Millennials are repeating Boomers’ ‘inflation binge’ of the '70s

Smead Capital Management CIO Bill Smead joins Yahoo Finance Live to defend his argument that millennial demographic shifts are contributing to inflation and discuss wage growth, the economy, and markets.

Video Transcript

- Of course, red hot inflation is putting markets on edge and triggering fears of a recession. The causes behind the price hikes include the war in Ukraine, record government spending packages. One investor is arguing there is perhaps one more factor to blame-- millennials. Not just that, but the size of the millennial cohort-- that's where we find Sozzi's take today. Sozz?

BRIAN SOZZI: All right, thanks so much. OK, Julie. This is a very special take where I want to bring in Bill Smead, Smead Capital Management CIO and co-portfolio manager, who talked about this in a recent interview.

Bill, good to see you here this morning. Thanks for hopping on. I understand it's been a challenging, I would say, 48 hours for you.

This situation really blew up on Twitter. So let me swap the deck here. Are you saying that millennials are to blame for this type of inflation we're seeing?

BILL SMEAD: No, that was a headline written by someone else. I never put the word blame in the piece that I wrote or the conversation that I had. So here's what's going on.

Back when I was in the 22 to 40-year-old age range as a baby boomer, there were 75% more baby boomers than there was the generation in front of us. So when 75% more people got into the household formation, home buying, car buying part of their life-- I call it the necessity spending part of your life-- there were too many people with too much money left over from the Vietnam War and Johnson's Great Society. And then we had an oil embargo in 1973, and it just triggered things like a wildfire. We call it wolverine inflation.

So 75% more people in the key necessity spending age group with massive liquidity in front of them created quite an inflation binge. So it's the demographic differential. It's not the humans.

It's not what they're doing. It's not the choices they're making that's causing inflation. It is just the sheer size of the group.

There are 41 and 1/2% more millennials than there are Gen Xers. Therefore there's 41% more people that want to buy houses and buy cars and buy the necessities that they need. And we got flooded with liquidity and had a-- you know, torpedoed the oil industry in April of 2020. And you set up the same kind of circumstances that we had in the 1970s. The difference this time, though-- it's 41 and 1/2% more people in the key necessity buying area rather than 75% more like it was in the 1970s.

- So Bill, how should we kind of warp or change our expectations around what for millennials and what for generations, regardless of how large their cohort is, what their expectations for wages should be and then that combating inflation so that they can still have equity in homes, so that they can still have family formation and all of the things that generations prior were also afforded?

BILL SMEAD: So it's an interesting group of people because they waited five to seven years later in life, you know, to get married and have kids.

- Out of necessity as well, though, right?

BILL SMEAD: And buy homes, right, and cars. If you lived in a major metropolitan city and worked, you took public transportation and Uber. You didn't buy a car.

So the fact of the matter is this group is the most college educated group. By the way, just so you know, we're very positive about the economy of the United States the next 10 years. But we also expect an elongated period of higher inflation.

Not 9%, but certainly we could see 5% inflation in the next 10 years because we're bullish on the way that those demographics favor economic activity. Do not worry about the wages. Everywhere I go, you know, In N Out and Chick-Fil-A and these people are offering $17 an hour to go to work.

Wages at the low end are rising fast. You need to worry about the people in the tech world. We got way too many coders, way too many tech people. We mass produced technology workers for, you know, 15 years, and there's a slowdown in technology spending going on. So the irony is we're very positive about the economy the next 10 years, but history would show that that positive economics will translate to lower price earnings ratios in the stock market because interest rates have to go quite a bit higher in relation to, let's say, inflation that averages 5% the next 10 years.

- And Bill, this goes back to something we were discussing earlier in the show, which is a callout from Goldman Sachs that we are going to see slowing job growth and that we could see, as of 2024, an unemployment rate back up to 4%. So with that kind of an economic scenario like you're describing, which is, you're saying, fairly strong earnings growth but lower multiples and perhaps lower job growth, I mean, what does that all spell in terms of what investors should be looking at right now?

BILL SMEAD: That lower job growth would only be in the short run as a consequence of the slowdown that the Fed's tightening would create. That's not a natural consequence of where we are in the timeline. That's just a function of the Fed tightening credit.

They first got to knock that 9% down to 5%, right? That's what's going to slow the job growth. But if you're a cook or a talented wait person or a talented greeter, I mean, they're paying through the nose right now.

They'll beg you to come and cook at Applebee's or Red Robin or wherever it is. This is the best time to be in that industry with skills you ever thought of. And so no, in the '70s, we had high inflation, high interest rates, a terrible stock market.

And we built more houses per population in that decade, any decade of my lifetime. And we believe that we're going to build more houses in the next 10 years per population than we've built for 20 or 30 years because these people need a home. Now what that's going to cause is spreading people out across the geography, right? The millennials are going to buy houses in places that are more affordable. And that's where we need to build the houses.

BRIAN SOZZI: Bill, we've talked to you for many years and you've been at this game for a while. Just curious on what the past 48 hours have been like for you, a veteran of the financial services industry, to essentially go viral off a story like this.

BILL SMEAD: I don't think people even watched the video, the interview that I did, because they didn't-- all they knew was the title, right? Whoever put the title and said that I blame the millennials, that's what made it go viral. Nothing that we've written or said-- everyone knows me as the guy that's super bullish. I have five millennial children, and no one's more bullish economically over the next 10 years on millennials than I am.

BRIAN SOZZI: All right, Bill Smead setting the record straight. Bill, always good to talk with you. We'll talk to you soon.

BILL SMEAD: Thank you.