Speaker 1: Chris Joy was straight to it. Mate, thanks for coming in.
Speaker 1: Thank you, Like this is a public holiday, you know,
Speaker 1: it's a big a couple of weeks coming up. It's
Speaker 1: been big days every day since March third or whatever
Speaker 1: the date was, whenever the Iran war started. People could
Speaker 1: be excused for having conniptions right now because no one
Speaker 1: knows what the fuck is going on. It's like brain damage. Shit.
Speaker 1: So what would be great to talk to you about?
Speaker 1: And last time we spoke to you and you did
Speaker 1: exceedingly well in our show. I'd like to talk to
Speaker 1: you about things like Iran, US equities, Australian equities, interest rates,
Speaker 1: of course, any recession going on here? What's going on
Speaker 1: in the world? Mate, Well, where do you want to start?
Speaker 1: Let's talk with Let's start with America. Let's start with
Speaker 1: Trump America, Iran. What's your prognosis on what's going to
Speaker 1: happen there and how will it spill back here to Australia.
Speaker 2: So I think the Iranian conflict, we had an unconventional
Speaker 2: view on that that was it would be cauterized quite quickly.
Speaker 2: So we're of the view the guts of the campaign
Speaker 2: would be done by the end of March, and we
Speaker 2: obviously got a seats far in the first week of August,
Speaker 2: and we positioned accordingly, so we bought hundreds of millions
Speaker 2: of dollars of assets.
Speaker 1: Late March, he joined about bonds now government bonds, YEP.
Speaker 2: Government bonds, bank bonds, corporate bonds. And Trump has had
Speaker 2: great success in Venezuela. I think he's going to roll
Speaker 2: the same playbook with Cuba. They had great success in
Speaker 2: Iran last year with their strikes, which were very surgical.
Speaker 2: The campaign itself has been I think astonishingly successful. They
Speaker 2: haven't lost a single person inside Iran, and they've basically
Speaker 2: achieved most of their objectives in terms of destroying most
Speaker 2: of the air Force, Navy, Army, they've killed most of
Speaker 2: the existing regime. I think Kameni and his son are
Speaker 2: both dead, and if his son's not dead, he's well incapacitated.
Speaker 2: I don't know if they will be raised. Change doesn't
Speaker 2: really look like they'll necessarily be Ragiam Change. There is
Speaker 2: this five hundred kilos of sixty percent and rich uranium
Speaker 2: sitting under the rubble in Isfahan that he needs to resolve,
Speaker 2: which is why I think he's still negotiating with him,
Speaker 2: he doesn't need the straight of hormones open necessarily. I
Speaker 2: think once they exit, which is a key waterway where
Speaker 2: roughly twenty percent of the world's oil passes through, the
Speaker 2: US is actually making out like an absolute bandit. From this.
Speaker 2: They've massively increased their crude oil exports and their a
Speaker 2: net energy exporter. But the minute he exits, the Iranians
Speaker 2: that's their life. They have to open up austrade. So
Speaker 2: once he's gone, I think that gets resolved and he
Speaker 2: doesn't need a cease far agreement. I think the midterm
Speaker 2: elections are a key binding constraint, which is why we
Speaker 2: were confident the guts of the campaign would be done
Speaker 2: in March, and he's not expected to do particularly well,
Speaker 2: but more generally, has had some interesting results. If you
Speaker 2: look at illegal border crossings in the US down ninety
Speaker 2: five percent, so he has shut those borders. He as
Speaker 2: a consequence, US population growth is the lowest in history,
Speaker 2: which is interesting for inflation. He's slash taxes. He's paid
Speaker 2: for the four trillion of tax cuts in this one
Speaker 2: big beautiful Bill act with the tariffs, which has been
Speaker 2: a bit of a genius move. He has coalesced the
Speaker 2: mother of all cap X booms, about a trillion dollars
Speaker 2: the US a year via AI and the tech oligarchy,
Speaker 2: the tech leadership in the US, which used to be
Speaker 2: disposed to the Democrats, has really galvanized behind him. He
Speaker 2: is reasserting US I think, geostrategic promise. There's this no
Speaker 2: doubt about that. They are now the dominant global hedgemon
Speaker 2: and having their way with the world, you know, whether
Speaker 2: you like it or not. And I think he's re
Speaker 2: asserting US economic exceptionalism because the US is unambiguously by
Speaker 2: far the biggest beneficiary of all the AI innovation research
Speaker 2: and development, all the AI spending. I mean, they're just
Speaker 2: killing it in AI. So having said that, you know,
Speaker 2: he's super polarizing, obviously, but we are seeing a secular
Speaker 2: global swing in the political pendulum to the right, and
Speaker 2: you've see it everywhere here in Australia with one nation
Speaker 2: is the UK with the reform Europe in Europe yep,
Speaker 2: and you know South America and Argentina. So it's fascinating, mate,
Speaker 2: and what that means for Australia as well, Like if
Speaker 2: we were to ever get Prime Minister Pauline Hanson which
Speaker 2: is an interesting conception. I mean, obviously she'd have to go.
Speaker 1: Lower house here.
Speaker 2: Yeah, but yeah, it's fascinating the.
Speaker 1: US stock market, it's sort of traveling at all time
Speaker 1: highs are close to there is an inflation. There is
Speaker 1: inflation in the US. Yeah. The the USAID has not
Speaker 1: responded to that either with interest rates. In fact, Trump's
Speaker 1: sort of trying to tell them to push them put
Speaker 1: the rates down or continue to put the rates down.
Speaker 1: How is how is the US traveling so well if
Speaker 1: they don't have new people coming into the town and
Speaker 1: starting to spend money. Yes, as an experiment in relation to.
Speaker 2: The US equity market, and this is the great conundrum
Speaker 2: of our time because you've got equities, as you say,
Speaker 2: at all time highs, and paradoxically, you've got the FED
Speaker 2: price for interest rate cuts despite the fact that core
Speaker 2: inflation in the US is running more than fifty percent
Speaker 2: above the fed's target. And for markets guys like US,
Speaker 2: this is just like I think, a not many people
Speaker 2: are actually talking about it would be it's kind of
Speaker 2: astonishing for me. So US core inflation. The FED has
Speaker 2: a particular measure called PCEE that they focus on slightly
Speaker 2: technical but that's been running at three point four percent
Speaker 2: anualized last six months, and that's way above what number,
Speaker 2: the two percent target? Yeah, they target two percent. In
Speaker 2: the last twelve months, it's been running at three percent.
