The Earbud Stock Market
by William Smead, Smead Capital Management
The earbud is nothing new, but it seems to be everywhere. The first implication of wearing earbuds is the solitary nature it creates. People signal through earbuds that they want to be left alone. Second, earbuds represent a willingness to disengage from the moment—a willful non-participation in society. This seems true in a world that is tied at the hip to technology and dominated by the largest population group between 20 and 36 years of age. This seems even truer for the markets, which greatly matters to long-duration stock owners like us.
The big winners of the past two years have been the companies which make money from those with ears plugged. You can pay Apple (AAPL) to hear music from a download on a device Apple made. You can buy things from Amazon (AMZN) online without ever interacting with a human. Starbucks (SBUX) will let you order online and all you have to do is call out your name when you get to the store. You don’t even need to take out your ear plugs to do any of these activities. Netflix (NFLX) will let you watch a movie or TV show without mixing with others at the theatre or tuning in at the time of the original broadcast. Facebook (FB), Tinder and others help those who wear earbuds find dates, because they operate in solitude much of the time. Stocks which benefit from the earbud mentality have soared in value the last two years.
Social solitude leads to the second implication of having the earbuds in. It is the unlikelihood of you sharing your life with someone else. The irony of today is that some have dubbed this the era of the “sharing” economy. You can ride an Uber, a Zipcar, rent a bike, share an apartment building, rent from Airbnb, participate in Lending Club (LC) or have a TaskRabbit come and assemble a piece of furniture at your house. Therefore, what they mean by “sharing” is sharing the ownership of things and or using things someone else owns.
We have argued adamantly that millennials are about to share their lives with others. The last five years has seen the lowest percentage of 25-34 year old Americans married, bearing children and purchasing homes in the last 50 years. Sharing your life with a spouse, with children, with neighbors and with your community drives the U.S. economy and allows businesses to thrive. It is hard to pull all of these things off in a solitary position with your earbuds in and effectively walled off from those around you.
When you marry, have or adopt children and buy a house, you share an interest in your life with the businesses which get compensated for making those events happen. The seamstress who makes the wedding dress, the florist and caterer who make the wedding day a success are the first beneficiaries. Hospitals, doctors, nurses and a wide group of product producers make money from the birth process.
Once children are in the game, the home builder and seller, the furniture maker and seller, the paint company and the security company find their business on the upswing. I haven’t even mentioned the blue-collar trade people who sub-contract on the building of the homes like carpenters, electricians and plumbers. All of this is domestic in nature and would hugely stimulate the U.S. economy.
Look at the U.S. housing starts chart going back to 1960. The chart shows that we are coming out of a housing depression and could easily see housing production grow more than 50% in the next five years. Remember, the chart is not adjusted for population. Therefore, 1.0058 million housing starts in a 325 million person society is way worse than the same numbers were in the 1960s when we started with 180 million people. Housing could lead to the one thing that few investors are prepared for—real GDP growth exceeding 3-4% for years. It means that the U.S. economy could hit escape velocity and interest rates could normalize.