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Bill Smead: Nesting Millenials to Power Economy, Stocks (Audio) · Bloomberg Intelligence

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  Speaker 1: I'm Charlie Pellett. The dial, the SMP naztack Hall declining,
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  Speaker 1: I'm Charlie Pellett, and that's a Bloomberg Business flash. This
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  Speaker 1: is Taking Stock with Kathleen Hayes and Grim Box on
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  Speaker 1: Bloomberg Radio. I'm Kathleen Hayes, my co host Pen Fox
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  Speaker 1: on vacation this week. You can look forward to hearing
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  Speaker 1: him back on the show on Monday. Meanwhile, the stock market,
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  Speaker 1: what's going to power it ahead? If you have a
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  Speaker 1: bullish case on stocks, people can talk about global disinflation
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  Speaker 1: and uh lack of business spending in the United States,
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  Speaker 1: a consumer that's spending some money but not exactly roaring
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  Speaker 1: well if you want a bullish case. According to Bill Smeade,
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  Speaker 1: chief executive of executive officer and chief investment officer at
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  Speaker 1: Smead Capital Management in Seattle, let's start with housing. Bill,
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  Speaker 1: welcome back to the show. Thank you, Kathleen. Good to
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  Speaker 1: be with you. Well, so this is a this is
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  Speaker 1: a thesis you've had for a while, and you would
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  Speaker 1: argue I think that as of August seen there was
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  Speaker 1: a shot heard round the world that is really evidence
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  Speaker 1: that your thesis is working right. The sale of new
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  Speaker 1: homes came in at a pace that was eighty thousand
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  Speaker 1: above the average of the economists at a kind of
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  Speaker 1: a shocking number. And we have been telling people that
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  Speaker 1: you have to be patient because you're you're dealing with
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  Speaker 1: the behavior of millions of people between the ages of
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  Speaker 1: five and forty. So it's not like it's all going
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  Speaker 1: to happen the same day. Uh, And it's not like
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  Speaker 1: you're gonna yell fire in the theater. They're all going
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  Speaker 1: to run out of by a house at the same time.
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  Speaker 1: But when first time homebuyers show up in a big way,
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  Speaker 1: and by the way, at age thirty five, a first
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  Speaker 1: time HomeBuyer won't buy a first time home right, they'll
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  Speaker 1: they'll buy a much nicer home because they've been paying
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  Speaker 1: an exorbitant amount of rent to what we like to
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  Speaker 1: refer to as Mr Potter like landlords. Well, I've been
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  Speaker 1: interested in your thesis since he started espousing what too
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  Speaker 1: three However, many years ago that was Bill because when
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  Speaker 1: people said, oh, millennials aren't going to buy homes, Oh
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  Speaker 1: they're going to want to rent that, you know other
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  Speaker 1: they say, there's being burned. And in the Great Recession,
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  Speaker 1: I keep thinking, hey, wait a minute, just let them
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  Speaker 1: get a little bit older, let them get married, Let
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  Speaker 1: them have a kid or two, and you know what,
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  Speaker 1: those kids, those millennials are going to grow upen up
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  Speaker 1: and say, no, I'd like a house. And oh, by
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  Speaker 1: the way, instead of just looking at at things on
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  Speaker 1: my mobile phone for TV. But I'm gonna look at
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  Speaker 1: on my mobile phone. But I want one of those big,
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  Speaker 1: nice flat panels to put on my living room wall. Right.
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  Speaker 1: There's a whole bunch of things mixed in with this.