Speaker 2: So US core inflation not only was a way above target,
Speaker 2: but it was accelerating. All those numbers mark pre March,
Speaker 2: pre this huge order pre now wow yeap that's before
Speaker 2: the inflation shot wow, accelerating, And so it makes no sense.
Speaker 2: Our modeling suggests the Fed needs to hike rates by
Speaker 2: fifty to sixty basis points. Trump's been very successful in
Speaker 2: Drawburny the Fed to cut rates last year. He has
Speaker 2: this beef with the current boss of the FAED, J Powell.
Speaker 2: He appointed him in his first term. He feels that
Speaker 2: Power was lobbying for the Democrats, which he was pre election,
Speaker 2: and so Trump's gone, iye for an eye Mode, wants
Speaker 2: to take him out, which he's He's definitely had his
Speaker 2: way with Power, and he's appointed this new guy called Wosh,
Speaker 2: who's been ostensibly much more dubbish fish means supportive of
Speaker 2: the notion of interest rate cuts. So markets are thinking, well,
Speaker 2: Power's getting replaced by Walsh. This is Trump's proxy Trump's
Speaker 2: Trump warts cuts, but there's no way they can cut
Speaker 2: rates in my view, because I've got this huge inflation
Speaker 2: shock and they are running more than fifty percent above
Speaker 2: target before the shock. And so what that means for
Speaker 2: listeners is that it's very difficult to rationalize the US
Speaker 2: equity evaluations. It makes no sense at all.
Speaker 1: Are we talking about a new style though, Are we
Speaker 1: talking about a new approach to this stuff? Or as?
Speaker 2: I don't think so, I mean, that would be one explanation. So,
Speaker 2: you know, one explanation would be that the Fed's going
Speaker 2: to shift the target. We've talked about this before, but
Speaker 2: there's no chance of that happening. The FED is these
Speaker 2: are very big data dependent organizations, you know, the politicians.
Speaker 2: One thing people need to understand is that whilst Trump
Speaker 2: has been criticized for attacking the FED and politicizing the FED,
Speaker 2: the reality is that every political leader appoints every central
Speaker 2: bank boss. So Charmers here sacked fille Low as he's
Speaker 2: entitled to do, and he appointed the governor of a
Speaker 2: deputy governor and seven of the nine voting Interest.
Speaker 1: Rate Committee members the whole on your board now, and
Speaker 1: what we get.
Speaker 2: We got a WHIBA, which means the IBA cut rates
Speaker 2: before the election, the cut rates three times last year
Speaker 2: and charmers. All power to him. I would have done
Speaker 2: more less the same thing, like everyone wants the two
Speaker 2: the probabilities in their favor. Trump is doing the same
Speaker 2: thing as well in the US. But you know what
Speaker 2: happens in Australia. We wake up, the RBA wakes up.
Speaker 2: Last year, they forecus two point six percent coinflation. Michelle Bullock,
Speaker 2: the boss of the RBA, the governor said we're going
Speaker 2: to hit our target. The targets two and a half percent.
Speaker 2: We said no, no, no, you're going to be running
Speaker 2: it through.
Speaker 1: You were cooler bar cool ol bar.
Speaker 2: Yeah, my guy said, that's not a snowballs chance of hell.
Speaker 2: Are hitting two point six? You'ren't run a three point
Speaker 2: three for core inflation. They printed three point four for
Speaker 2: the year, way above target. Disaster. So but to the
Speaker 2: RBA's credit, what do they do? Data dependence doy. They're like, okay,
Speaker 2: we got it wrong. Guess what We're hiking rates and
Speaker 2: they've hyped rates twice. The market's pricing in another two
Speaker 2: to three hikes. They're pricing in a four point seven
Speaker 2: percent cash rate. Now remember at the peak of the
Speaker 2: hiking cycle after the pandemic, we peaked at four point
Speaker 2: three five percent, so we're going this is absolute capitulation
Speaker 2: and humiliation. The RBA is the first central bank in
Speaker 2: the world to have cut rates in the pandemic, hiked
Speaker 2: cut again, and they had to turn around one hundred
Speaker 2: eight degrees and say we've got it totally wrong. We're
Speaker 2: hiking again. First in the world to do that, right,
Speaker 2: And now interesting series, first in the world, first in
Speaker 2: the world. Yeah, yeah, the Japanese were always hiking, so
Speaker 2: they don't count. But yeah, first in the world. The
Speaker 2: most embarrassing, you know. But in the Harber's defense, first
Speaker 2: point is when inflation smacked them in the face, they said, hey,
Speaker 2: we're going to lift rates. They didn't hesitate, so you know,
Speaker 2: all power to them. And they may lift rates again
Speaker 2: in May. They've got a meeting before the budget. But
Speaker 2: we're talking about monster short term rate hikes. We're talking
Speaker 2: about a totality of four to five hikes, a totality
Speaker 2: of more than one hundred basis points of hikes.
Speaker 1: One hundred basis points.
Speaker 2: Yeah, we've already had two and we're talking about marcuts
Speaker 2: pricing number two to three. So this and you're seeing
Speaker 2: in your business already and you were just telling me
Speaker 2: before that you know you're seeing an instantaneous radioaction to
Speaker 2: rate hikes in mortgage approval flows and mortgage settlements. So
Speaker 2: this is a game change of Frustralia. We're going to
Speaker 2: see house prices are going to fall. They're already starting
Speaker 2: to fall in Sydney and Melbourne. You saw the minute
Speaker 2: that they started talking about hike slate last year, Sydney,
Speaker 2: Melbourne got ko Wushka market rolled over. Brisbane and Perth.
