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In this podcast, Motley Fool senior analyst Bill Mann discusses:
Plus, Author Morgan Housel joins Motley Fool host Alison Southwick and Motley Fool retirement expert Robert Brokamp to discuss how the economic challenges of the 1970s offer lessons for investors today.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on June 21, 2022.
Chris Hill: Kellogg's is splitting into three companies and DocuSign's CEO is splitting period. Motley Fool Money starts now. I'm Chris Hill, joining me today, Motley Fool senior analyst Bill Mann, thanks for being here.
Bill Mann: Hey Chris, how are you doing?
Chris Hill: I am doing pretty well. Let's start with DocuSign because DocuSign came out this morning and announced that CEO Dan Springer is leaving the corner office effective immediately. Maggie Wilderotter, who is the board chair, is going to take over as interim CEO as DocuSign searches for a new leader. I say this as a shareholder, I'm a little surprised by this. Some may not be because shares of DocuSign are down, let's just ballpark it, 80% from its high in 2021.
Bill Mann: He had a lot?
Chris Hill: I'm feeling that pain but I felt like the business was humming along OK. What did you think when you saw this news? Because I was surprised by it.
Bill Mann: I am surprised by it, too, and I'm always cynical whenever I see a CEO or an executive leave effective immediately. That means, generally, and we don't know anything in this case. Let's not drag Dan Springer through the mud just yet. But usually, that means that there's something else going on in the background. Usually, if it is an agreed-upon split there is a period of time in which they work until they find someone. This is immediate which suggests that there is something going on behind this because as you said, the business is doing well. It's about two and half times what it was when it reported in January of 2020. You're talking about a company that obviously benefited wildly during the pandemic, would to be expected, has slowed down a little bit after that. But it's not like it went back to where it was before the pandemic started. Yeah, this is very surprising to me. I cannot imagine that this is happening simply because the stock is down as much as it is.
Chris Hill: How attractive do you think this job is? Do you think DocuSign is in a position to maybe not hire whoever they want but is this an attractive opening for some potential CEO?
Bill Mann: We talk a lot about the verb portfolio, like companies that have become verbs or have become defaults, and DocuSign absolutely positively has become the default for electronic signature and document management. I think it's a pretty attractive job. The economics of the business obviously is pretty great. They have spent a ton of money on their own back office and so I think that there may be efficiencies to be wrung out there. This company is still trading at about six times trailing sales. It's not a cheap stock by any stretch of the imagination but it is much cheaper than it was. It becomes a situation where someone who's coming in isn't immediately as likely to be as held responsible for a massive stock drop as you might be for someone who would have come in, for example, when this company was trading at $75 billion.
Chris Hill: The last thing before we move on, do you think whoever the next CEO is, they're going to have some runway to implement whatever plan they want to do before they get any questioning either from the board or Wall Street?
Bill Mann: Yeah, I think they should. If this is simply a matter of business momentum, the momentum has slowed substantially. Their recent earnings, their revenues were up about 16% which seems pretty good but it is absolutely slow. The rate of growth, I should say has slowed substantially so they should have plenty of runway if there is something behind that may be causing this internally.
Chris Hill: Let's move on to Kellogg's which is planning to split into three separate public companies. There's going to be a breakfast cereal company, a snacks company, and a plant-based foods company. CEO Steve Cahillane says all three have significant potential as stand-alone companies. I will point out, however, that he's planning to run the snack business, which tells me that's the business with the most potential.
Bill Mann: I will be so disappointed if they don't name these three divisions Snap, Crackle, and Pop.
Chris Hill: [laughs] I don't think they're doing that.
Bill Mann: [laughs] Then I am disappointed. That's all there's to it, I laid out what felt about this entire deal. Obviously, Pop-Tarts should be with Pop.
Chris Hill: All kidding aside, this really does seem like a move that is growing to unlock growth potential for the snack business because I think we're into our second decade now of slowing cereal sales and the plant-based foods, that are going to be the smallest of the three. Just from a brand portfolio standpoint, it's the smallest of the three and they've already said, even before this split happens and Kellogg expects this split to take about a year-and-a-half to fully execute, there's a chance that plant-based food business just gets sold off wholesale. Someone comes in and buys it on its own. But it really does seem like the snack business, I said to you this morning I might have to have to pick up a few shares of this thing.
