstood and historically attractive. Yield curve inversions as recession signals (Priority: 5/5): Harvey explains that his dissertation found the yield curve’s slope predicts real economic growth and has correctly preceded every U.S. recession since publication. He emphasizes the signal is about growth slowdown, not just recession timing. Portfolio implications after inversion (Priority: 4/5): Harvey and the hosts discuss how inversions tend to be followed by poorer market returns and stronger value/quality performance, suggesting investors should tilt toward defensive exposures and manage cycle risk rather than assume markets always mean-revert quickly. Global macro: bonds, dollars, and slowing growth (Priority: 5/5): Raoul Pal argues the dominant macro setup is a synchronized global slowdown that makes bonds, especially the front end of the curve, and the U.S. dollar attractive. He frames this as a low-volatility, high-quality trade tied to rate cuts and dollar shortages. Demographics, housing, and the next cycle (Priority: 4/5): Smead and Pal both highlight millennial household formation, homeownership, and family spending as major economic drivers for the next decade, implying homebuilders, home-improvement, and consumer cyclicals tied to families may benefit. Blockchain, tokenization, and financial-system disruption (Priority: 4/5): Harvey argues blockchain will democratize access to assets and capital by enabling tokenization, peer-to-peer funding, and new forms of ownership. Pal similarly sees crypto as part of a broader shift to a new financial system and digital value layer.

Key Arguments: Smead’s process is designed to identify high-quality businesses at bargain prices, not to predict macro variables; he relies on criteria that screen for durable economics and management alignment. Wide moats and free cash flow matter because they protect returns across cycles; shareholder buybacks and insider buying are especially valuable signals of confidence. He believes the current market has echoes of the dot-com and 2000s housing bubbles, with e-commerce and money-losing IPOs showing late-cycle parabolic behavior. Harvey’s yield-curve work is not a one-off data mine: the same inversion signal has preceded all four recessions since his dissertation, with no false signals so far. The yield curve primarily forecasts future real growth; even a mild inversion implies slower growth, which should pressure valuation multiples and earnings growth. After an inversion, value stocks tend to do better than before the inversion, suggesting factor timing matters and value may regain leadership after a long underperformance period. Pal argues the best macro expression is to buy bonds and dollars because global growth is rolling over, central banks will cut aggressively, and the front end of rates has the cleanest risk/reward. He sees corporate leverage and BBB debt as the main doom-loop risk: weaker growth hurts buybacks, bond demand, and eventually credit markets, creating a negative feedback cycle. He believes demographic aging, household formation, and cheaper borrowing for millennials can support housing, home-improvement, and family-oriented consumer spending. Both Harvey and Pal think blockchain/tokenization can lower financial frictions, broaden access to investment opportunities, and eventually reshape capital formation and asset ownership.

Data Points: Cropland lost to urbanization: ~4.8 acres per minute - Mentioned in the farmland sponsor segment as a reason farmland supply is shrinking. Farmland investment minimum: $15,000 - AcreTrader ad copy noting passive access to farmland starts at this minimum. Smead’s separate-account strategy start: 1993 - He said he began running separate accounts in early 1993 after getting RIA licensing. Smead’s fund start date: Second trading day of 2008 - He noted the fund launched just before the worst 14 months in 86 years for that strategy. Amgen dividend at initiation: 28 cents per quarter - Smead cited Amgen starting its dividend in summer 2011. Amgen share price at dividend start: $52.28 - Price when the company initiated the dividend. Amgen yield vs. 10-year Treasury: Higher than the 10-year Treasury - Smead said the initial dividend yield exceeded Treasury yields at the time. Smead’s estimated total return from Amgen purchase: ~11% cash return - He described dividend + buybacks + R&D context from the 2011 purchase. Homebuilding in 2011: 320,000 new single-family homes - Used to illustrate how weak housing production was relative to population. U.S. population in 2011: ~315–320 million - Smead contrasted this with 1960s-70s housing completions. Worst recession-year homebuilding in 1960s-70s: 550,000 homes - He compared 2011’s low output with earlier recession years that still built more homes. E-commerce parabolic move ranking: 3rd biggest in 45 years - Smead argued the e-commerce surge ranks behind only the dot-com bubble and the early-2000s housing mania. Money-losing IPOs vs. 1999: 2018 broke the record - Smead said 2018 surpassed 1999 for money-losing companies going public. SP 500 valuation spread: 8x to 94.8x earnings - Smead described the cheapest 100 stocks at about 8x and the most expensive 100 at 94.8x. CFO recession expectation: 85% expect recession in 2020 or early 2021 - Harvey cited the Duke CFO Survey as a near-consensus recession warning. Yield-curve lead time: ~1 quarter on average for his trigger; 9–18 months to recession - Harvey explained the inversion trigger is measured over a full quarter, while recessions typically lag. Global PMI: ~48 - Pal said global PMI was near recessionary territory. Germany PMI: ~45 - Pal cited Germany as already in a significant recessionary phase. Interest-rate margin on Eurodollar contracts: $2,500 margin for $250,000 exposure - Pal highlighted the leverage and liquidity in Eurodollar futures. Foreign USD debt: $13 trillion - Pal argued the world is structurally short dollars, supporting dollar strength. Japan bond-market ownership: ~70% of government bond market - Pal used Japan as an example of central-bank dominance and extreme policy space. Corporate BBB debt: ~$4 trillion - Pal identified BBB debt as a key systemic risk in the doom-loop scenario. Potential junk-market size: ~$1 trillion - Pal contrasted this with the much larger BBB market to show downgrade risk. Bitcoin supply cap: 21 million - Pal referenced Bitcoin’s fixed supply in discussing stock-to-flow dynamics. Real Vision subscriber base: ~45,000 subscribers - Pal described the growth of the media/education business. Real Vision free content share: ~20–30% - He said a substantial share of content is now freely available.

Pivotal Quotes: "We are not here to invent the wheel. We are here to wait until a wonderful business... and buy them at a point in time when they're out of favor." — Bill Smead: Explaining his value-investing philosophy and how he selects stocks. "When the yield curve inverts... it precedes a recession." — Cam Harvey: Summarizing the core empirical finding from his dissertation and decades of out-of-sample validation. "Buy bonds, buy dollars, wear diamonds." — Raoul Pal: His shorthand for the highest-quality macro trade in a slowing global economy.

Implications: The episode argues for disciplined, evidence-based investing: favor quality and balance-sheet strength, respect recession signals, avoid chasing expensive growth, and prepare for a regime where bonds, the dollar, housing-related spending, and tokenized finance may outperform broad risk assets.