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  Speaker 1: For example, the ten year Treasury rate is currently one
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  Speaker 1: point five five and that is the primary interest rate
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  Speaker 1: for setting mortgages because the average time it takes to
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  Speaker 1: be off mortgages twelve years. So if by chance six
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  Speaker 1: million people between forty I have about six of them
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  Speaker 1: uh buy homes in the next ten years to fifteen years. Uh,
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  Speaker 1: there's gonna be tremendous demand for credit. So rather than
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  Speaker 1: focusing all the time on the Federal Reserve Board and
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  Speaker 1: asking how are they going to set interest rates, why
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  Speaker 1: don't you just watch the demand that comes from the
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  Speaker 1: largest population group. So if this thesis is going to hold,
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  Speaker 1: what do I buy bill? Well, first of all, it
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  Speaker 1: will be a bifurcation, and it probably to us if
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  Speaker 1: we're right, the most gratifying part of this will be
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  Speaker 1: uh there will be a parting of the red sea
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  Speaker 1: between passive and active because we also wrote recently that
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  Speaker 1: it appears that the S and P FI index has
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  Speaker 1: trapped itself in large capitalization US companies that are very
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  Speaker 1: overpriced from a historical standpoint and very over owned by
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  Speaker 1: active manager. That'd be your staples, your utilities, your your
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  Speaker 1: glam tech stocks with nosebleed uh PE ratios and huge capitalizations.
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  Speaker 1: So the index is pretty well trapped in three or
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  Speaker 1: four or five categories of large capitalization companies, and they
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  Speaker 1: don't own very many businesses that employ carpenters or plumbers
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  Speaker 1: or electricians, or or really have much to do at
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  Speaker 1: all with what happens when you go through a ten
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  Speaker 1: year period of sustained and successful home building. Okay, now,
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  Speaker 1: what about other gettle bit broader, other kinds of companies,
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  Speaker 1: other kinds of industries that are on your shopping list
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  Speaker 1: right now. Well, the first one is the one that
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  Speaker 1: started to perk up the most just lately, and that
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  Speaker 1: is the financials. The the the lack of participation in
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  Speaker 1: borrowing money for cars or homes has caused the environment
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  Speaker 1: for bank lending to be very subdued, and therefore the
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  Speaker 1: velocity of money has been low. So even though the
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  Speaker 1: Federal Reserve has created a lot of money, as they've
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  Speaker 1: created at the velocity has slowed down. So if you
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  Speaker 1: see a pickup in velocity. And by the way, we
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  Speaker 1: know that demographically and mathematically, it's a certain the spending
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  Speaker 1: between age and thirty five goes up six in the
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  Speaker 1: United States on average, So we know that just the
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  Speaker 1: aging of this group is going to cause a rise
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  Speaker 1: in spinning. So not only is borrowing going up, but
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  Speaker 1: velocities going up. So we like you know, we like
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  Speaker 1: Wallas far Ago, we like Bank America, we like JP
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  Speaker 1: Morgan and a number of other financials that we own
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  Speaker 1: that that would enjoy better interest rate spreads. But also,
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  Speaker 1: far more important, a lot of main street activity, right,
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  Speaker 1: a lot of little nicks out of assisting clients with
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  Speaker 1: the financial services they need from living life and getting married,
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  Speaker 1: having kids and doing those kind of things. Afflack is
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  Speaker 1: the largest seller of supplemental health insurance in the United
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  Speaker 1: States America. And we ask a lot of people who
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  Speaker 1: number two is. And I've never met anybody besides us
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  Speaker 1: that could tell us, And and so when you get
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  Speaker 1: a child is the first time that you really seriously
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  Speaker 1: consider supplemental health insurance. So we're having a baby boom
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  Speaker 1: between the ages of thirty and forty five in the
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  Speaker 1: United States right now. Wall Street Journal had a piece,
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  Speaker 1: uh like it was about two months ago, and it
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  Speaker 1: showed that last year's birthing was flat. But birthing is
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  Speaker 1: flat because we've had a monumental drop off in the
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  Speaker 1: last twenty years, reduction in teenage pregnancy and a drastic
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  Speaker 1: reduction in births for women twenty five. So to be
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  Speaker 1: flat and you've got a big drop off in the
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  Speaker 1: people that we're having kids over the last twenty years.