Bill Mann: I completely agree, it may be the business that is most poorly named outside of Pepsi, which really ought to be called Frito-Lay. Kellogg's is in the same boat, so their cereal business is about $2.4 billion in revenue. Certainly, they've Frosties, their Cocoa Puffs, their Crunchy Nuts. Their plant-based business which is mostly MorningStar Farms had about a little more than $300 million of revenue, so much smaller. Then the snacks business was over $11 billion in sales so it really truly was the biggest part of the business. It make some sense that they would be moving these apart from each other. They don't have a huge amount of infrastructural overlap between them. This seems like a great move to me but Kellogg itself, as the cereal company, is going to be a much smaller company. I agree with you, they do have some potential to unlock each of those three segments.
Chris Hill: I think it was 10 years ago, I think it was 2012 when Kellogg bought Pringles and there was a little head-scratching at the time, now with the benefit of hindsight it's clear that this is where they were headed.
Bill Mann: Yeah, I think that's right. I think it was a good transaction for them. Pringles is a business like a lot of other businesses in this segment that does not require a huge amount of research and additional investment. It was a great platform as you and I know very well as Pringles fanboys, it was a great platform for them to do short-term and special flavors, increase their shelf space through offerings of that nature. They have done a great job managing this brand but piling it into a dedicated snacks company I think is going to be a really good move for them.
Chris Hill: They're not the only company making headlines in the snack world. Today, Mondelez announced its buying Clif Bar for $2.9 billion, which I still can't wrap my head around. I said this as someone who actually likes Clif Bars, that's basically the energy bar of choice for me. When I saw the headline, I thought, wait a minute, that's a $3 billion company?
Bill Mann: Yeah.
Chris Hill: The answer is yes because that's what Mondelez is paying for them.
Bill Mann: Yeah, exactly. It's a really interesting transaction. Mondelez also owns Oreo, Toblerone, Milka. I'm not sure, given the positioning of Clif Bar, what combinations you can make where they'll have an Oreo-flavored Clif Bar or something of that nature. But from a brand perspective, it is by far the most important in the energy bar segment. I don't know what synergies they're seeing, but yeah, they have paid $3 billion for it. Interestingly enough, they are not expecting it to be accretive to the top line until next year, which means that they are seeing elsewhere in their business or even within Clif, some potential weakness in sales this year. It could be that they are filling a hole and using some cash that has been sitting on their balance sheet.
Chris Hill: We've got this acquisition, we already talked about the potential for the plant-based food business within Kellogg being acquired before the spin-off happens in 2023. Are you expecting more MA activity? I mean this is not insignificant sums of money that we're talking about here and this is all against the backdrop of what is now officially a bear market for the SP 500.
Bill Mann: I think absolutely true. You're going to see the companies that have been conservative that have hoarded cash, they're now being punished a little bit for the first time in about 15 years, you're being punished for holding cash on your balance sheet because the cash is being inflated away. You have that factor. You have targeted companies in a lot of different spaces that have seen their valuations come down a great deal. You've got certain brands that may be much more valuable within the larger framework, within a larger organization that is stored for cash now. I absolutely not just in the snack division, I see this in tech, I see it in software. I see it in a bunch of different segments the potential for companies that are cash-rich to start to use some of that cash in making opportunistic buys throughout. I think you're going to see it throughout the market. That may be one of the leading themes for the remainder of 2022.
Chris Hill: Keep watching for it. Bill Mann, thanks so much for being here.
Bill Mann: Thank you, Chris.
Chris Hill: What happens to an economy when oil prices and interest rates go higher at the same time? The 1970s might offer a few clues. Morgan Housel continues this series with Alison Southwick and Robert Brokamp on previous economic challenges and the lessons that investors can pull today.
