Excess Returns Cole Smead on Deficits, Inflation, and the Erosion of Earnings Quality in Technology Stocks
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Sep 3, 2025 Cole Smead, Portfolio Manager at Smead Capital Management, offers sharp insights into the complexities of today’s markets. He discusses the dangers of fiscal largesse and inflation while challenging the myth of American exceptionalism. There's a deep dive into earnings quality, revealing troubling trends among U.S. corporations, and an analysis of passive investing's effects on market dynamics. Smead also contrasts the current AI boom to historical manias, emphasizing lessons from Buffett and Munger about evaluating companies and understanding investment risks.
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Deficits Mask Recessions, Raise Future Risk
- Large sustained fiscal deficits blunt recessions but create long-term instability.
- Rising M2 and fiscal largesse make inflation stickier and increase systemic risk.
Politics Entrench Deficit Spending
- Politicians show little appetite to cut entrenched spending, extending deficit pressures.
- That political dynamic increases the chance fiscal policy forces the Fed to ease, worsening money supply growth.
Government Stakes Undermine Market Signals
- Government equity stakes and intervention signal a big-government era that distorts markets.
- Such crowding out raises future sovereign borrowing costs and private cost of capital.