Speaker 2: House prices are still as strong as ten men, but
Speaker 2: that's going to cool unambiguously. National house prices are going
Speaker 2: to fall for sure. At the start of last year
Speaker 2: everyone was like house buses were falling in and saying, oh,
Speaker 2: Hausprus are going to be weak. We thought the RBA
Speaker 2: would cut two to three times. We didn't agree with
Speaker 2: what they were doing, but I argued that house pruces
Speaker 2: would rise five to ten percent. National house bruses rose
Speaker 2: nine percent, and within that you had like killer growth
Speaker 2: in Perth twenty plus percent, Brisbane fifteen percent, Sydney and
Speaker 2: Melbourne weaker. So the RBA, I think has done the
Speaker 2: right thing. And we can talk about this later, but
Speaker 2: just come back to the original question on equities. The
Speaker 2: essential challenge here is you've got all time stock market evaluations,
Speaker 2: which is reflected in our super portfolios, and you've got
Speaker 2: the FAED price for rate cuts which makes no freaking sense.
Speaker 2: And again our models, which are very accurate, at saying
Speaker 2: the FED has to raise rates. And what does that
Speaker 2: mean for Australia in the world, Well, that means a
Speaker 2: hiking cycle. And what we're starting to see the portense
Speaker 2: of mark is a globally synchronized hiking cycle. Now, last
Speaker 2: year this serious. Yeah, So last year, no one in
Speaker 2: the world, I think, aside from US, was talking about
Speaker 2: the risk of a double hiking cycle. I told some
Speaker 2: of my class, prepare your portfolios for the specter of
Speaker 2: a second hiking cycle. Everyone thought I was crazy. The
Speaker 2: US bond market, the most powerful mark in the world, right,
Speaker 2: trillions and trillions at all. The bonds was pricing in
Speaker 2: as zero percent, zero percent chance of a rate hike
Speaker 2: in the US in twenty twenty six, twenty twenty seven,
Speaker 2: twenty twenty eight.
Speaker 1: At what point, what point was this.
Speaker 2: Mid to late last year? Right? Yeah, but think about
Speaker 2: the US economy right now. Unemployment's falling. Yep, four point
Speaker 2: three percent. Growth is strong. You asked me, why is
Speaker 2: the economy doing well despite population growth being non existent.
Speaker 2: It's a great question. US productivity growth is amongst the
Speaker 2: strongest in the world. So what that means is again jargon.
Speaker 2: Productivity growth just means that you're producing more for a
Speaker 2: given set of human and money inputs hours. Yeah, so
Speaker 2: more output per our works. So they've just been more efficient.
Speaker 1: That's all about. What was driving that now?
Speaker 2: Yeah, so you're getting a massive manufacturing boom in the US.
Speaker 2: There's another thing that we kind of been talking about
Speaker 2: for a long time because Trump's bring brought all the
Speaker 2: supply chains or a lot of the strategically important supply
Speaker 2: chains that come home. With automation, robotics and digitization, you
Speaker 2: can now make a lot of stuff cost effectively in
Speaker 2: the US. Look at SpaceX, number one producer of rockets
Speaker 2: and satellites in the world. So the US economy and
Speaker 2: I've traveled a lot many states through the US in
Speaker 2: the last six months, and the zeitgaist there mate is
Speaker 2: super positive amongst businesses. If you're a business person in
Speaker 2: the US. You feel you have the most business friendly
Speaker 2: government in the history of the US behind you. Well,
Speaker 2: remove red tape, remove reregulation, whatever you want to get done,
Speaker 2: you call Washington. They've got your back to you. An
Speaker 2: anecdote A guy I know was speaking to the CEO
Speaker 2: of Welds FAGA, one of the biggest US banks, and
Speaker 2: he said under Biden, he couldn't get a single meeting.
Speaker 2: Under Trump, He's had meetings with Trump, and Trump will
Speaker 2: randomly call them and say, hey, what do you think
Speaker 2: about this? Trump just wants to do deals. I mean,
Speaker 2: you know Trump as well as anyone, He just wants
Speaker 2: to get shit done right. And the US right now
Speaker 2: is in massive entrepreneurial innovation mode and the zeitgeist in
Speaker 2: atmospherics are super positive. I was actually on the way here,
Speaker 2: I speaking to a dude whose father was one of
Speaker 2: the most powerful unionists, like union officials in the United
Speaker 2: States right and literally on the way here, I was
Speaker 2: spinning this dude and he said, Mate, the unions are
Speaker 2: booming because there's so much frickin building in the US
Speaker 2: right now because of all the data centers and that
Speaker 2: they're constructing. So we're talking about it at trillion dollars
Speaker 2: of spending just through AI and also because they're doing
Speaker 2: a lot of infrastructure investment in the US right now.
Speaker 2: So the US is doing great, which warrants, which basically
Speaker 2: meant so strong productivity growth. You've got strong economic growth,
Speaker 2: you've got strong inflation, which is a huge problem. You've
Speaker 2: got no illegal immigrants coming in. What that means is
Speaker 2: with no population growth, no migration, there's no workers. And
Speaker 2: so what that's going to do is push up wages.
Speaker 2: So rates inevitably need to go high in the US
Speaker 2: in our of you. But the market thinks I'm totally wrong.
Speaker 2: Market's pricing and cut still because they think Trump is
Speaker 2: whipped the FED and power and they think that basically
Speaker 2: his butt boy Wash is going to rock in there
Speaker 2: and cut rates. But I think it's zero. I mean, okay,
Speaker 2: maybe there's a perfunctory cut, but I think right now
Speaker 2: he's got the perfect cover to say, hey, Trumpy, this
Speaker 2: is Wash, the new Fed boss. He's going to say, listen,
Speaker 2: you just set off this mother of or prush shocks.
Speaker 2: I've got this huge inflation crisis. I can't cut rates.
Speaker 2: But there's a real dichotomy or cognitive dissonance between market
Speaker 2: pricing for equities and what's actually happening in the economy.
Speaker 2: And I see the economy just getting stronger and strong.
Speaker 2: And we've been arguing this for a year.
Speaker 1: Because often I think to himself, particularly with the equities,
Speaker 1: I wonder to myself whether or not Trump has a
Speaker 1: team of people that go out to all the big
Speaker 1: Wall Street guys and just say, listen, this will be
Speaker 1: over soon. Don't worry. I'm going to sort this out.