Alison Southwick: Last week we talked about the Great Depression and now we're taking a big jump to the '70s. We're all wearing polyester and sweating or freezing because there's no in-between in polyester and we're waiting in line to fill up our Buick LeSabre. Despite disco, the '70s don't sound like a whole lot of fun. I mean, people made pets out of rocks. It's just sad [laughs].
Morgan Housel: Bro still drives a Buick LeSabre.
Robert Brokamp: That not true but I do still have my pet rock. [laughs] Thank you very much.
Alison Southwick: Morgan take me back to the '70s. This is going to get really geopolitical heavy.
Morgan Housel: Yeah. When talking about the market in the '70s, I think you have to take it back a little bit further and start right at the end of World War II in 1945. Two really important things happened in 1945 that pave the way for what happened in the '70s. Then they're interconnected. One was that, at the end of World War II, it was indisputable among every economist, every policymaker, that at the end of World War II, once all the wartime spending contracted, the economy is going to go right back into the Great Depression and the World War II is what pulled us out of the Great Depression in the '30s. It was assumed by everybody that as soon as that ended, boom, right back into it. It really freed up policymakers, especially because you had 13 million U.S. troops that were being demobilized and were going to come home with no job into Great Depression II. This was a really big deal for Truman and for all the policymakers at the time.
Then to add on top of that, because of World War II, the federal government had a massive amount of debt that they built up to pay for World War II, way more than we've had since, well more than we have today. This is a really big deal. How are we going to deal with this? Maybe this is going to be worse than the Great Depression because we have all this debt now. They really did two things. One is the Federal Reserve, which was much more politicized back then than it is now. Basically said, "No worries we will keep interest rates at 0%." Because at federal government, you have all this debt that you care if interest rates shoot up, you won't be able to pay for it. We will keep interest rates at 0%, guys don't worry about it, we got you. That was one thing. The other thing that they did at the federal government level was for all the troops coming home they really made an effort to say, "We got to make sure that these people have jobs and that they turn into consumers, and what can we do for them?" There's a lot that went on with the GI Bill and other works programs.
But two other things that they did was they really loosen the restrictions on getting a mortgage and consumer credit to turn people into consumers so they can really start buying stuff and both of those things worked. Both those things worked really well. The federal government kept control of its debt in the 1950s and '60s. The debt that was accumulated from World War II got paired down over time, wasn't that big a deal. Also, particularly in the '50s and '60s, the U.S. economy was great because consumers were buying homes, they were buying houses, they were buying refrigerators. Because Japan and Germany at the time were literally in rubble, the U.S. had a monopoly on the world economy more or less. The '50s and '60s were just this huge boom time. This is where everything went right in the U.S. economy.
Alison Southwick: It sounds like the lesson is in there's no problem that you can't spend your way out of it. [laughs]
Morgan Housel: It worked well. That's actually a good point to make because that amount of spending worked really well in the '50s and '60s. For various reasons, one, as I mentioned, because a lot of the developed world, particularly Japan and Europe, was just trying to rebuild themselves. It worked that we could spend all this money because we had a monopoly on global manufacturing. Even though we're spending all this money, we had the capacity to build it. We also built up manufacturing so much during the war to build tanks and airplanes and whatnot that we had all this manufacturing capacity to build cars and refrigerators and washing machines. It really wasn't that much of a problem with interest rates low and having that much debt, it just worked.
I think that set up a sense of complacency among policymakers at the Fed and at the president level, at the Treasury level and among consumers, that A, monetary policy and fiscal policy for the government didn't matter that much. Like we got this down. We haven't had really any big consequences from it for a long time. You just get complacent from it. U.S. consumers, too, I think really got complacent with the lifestyle that they were living. That the U.S. would own the world economy, the interest rates were going to stay low and there was always going to be a good-paying job right down the street. Those two senses of complacency cracked in the late '60s and early '70s.
A lot of it started when spending for Vietnam came along and then wartime spending had a jump back up again. But interest rates were still low. Because the rest of the world economy was coming back on line from World War II, a lot of that spending and debt that was being taken out from Vietnam started to trigger inflation, which the U.S. really hadn't experienced at all since the 1920s. It had been half a century at this point since you've dealt with inflation, which sets up a lot of complacency, which is just a long way of saying inflation really started picking up in the early 1970s. That has all impacts on investments in the stock market.