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  Speaker 1: Guess who had to pick up the pace, and that
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  Speaker 1: is Uh. Women are waiting later in life, get going
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  Speaker 1: to college, great in a career, getting married, and then
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  Speaker 1: having their children in the thirties. There's an explosion of
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  Speaker 1: birth rate between thirty and forty five. Sounds like a good,
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  Speaker 1: solid trend to me. That really lays the groundwork for
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  Speaker 1: stronger fundamentals across the country right the culture, the economy,
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  Speaker 1: the productivity, even burst your half away, uh one that
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  Speaker 1: you feel go ahead, no, no, uh, let me, let
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  Speaker 1: me just caution everybody though, remember in our thesis, Yeah,
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  Speaker 1: it's great for Main Street, but it's gonna be a
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  Speaker 1: lot tougher on Wall Street. Now. First of all, the
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  Speaker 1: as the interest rates rise, the history would be that
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  Speaker 1: that compacts price rze ratios. So for people that have
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  Speaker 1: been way over paying for four or five year out
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  Speaker 1: earnings estimates, when those interest rates rise, what people are
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  Speaker 1: willing to pay for money that comes a long way
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  Speaker 1: down the road goes down. So we're very positive about
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  Speaker 1: what we're positive on, but we're also very negative about
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  Speaker 1: the way that people that have bought stocks just for
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  Speaker 1: the dividend or or others. So Berkshire Hathaway is unusually
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  Speaker 1: well positioned for almost any environment. They have seventy billion
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  Speaker 1: dollars sitting in cash to make their next acquisition. Uh
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  Speaker 1: they are a huge holder of financial instruments a lender,
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  Speaker 1: but fit would love for capital get more dear right,
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  Speaker 1: he would love for interest rates to go up and
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  Speaker 1: for price owners ratios to go down. He's the largest
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  Speaker 1: owner of Bank America American Express, while Spargo. He just
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  Speaker 1: recently asked for permission to exceed ten percent ownership of
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  Speaker 1: Walla Spargo and uh so he you know he owns
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  Speaker 1: the second largest residents of real estate brokerage. Uh. He
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  Speaker 1: owns the Shock carpet, the Benjamin Moore paint, he owns
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  Speaker 1: the railroad. I was near my hometown in southern Washington
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  Speaker 1: a couple of a couple of days ago, and the
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  Speaker 1: train went by and about six of the cars were
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  Speaker 1: finished wood, heading west on the Burlington Northern Santa Fe.
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  Speaker 1: And I promise you five years ago the train didn't
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  Speaker 1: have finished wood. It had logs, and it was headed
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  Speaker 1: east to China. Well, that's an interesting trend to just
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  Speaker 1: really quickly south Washington. Which town is your hometown, wash Google?
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  Speaker 1: And I just ran into one of your high school friends, Glenn,
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  Speaker 1: at the talk I did in Everett, Washington yesterday, and
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  Speaker 1: she said to say, Hi, all righty, Well you know
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  Speaker 1: what's Sugle? I know that very well. Right across the
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  Speaker 1: Columbia River from Portland's really quickly. Wells Fargo is another
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  Speaker 1: company you like. Was interesting when the odds jumped of
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  Speaker 1: an interest rate increase, the regionals outperform, and so did
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  Speaker 1: Wells Fargo. Among all the big banks. People are positive.
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  Speaker 1: Remember that the three big banks that we own, they
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  Speaker 1: probably hold deposits the United States, and there's lots of
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  Speaker 1: fantasies out there about how the fintech companies and these
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  Speaker 1: kind of side sideways lenders coming from the outside are
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  Speaker 1: going to do all the mortgages. The problem is you've
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  Speaker 1: got to have deposits to make mortgages, right you. You
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  Speaker 1: can't just make a mortgage. Somebody has to have the
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  Speaker 1: deposits to make the mortgage. So once these young people,
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  Speaker 1: and when I say young, I mean below forty start
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  Speaker 1: buying houses and cars and large volumes, the banks are
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  Speaker 1: are in a position to get alliance share of that business.
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  Speaker 1: Bill Smeat, thank you so much for joining US. Chief
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  Speaker 1: executive officer, Chief investment officers. S Meet Capital Management were
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  Speaker 1: the two point three billion dollars under man in Chaman.
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  Speaker 1: He's located in Seattle. Millennials, they're having families, they're having kids,
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  Speaker 1: they're building homes. That's going to be the behind a
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  Speaker 1: nice move up in stocks for some time. On Kathleen Hayes,
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  Speaker 1: this is Bloomberg