Speaker 1: I think he does like media style pitching, and also
Speaker 1: to your markets, to the interest rate markets, to go
Speaker 1: and say, look, don't worry, we're going to control this.
Speaker 1: We're going to control inflation. Number two. So you know,
Speaker 1: somehow we're going to control inflation, and somehow we're going
Speaker 1: to and we're not going to have to put rates up.
Speaker 2: Yeah. So the only resolution to that challenge where you've
Speaker 2: got a combination of super strong growth and a labor
Speaker 2: market that's tightening up and no fresh labor supply, and
Speaker 2: you've got inflation that's running like more than fifty percent
Speaker 2: above target, the only way to resolve that it's through productivity,
Speaker 2: and that means again just being more efficient, more innovative,
Speaker 2: and producing a whole bunch of stuff with less inputs.
Speaker 1: So let's just talk about the US, because it's important
Speaker 1: that this piece is really important because our fed, our
Speaker 1: reserving sort of talks about this every now and then.
Speaker 1: But maybe just put in a simple context the idea
Speaker 1: that wage price pressure can be neutralized with more productivity.
Speaker 1: Just like, just open it up a little bit, because
Speaker 1: it's not something we're going to achieve here. Yeah, but
Speaker 1: certainly in the US you could believe that argument if
Speaker 1: that Trump's guys are out there talking about this.
Speaker 2: Yeah, it's pretty simple. Work harder. If the same team
Speaker 2: is working harder and producing more for the same wage bill,
Speaker 2: then you can grow faster.
Speaker 1: And if I pay you more, but youse, I'll work
Speaker 1: even harder or I'll produce more.
Speaker 2: Yeah, that's okay.
Speaker 1: That's okay because that's non inflationary, correct, because the vendor
Speaker 1: of the product doesn't need to sell for a higher
Speaker 1: price because he can just sell more of the product.
Speaker 2: Conversely, if you keep on having to hire extra people
Speaker 2: to produce the same products, the same goods and services,
Speaker 2: then that's going to drive it be cost base and
Speaker 2: that's going to be inflationaty which.
Speaker 1: Means the vendor will put have to put his price
Speaker 1: up to maintain his margin. It becomes inflationary. Do you
Speaker 1: think people are buying that argument in America that look,
Speaker 1: we will open the doors to productivity, will open the
Speaker 1: doors to let's call it AI. We'll just get rid
Speaker 1: of red tape. And if you need to produce more
Speaker 1: widgets because you got to pay more wages, if you
Speaker 1: help us with the inflationary is.
Speaker 2: Having I mean, he has absolutely destroyed red tape, is
Speaker 2: mass deregulating. So it's happening as because you just gave
Speaker 2: us an example of you and you know I'll give
Speaker 2: you another example. He's shrunk the federal workforce by three
Speaker 2: hundred and fifty five people. He has shrunk government by
Speaker 2: twelve percent? Does that by definition in a short period
Speaker 2: of time? Mate?
Speaker 1: Does that by definition? To shrink red tape or get
Speaker 1: rid of red tape by getting.
Speaker 2: Is that part of a lot of business people would say,
Speaker 2: if you slim down these government institutions that we're trying
Speaker 2: to suffocate us, it might make decision making a little easier,
Speaker 2: particularly if Washington's telling those same government institutions, hey, approved stuff,
Speaker 2: hurry out, Yeah, hurry up. So it's just unambiguous that,
Speaker 2: like the US economy has got a lot of momentum.
Speaker 1: How does this spill back to us? Does that help us?
Speaker 2: Or just staying on AI. The one of the ringles though,
Speaker 2: is that and this answer to your question about well,
Speaker 2: what's he saying. Are people buying this argument that you
Speaker 2: can grow fast without credit inflation? The problem is they
Speaker 2: do have inflation. The problem is they can't grow their
Speaker 2: workforce because population growth is the lowest in history in
Speaker 2: the US. And here's another problem, which we've argued for
Speaker 2: a year, and that is we believe, contrast to pretty
Speaker 2: much everybody else, that AI is not going to create deflation.
Speaker 2: So the traditional meme or narrative is AI is going
Speaker 2: to eviserate a big part of the workforce. You know,
Speaker 2: we're going to have drivers cars. Uber's dead, We're going
Speaker 2: to have Optimist robots produced by Tesla and rather being
Speaker 2: interviewed by Mark Boris, I could have an optimist here
Speaker 2: cost twenty thirty grand, about one percent of Marks costs,
Speaker 2: and it's free cheaply, and optimists can interview Chris Joy
Speaker 2: and and you know your business can get rid of
Speaker 2: Mark and hologramd Mark, Yeah, hologramd Mark. But there's a problem,
Speaker 2: we think with those you So the first issue is
Speaker 2: that we're not seeing any of that happen. What we're
Speaker 2: actually seeing, rather than kill jobs, AIS creating jobs. So
Speaker 2: if you look at new business openings in the US,
Speaker 2: there's another positive the US economy. They are booming and
Speaker 2: going through the roof, so new business formation. People are
Speaker 2: establishing as you'd imagine, as they did during the Internet days.
Speaker 2: They're establishing startups and companies to service the trillion dollars
Speaker 2: that's been spent on AI. Every man and their dog
Speaker 2: wants to do something in al everyone we know is
Speaker 2: trying to off the AI wave, and so it's actually
Speaker 2: creating a positive rather than negative employment effect. The second
Speaker 2: thing is you're not seeing job losses in industries people
Speaker 2: predicted you see them in for example, everyone said management
Speaker 2: consultants are completely folds. You know, they're dead as a
Speaker 2: doorn on. But the consultants have reinvented themselves as AI
Speaker 2: experts and their industry is booming. People said that radiography
Speaker 2: won't be wiped out, but radiography employment demand is growing
Speaker 2: faster than the broader labor market. So I think we
Speaker 2: are of the view that rather than being deflationary, actually
Speaker 2: ais inflationary. Why basically got these big companies like Amazon
Speaker 2: and Google and Meta and others known as hyperscolars that
Speaker 2: are spending a trillion dollars on data centers and compute
Speaker 2: to basically monetize AI. So you're spending a trillion dollars
Speaker 2: a year and these dudes are all competing for the
Speaker 2: same stuff. They're competing for the same chips, the same
Speaker 2: memory cards, the same people that work in AI. There's
Speaker 2: stories of young Ossie has been paid one hundred million
Speaker 2: bucks to go and leave HI research centers. In these firms,
Speaker 2: they're competing for the same energy that needs to power
Speaker 2: the data centers data centers, and they're also obviously the
Speaker 2: same bricks and mortar to produce.