Alison Southwick: This is like we were talking about planning for this series. This is the longest span between episodes in time. We did Great Depression and then fast-forward 30 years later, that is the sound of nothing fasting-forward. [laughs] It sounds like it worked for a really long time until it didn't.
Morgan Housel: Yeah.
Alison Southwick: When are we going to start talking about energy? Because I thought this was about energy.
Morgan Housel: Yes. I mean, that's one of the big things.
Alison Southwick: Because we've got big cars. That's it.
Morgan Housel: Well, that's a really great point is that as oil prices started rising in the 1970s, it had a huge impact on the U.S. economy more so than it would today, or did in 2008, the last time that oil prices spiked. Because energy efficiency in 1970s was awful. You had your average car that was getting 7 miles per gallon and trucks, semi trucks that were getting 3 miles per gallon, which it was just so inefficient. When oil was cheap in the '50s and '60s, when the U.S. just owned the world economically, that wasn't that big a deal because oil is cheap, it didn't matter. As you get into the '70s and oil prices start rising and oil prices double and then triple.
It had a way bigger impact on the economy than it would today. Just because oil as a share of most people's spending was much higher back then than it is today. Even when oil prices doubled in 2008, the share of most people's income that went to gas was still a fraction of what it was in the 1970s. It just had a much bigger impact on the economy back then. Also, because we had been, at this point 30 years, even 40 years since the economy was in really bad shape during the 1930s, the Great Depression. You get not only complacency but just a sense of shock among consumers who have never seen a really bad economy.
I think it causes a lot of retrenchment, both for companies that say, "Well, maybe we shouldn't hire as many people because we don't know what's going to happen next," and among consumers, who start saying and start forming a mentality that I love my job, it's going to be here next month so we should slash our spending this month. Then you have high inflation coming in from the energy markets, which has a lot of geopolitical instability in the Middle East and in Egypt and Iran. Then you mix that with just a lingering recession in the United States. All came to a head in the mid-1970s with both recessions and a pretty bad market crash.
Robert Brokamp: Just to put some numbers on it. When you look at the '70s as a decade, U.S. large-cap stocks averaged 6% a year. That's significantly below the 10% you always hear about. But on top of that, inflation was 7.5% a year. Even though your portfolio was growing on a nominal basis, you were losing purchasing power each and every year.
Morgan Housel: That was not only true for the stock market, but especially true, I think for Treasury bonds, which are back then and today are seen as the safest asset or even a riskless asset, invest in Treasury bonds. There's no risk involved in that. But during this period from the late '50s to the early '80s, let's say, Treasury bonds lost so much money to inflation that if you invested in Treasury bonds in the late '50s, by the early 1980s, you had lost half your money in real terms adjusted for inflation.
That's, I think, really easy for investors to overlook because they often don't subtract inflation from their investments at the end of the year to really get a sense of how much wealth did I actually gain this year? But it had a huge impact on investing during this period. Then the other thing like as this feeds into the stock market is that, stocks compete with other assets for returns. It's just a big competition among stocks and bonds and real estate of what asset classes are offering the best returns. That's where investors are going to put their money. As interest rates start rising, they become more attractive relative to stocks. Because of that, when you have a period where now the interest rates are rising in the '70s, so you can buy government bonds that yield 7%, 8%, 10%. Now stocks look way less attractive because you can earn a 10% return on bonds. So stock prices needed to fall and fall a lot just to make up the parity by comparison with bonds. That's what really dragged stock prices down in the 1970s was the fact that bonds got way more attractive because interest rates are rising.
Alison Southwick: It was a slow drag, there wasn't a big major market crash or was there a major market crash?
Morgan Housel: No, not the one-day crashes that happened in 1929 or 1987. But 1974 is a really bad year for stocks. You had some bad years but no overnight crashes like the other periods. But it was bad year after bad year. Or even in 1970s there were a couple of really good years. It was a period of just a lot of this pin balling back and forth. We've had years where the market really down, 40% one year and then up 30% the next year, and then down 20% the next year. During the 1970s, it was just a pretty chaotic time all round.
Robert Brokamp: Though I think one of the important historical aspects of this, the consequences of it, people basically gave up on stocks. They started moving into gold and real estate and saying that basically stocks were for suckers. Famously in 1979, Newsweek had an issue and the cover was the death of equities basically saying no one invests in stocks anymore, of course at that point it would have been the best time to invest in stocks. But people had given up.
Morgan Housel: Yeah.
Robert Brokamp: Really, why would you invest in a risky asset when you can go out to the bank and get a CD that was yielding 12, 13%.
Morgan Housel: Right.
Alison Southwick: Wow. That's crazy.
Morgan Housel: But the CD that was yielding 12% was during a time when inflation was 10 or 11%. It was a pretty crazy time all around even though I obviously wasn't an investor or even a person back then. [laughs] Definitely, when you read about the period and read what people were writing at the time, it wasn't just pessimism at the moment, but a sense of long-term pessimism. Where it's, I think the U.S. as leading economy is over. Very similar to, I think what you saw in 2008-2009, where people really saw it as a paradigm shift back to something else. Interesting, too. This is around the period where both Japan and Germany had effectively rebuilt themselves from World War II. Their economy started not just growing, but surging. Particularly Japan around starting in the late '70s, early '80s was really looking like it was going to become the world's dominant economy. Just by leaps and bounds, not only in economic growth, but technology and innovation was really running laps around the U.S. at the point, which added to the sense of pessimism in the United States, that they were falling behind.
Robert Brokamp: Robert Shiller's used the term animal spirits, so when you look at the '70s in terms of the zeitgeist for the time you had Watergate, you had the Vietnam War, you had the OPEC and the oil crisis which made us feel like we're a little powerless against these other countries. I was around for the 1970s. I was born in '69. And what I remember were the long gas lines. I remember that my first car was in 1977 Lincoln Continental and it got 5 miles to the gallon.
Morgan Housel: Six miles to the gallon.
Robert Brokamp: Six miles to the gallon. [laughs]
Morgan Housel: That's great.
Alison Southwick: It was a slow-burning economic mess. How did we come out of it?
Morgan Housel: There are a few times I'm talking about these events where you can point to one person and say that person pulled it out. But I think in this event, you can point to Paul Volcker who was the Fed chairman in the early 1980s.
Alison Southwick: A maker of rules.
Morgan Housel: Right, that's right. Yeah, he came back in the last couple of years with the Volcker Rule. But he did something in the early '80s that I think very few people in the history of the Fed would do, which he was fearless about jacking up interest rates as high as it needs to go. Brought interest rates up to close to 20%, which made this economic recession and paying that much worse. A lot of businesses went out of business that had to refinance our debt, but now interest rates are 20%, so there's no way you can refinance it. Really caused a lot of pain in the economy. But it broke the back of inflation, which is what needed to happen. Paul Volcker during the time. It's funny now that we, in hindsight, I think a lot of people think Volcker is a hero. I think he's the most universally seen as a hero today. In the '80s, he was probably the least popular person in America. Much so that I think he was the first Fed chairman that had Secret Service detail because people at the Fed built an effigy of him and burned it on the steps to the Fed.
Alison Southwick: All his employees did that?
Morgan Housel: No, not his own employee, but somebody. But he was truly one of the least popular people in America at the time because he was viewed, and I think rightly viewed his actions, were driving economy into the ground. It's true they were, but they were also at the same time killing what needed to be killed. It's almost like with chemotherapy, it's going to destroy your body. It's awful and from the outside, it's like God, chemotherapy is the worst thing ever, but at the same time it's killing the worst disease that was what Volcker was doing in the '80s. It took several years of doing it. But finally in the early '80s, about '83, '84 is when things, inflation and interest rates started falling again. Then you have the opposite effect of rising interest rates are bad for stocks, then also now '83-'84 interest rates are plunging, which is great for stocks and then Reagan, morning in America, and bonds, too, inflation's falling. You get a new president who's got a lot of optimism, then you start the '80s boom and rally.
Chris Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill, thanks for listening. We'll see you tomorrow.
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