Speaker 1: This Electricians like you because everyone gets got to some
Speaker 1: weird think about AI or data centers. For example, data
Speaker 1: is just bricks and mortar and metal and electricity in
Speaker 1: power and water like that's all it is.
Speaker 2: It's so basically our hypothesis has been a couple of
Speaker 2: four one we last year originated this idea that the
Speaker 2: hyperscolars were lying about the capecks because when we looked
Speaker 2: at the Googles and the Amazons and what they said
Speaker 2: they were going to spend each year in aar and
Speaker 2: then when we studied what they actually spent, they were
Speaker 2: spending fifty to one hundred percent more than their intention.
Speaker 2: So we think they're deliberately understanding the size of the
Speaker 2: capex sperm because they don't want to tip off their
Speaker 2: rivals because they're competing for the same people, the same resources,
Speaker 2: the same chips and merry carts. So we think the
Speaker 2: capex berm is going to be bigger than people think.
Speaker 2: We think it's going to be a huge spending shock,
Speaker 2: positive spinning shock that is basically an income demand and
Speaker 2: wealth shock, which is a inflation and it's going to
Speaker 2: create bottlenecks, and that we're not seeing the evisceration of
Speaker 2: the workforce that was predicted by many. Now that may
Speaker 2: play out in the future, but we've had very contrary
Speaker 2: views on all this stuff, and all roads lead to
Speaker 2: higher inflation in the US, which is probably not good
Speaker 2: for the global economy because eventually, if we do get
Speaker 2: rate hikes, what does that mean, Well, equity valuations are
Speaker 2: going to have to contend with a much higher cost
Speaker 2: of capital, which like if I'll give you another example,
Speaker 2: the Aussie ten year government bond yield, which is the
Speaker 2: market's guess of where the RBA cash rate will be
Speaker 2: for the next ten years. A year or two ago,
Speaker 2: that was like zero point one five two point three
Speaker 2: percentage points below the US ten yure. Right now it's
Speaker 2: zero point seven percentage points or seventy basis points above
Speaker 2: the US tenure. Austral As pricing and rate hikes, those
Speaker 2: two to three rate hikes we talked about, our view
Speaker 2: is that RBA cashroate could go a lot higher. So
Speaker 2: we think we've been saying high fours. But there is
Speaker 2: a possibility the RBA pushes the cash rate to five
Speaker 2: to six. We can talk about this later. There's a
Speaker 2: possibility this rate hiking hiking cycle we're having in Australia
Speaker 2: could be protracted, elongated. It will be multi year and
Speaker 2: we've seen this in the past. You look at the
Speaker 2: decade before two thousand and seven and we had this
Speaker 2: stop start hiking cycle. They paused for six to twelve
Speaker 2: months and they start again because they couldn't get inflation
Speaker 2: under control. So again we need to kind of think
Speaker 2: about that. But coming back to equities, the US tenure
Speaker 2: government bony was quite low. It's only four point three percent.
Speaker 2: Our ten government bonyard was five percent. Now our ten
Speaker 2: government bonyiard in twenty twenty one was one percent, So
Speaker 2: it's gone from one to five. Was that important to
Speaker 2: Aussie's just a little aside. Between twenty nineteen and today,
Speaker 2: governments have racked up no less than eight hundred billion
Speaker 2: dollars of debt to fund the political spending which is
Speaker 2: completely out of control. Back in two thousand and seven,
Speaker 2: we were running across all ossie governments a seventeen billion
Speaker 2: dollar surplus. Today we're running an eighty billion dollar deficit.
Speaker 2: So our fisk like the amount of they're spending ninety
Speaker 2: seven billion a year more than they're making in terms
Speaker 2: of revenues than they were back in two thousand and seven.
Speaker 1: And that doesn't include off balance sheet, off off the
Speaker 1: ballot sheet.
Speaker 2: Yeah, it doesn't include the NBN and things like that.
Speaker 2: And the the problem, of course is as that eight
Speaker 2: hundred billion dollar debt bill, which we all have to
Speaker 2: repay through our taxes, was racked up, the cost that
Speaker 2: debt used to be one percent pantum is now five
Speaker 2: percent produm So that's a big problem. But again the
Speaker 2: challenge for the US is if that four three percent
Speaker 2: ten you government bondio in the US, which assumes cuts.
Speaker 2: If that was to lift, then equities are cactus. I
Speaker 2: think you can see equity evaluations easily pulled back by
Speaker 2: more than ten to twenty percent. So this dichotomy that
Speaker 2: you know, I leave listeners with is think about what
Speaker 2: the US inflation problem, if it intensifies, which I believe
Speaker 2: it will means for the valuations of equities and your
Speaker 2: super portfolios. And think about what a US hiking cycle
Speaker 2: means for those portfolios. Because I think it's not priced.
Speaker 2: Markets are not thinking about it. So what we're discussing
Speaker 2: here is kind of quite novel. It's not a popular debate, like,
Speaker 2: no one's really talking about an aggressive Well, they're ignoring
Speaker 2: the inflation, and I think it comes back to your
Speaker 2: original question. They're saying productivity is a panis. So basically
Speaker 2: they're saying, we're going to create all this deflation because
Speaker 2: optimists will rule, the robots will rule. They're going to
Speaker 2: these massive job losses and it'll all be fine because
Speaker 2: productivity will go through the roof.
Speaker 1: So see what is the way for Australia and austrain
Speaker 1: equities because Austrainan equities are also you know, hitting the
Speaker 1: heights as well.
Speaker 2: Yeah, so there's two thoughts there and full disclaimer. I
Speaker 2: don't run equities at this point. We run fixed income
Speaker 2: bonds debt, so that's my wheelhouse. But OSSI and US
Speaker 2: equities are hyper correlator, so where US equities go, OSSIS
Speaker 2: equities will follow. But I think Australia has a bigger problem.
Speaker 2: So in Australia we have even higher inflation than the US.
Speaker 2: So last I mentioned in the US they're running at
Speaker 2: three point four last six months, three last twelve months
Speaker 2: targets too. In Australia the targets two and a half
Speaker 2: last six months. We've been running at three point nine
Speaker 2: for core inflation three point nine, two and a half
Speaker 2: last twelve months, three point four. And the problem in
Speaker 2: Australia is our inflation is not being driven by all
Speaker 2: this private sector growth. It's actually the opposite. All of
Speaker 2: our inflation in Australia has been driven by two things,
Speaker 2: really only two things. Government spending, the eight hundred billion
Speaker 2: dollars of debt, almost thirty thousand dollars per person that
Speaker 2: wracked up since twenty nineteen. The NDAs is a great example.
Speaker 2: It is meant to be thirtyen to forteen billion sized
Speaker 2: by the Productivity Commissioner a year, so thirty to forty
Speaker 2: billion a year, they're now spending over fifty billion a year.
Speaker 2: All that waste is basically like a python squeezing a balloon,
Speaker 2: and the balloon is kind of getting bigger and bigger,
Speaker 2: and it's crushing or asphyxiating the private economy and it's
Speaker 2: creating price pressure. So government spending is so large that
Speaker 2: eighty billion deficit paranum is so large that it's pushing
Speaker 2: out the price of everything. It's pushing up at cost
Speaker 2: of living, it's pushing up inflation, and ultimately it is
Speaker 2: pushing up interest rates while we're getting rate hikes. But
Speaker 2: the other dynamic is immigration. We had record a record
Speaker 2: number of five hundred thousand people ruving the country in January,
Speaker 2: so we've got record migration. Well yeah, and if you've
Speaker 2: done five hundred thousand people half a million people a
Speaker 2: year on Sydney and Melbourne, we just can't cope because
Speaker 2: we don't have that much rental accommodation. We don't have
Speaker 2: that much capacity to transport this population shock efficiently. And
Speaker 2: so the Aussie economy has been artificially inflated by immigration
Speaker 2: and by government spending, not by businesses, not by the
Speaker 2: private sector. In fact, the private sector is in a
Speaker 2: per capita income recession has been since twenty twenty three.
Speaker 2: So what's actually happening Mark is relative to government. The
Speaker 2: private economy is shrinking. The government part of the economy
Speaker 2: is the biggest since World War II. This is actually
Speaker 2: stealth socialism right because Australias got austraids, have been addicted
Speaker 2: to the idea that the Dan Andrews of the world
Speaker 2: will boil them out. And according to the Center for
Speaker 2: Independent Studies, one in two Australians now drive more than
Speaker 2: half their income from government and related sectors. So this
Speaker 2: means we have an economy built on fake growth, an
Speaker 2: economy with a lot of.
Speaker 1: Cost breass sure on debt because that money.
Speaker 2: Is and immigration, and we have a huge amount of
Speaker 2: fake growth. The private sector is actually struggling. So if
Speaker 2: you speak to mums and dad like I'm working my
Speaker 2: ass off, and why rates rising and why is my
Speaker 2: cost living rising? Like how Am I contributing to these problems?
Speaker 2: You're not. It's got hothing to do with you, mate,
Speaker 2: It's got everything to do with politicians and population.
Speaker 1: So when the Reserve Bankers says inflation is to some
Speaker 1: extent being driven by both private and public demand, it's horseshit. Yeah, okay,
Speaker 1: can you explain that, because because of course our treasurer
Speaker 1: gets something and goes, well, I've told you it's private demand.
Speaker 1: Private demand is fantastic, everyone's which is sort of the
Speaker 1: implications everybody's doing fantastic and we're all out there spending
Speaker 1: like drunken sailors. Can you just give us a reconciliation
Speaker 1: of that?
Speaker 2: No, No, almost all, Almost all the inflation Australia has
Speaker 2: been driven by immigration and government spending, and in the
Speaker 2: absence of that, the overall economy would be very weak,
Speaker 2: inflation would be much lower, and interest rates would be
Speaker 2: much lower. That's just the statement of fact. It's an
Speaker 2: objective fact that interest rates and inflation would be much
Speaker 2: lower not for the extreme government spending and population growth
Speaker 2: we're seeing. I think the politicians probably think the ship
Speaker 2: in million people a year. They probably vote for you,
Speaker 2: but it's not sustainable. And the broader question is, well,
Speaker 2: the challenge for the IBA, and in your question is
Speaker 2: really wasn't the RBA calling this out. The reason the
Speaker 2: IBA isn't calling this out is because they've been whipped
Speaker 2: by Charmers. Charmers appointed the governor and deputy government. Charmer's
Speaker 2: appointed most of the voting members of the insut Act
Speaker 2: Setting Committee, which is in total to and I would
Speaker 2: have done the same thing, but the reality is they've
Speaker 2: been completely muzzled. They are completely unwilling to call out
Speaker 2: government spending. Other iterations of the Reserve Bank in the
Speaker 2: past have been quite forthright in saying that governments need
Speaker 2: to balance their budgets and pull in the purse trainings
Speaker 2: and kind of contribute to more prosperity because you can't
Speaker 2: drive living standards up without an increasing productivity. So this
Speaker 2: is the other problem. So it's all related. The governments
Speaker 2: sector completely asphixiating the overall economy and private activity is
Speaker 2: crushing productivity because there's no productivity in the government sector.
Speaker 2: In the public sector, there's been no productivity growth for
Speaker 2: twenty five years. So Australia actually has gone from one
Speaker 2: of the most competitive nations in the world up as kids.
Speaker 2: The whole world in mind, our sports people and our
Speaker 2: business leaders. You know the Don Bradman's, the Ruper Murdocks,
Speaker 2: you know the Shane Warns for their innovation, ingenuity, intensity
Speaker 2: and at work ethic, and that's more or less disappeared.
Speaker 2: So our productivity performance is amongst the worst in the world.
Speaker 2: Whilst the US productivity is soaring, we are worse in Europe,
Speaker 2: and that's because the government sector is taken over so
Speaker 2: much of the overall growth pulse, and productivity in the
Speaker 2: government sector is so poor that it's dragging down our
Speaker 2: overall productivity statistics. The productivity in the private sector is
Speaker 2: not amazing, but it's not nearly as bad as it
Speaker 2: is in the government sector. And low productivity means you
Speaker 2: just have to pour more money and people into producing
Speaker 2: goods and services, which is inflationary. So I think all
Speaker 2: roads lead to entrenched inflation pressures that are going to
Speaker 2: be hard to resolve unless we do one of two things.
Speaker 2: The solutions are simple. You've got to spend a lot less,
Speaker 2: so the government has to spend a lot, and you need
Speaker 2: to pull back on immigration. Now, the interesting thing is
Speaker 2: the government saying that they want to tax us more.
Speaker 2: So they want to take more of our savings so
Speaker 2: they can spend more to resolve a spending problem, which
Speaker 2: makes no sense. You can't resolve a pathological spending problem
Speaker 2: by stealing even more money from taxpayers, right, You've got
Speaker 2: to resolve your kind of addiction to pork barreling, and.
Speaker 1: It works against that also works against productivity. Why is
Speaker 1: it going to work harder if they've just got to
Speaker 1: pay more tax man?
Speaker 2: This is a key point, Like we have a you know,
Speaker 2: you can as an Australian, you can move to Florida
Speaker 2: and have a top marginal tax rate of thirty eight percent.
Speaker 2: Why would you stay in Australia and be if you're
Speaker 2: a top producer and pay forty seven percent and by.
Speaker 1: The way, kicks in much earlier too. Yeah, I mean
Speaker 1: in the US you can be only five or grand
Speaker 1: a year. Do you get in the top rate US dollars?
Speaker 1: Here you're in the top rate two hundred.
Speaker 2: So you're exactly right. So not only are they raising
Speaker 2: taxes to crush entrepreneurship and innovation and dis incentivize hard work,
Speaker 2: but they're trying to say that our spending problem is
Speaker 2: going to be resolved Mark by giving us more money,
Speaker 2: which makes absolute no sense. Your spending problem, Mate is
Speaker 2: resolved by you spending less mo folk. Yeah, it's pretty simple.
Speaker 2: But also would you suggest that, and can I say,
Speaker 2: I think when sorry to interrupt it, when main Street
Speaker 2: connects the dots, which I think, ma'am man out here, Yeah,
Speaker 2: when mum and dad understand that whilst they're making out
Speaker 2: like a bandit on the ndias and probably ruling the ndias.
Speaker 2: The quid pro quo cost of that is a high
Speaker 2: cost of living, higher inflation and getting whacked by higher
Speaker 2: interest rates net net against you. Yeah, and then higher taxes. Right.
Speaker 2: I think people start to realize actually, this is not sustainable,
Speaker 2: particularly if the government, as they're already doing, starts to
Speaker 2: self cannibalize and say, well, actually we've got a massive
Speaker 2: corruption problem with the NDAs. We need to start pulling
Speaker 2: it back in And it was interesting that they raised
Speaker 2: that last week. But the other dynamic in Australia is
Speaker 2: the swinging the political pendulum to the rights here. I
Speaker 2: think the casualty of that will be immigration, which we
Speaker 2: do need to pull back on.
Speaker 1: Can we talk about that, Nick, because what's your prognosis
Speaker 1: on that.
Speaker 2: Yeah, I think our view is if you look at
Speaker 2: what's happened in the UK and the US, so you've
Speaker 2: gone from Biden to Trump, and you're going from a
Speaker 2: very hard left government in the UK to potentially Farage
Speaker 2: and Reform in the UK, which are hard right, and
Speaker 2: then you're seeing similar dynamics start to manifest here in Australia.
Speaker 2: You can clearly see a lot of community discontent with
Speaker 2: the idea that you've spent almost trillion bucks of our
Speaker 2: money in our asking us to pay it back through
Speaker 2: a high taxes. Our interest bill's gone from one percent
Speaker 2: panum to five percent pranum and the casualty is our
Speaker 2: cost of living is going through the roof and yeah we're.
Speaker 1: Getting wettern living is going backwards.
Speaker 2: Stand living, Yeah, that's the key point I think. Yeah,
Speaker 2: our per capita incomes actually declining, so our stand living
Speaker 2: and our prosperity is shrinking. You know. I think that
Speaker 2: galvanizes or catalyzes the change in the political cost. Whoever
Speaker 2: wins government, I think you're going to see big policy change.
Speaker 2: So this is my prediction. We're going to see Australia
Speaker 2: for pretty much the first time in history at some
Speaker 2: point without any population growth. In the US, you've gone
Speaker 2: from super strong population growth under Biden to none. In Canada,
Speaker 2: super strong population growth and they've crushed it. And immigration
Speaker 2: in New Zealand they had super strong population growth and
Speaker 2: it's fallen dramatically. And I think you'll see the same
Speaker 2: thing happened in the UK. So I think whether labor
Speaker 2: judges that, hey, all of this immigration is creating lots
Speaker 2: of problems, whether it's assimilation issues, are La bondai, whether
Speaker 2: it's inflation issues, cost of living issues. I mean, I
Speaker 2: think blind free, you can see the country just can't
Speaker 2: cope with half a million foreigners coming here every year live.
Speaker 2: So I think you'll see policy change whoever prevails either party. Yeah, yeah,
Speaker 2: but I think you'll see big policy change. And what's
Speaker 2: profoundly important I think for viewers is we have to
Speaker 2: imagine in Australia and there's a sequencing to this, but
Speaker 2: we've got to think forward and imagine in Australia with
Speaker 2: no population growth, which we've never seen before. Mark, that
Speaker 2: hasn't happened really, We've always run.
Speaker 1: There's no population growth through immigration. Yeah, we don't have
Speaker 1: that's the family.
Speaker 2: For kundit is you know, we're basically not replacing naturally. Yeah,
Speaker 2: so immigration is basically all population growth, and Australia has
Speaker 2: for decades, for like thirty forty years, run the strongest
Speaker 2: population growth in the OECD. So the wonder down Under
Speaker 2: is when known has really been built on population growth
Speaker 2: and also natural resource endowments. But if you take that
Speaker 2: population leg out from under the chair, which I think
Speaker 2: you have to to try and resolve the inflation crisis,
Speaker 2: you're going to see a much much weaker economy. So
Speaker 2: this is the way I think it plays out. The
Speaker 2: market's pricing in We're currently at a four point one
Speaker 2: percent cash rate. We were at three point six markets
Speaker 2: pricing in a four point seven percent cash rate, so
Speaker 2: another two to three hikes house prices is already falling.
Speaker 2: House prices are going to continue to fall. I think
Speaker 2: they give back the gains that we had last year,
Speaker 2: so we had nine percent growth, we'd probably pay that
Speaker 2: back at the same time. Clearly, charmers are starting to
Speaker 2: see the writing on the world. I think there's a
Speaker 2: there's a ground swell of animus around the NDI is
Speaker 2: staying to brew. I think just in terms of the
Speaker 2: corruption and routing and the inequity of it all. So
Speaker 2: I think you're going to see some fiscal console relation,
Speaker 2: which is fancy terminology for just governments spending a little less,
Speaker 2: not much less, but a little less at the margin.
Speaker 1: You took about the next budget.
Speaker 2: In the next budget, but just looking ahead, I think
Speaker 2: they're going to coming into the next election at the margin.
Speaker 2: Government spending one't increase nearly as much as it has
Speaker 2: in the past. So the idea that government's growing the
Speaker 2: economy that leg won't really be there now. How much
Speaker 2: they have to slash spending, I don't think they're going
Speaker 2: to do that, but they'll pull back a little bit.
Speaker 2: And the key point is the marginal contribution to growth
Speaker 2: from government won't be there. Population growth, I think is
Speaker 2: going to get crushed one way or another, which we've
Speaker 2: never seen before, and the RBA is just going to
Speaker 2: keep hiking. I'll tell why they're going to keep piking
Speaker 2: is because they've got relentlessly wrong right. Their forecast miss
Speaker 2: last year was the worst sincerely nineteen nineties. They expected
Speaker 2: two point six corinflation and printed three point in four.
Speaker 2: They've been humiliated repeatedly for big misses. This is slightly technical,
Speaker 2: but in late twenty twenty one they dropped their interest
Speaker 2: rate target called the yield curb target, which was fixing
Speaker 2: the interest rate yield on the twenty twenty four government
Speaker 2: bond at zero point one percent. They gave up, and
Speaker 2: it was the first time a central bank had been
Speaker 2: pushed out of a so called peg since George Soros,
Speaker 2: the famous hedge fund manager, bullied the British pound sterling
Speaker 2: out of the European exchange rate mechanism the early ninety nineties.
Speaker 2: So that was a disaster of the RBA, like a
Speaker 2: global humiliation. And then they've got all their inflation forecasts wrong.
Speaker 2: As the first central bank of the world to cut
Speaker 2: Hi cut and the hiker again, we've got a second
Speaker 2: hiking cycle. So they're in full data depending mode. Because
Speaker 2: their legacies and livelihoods are one hundred percent and the
Speaker 2: cross this. I don't think they give a rat to
Speaker 2: ask any more about charmers. They're just laser like focus.
Speaker 2: They're not going to criticize charmers for all this spending.
Speaker 2: And the states, by the way, because it's not just charmers,
Speaker 2: it's for us a state government problem. In fact, probably
Speaker 2: more of a state government problem than a federal government problem,
Speaker 2: and so they're going to keep hiking. And I don't
Speaker 2: think a four point seven percent cash rate or four
Speaker 2: point six percent cash rate, whatever the number ends up being,
Speaker 2: is going to deal with the inflation problem. So I
Speaker 2: think it'll be stop start, and I think the cash rate,
Speaker 2: my own view is it bleeds into the fibes and
Speaker 2: then at the same time, now you get the population
Speaker 2: growth slowing, you get the government spending slowing, and then
Speaker 2: you get a recession. So I think where we land.
Speaker 2: And this is also your question on I equities. The
Speaker 2: flying the ointment for equities is not just higher interest rates.
Speaker 2: It's an iy recession and possibly the first decent recession
Speaker 2: we've had since ninety ninety one.
Speaker 1: Can I talk about that for soon? I mean you
Speaker 1: and I Probably he's probably not quite a flavor keating,
Speaker 1: but one of the things he was that him was
Speaker 1: very honest, probably to his own device, but he did say,
Speaker 1: this is a recession. We had to have meaning meaning
Speaker 1: like in his awkward way of saying things, to deal
Speaker 1: with inflation that was around eighty eighty nineteen ninety one,
Speaker 1: we had to have a recession, and he said it
Speaker 1: was the recession we had to have. He was the
Speaker 1: king of inner one liners, but he actually meant it.
Speaker 1: That was the truth. And it's nearly like in order
Speaker 1: to control inflation today here we probably have to have
Speaker 1: a recession. You're right, mate, because we've got a part
Speaker 1: of our economy it loves interest rates going up. You know,
Speaker 1: one thirty economy over sixty own their own home, have
Speaker 1: no doubt, have big super because Keating introduced it, feeling
Speaker 1: pretty comfortable. It just raids go up. There's how good
Speaker 1: it is, darling. But it's going on holiday to Bali.
Speaker 1: But one thing those people are very aware of, very
Speaker 1: cognisant of, is a recession. They get nervous about that shit.
Speaker 1: Everything's going up and price going up and the economy
Speaker 1: is in trouble. We read they read the newspaper one
Speaker 1: way to get into their psyche because all this is psychological.
Speaker 1: The whole reserve bank game is how do I get
Speaker 1: inside your head to make you feel like you to
Speaker 1: stop spending money. And if there's a whole group of
Speaker 1: people who I don't effectcause on the reserve bank, one
Speaker 1: way I can do it if I am in reserve
Speaker 1: bank is put us into recession.
Speaker 2: Yep, one hundred percent. And I think you know, we're
Speaker 2: leaving them with no choice because of the rampant government
Speaker 2: spending in the rampant immigration. And I think you're a
Speaker 2: hundredercent right. It is a recession that it looks like
Speaker 2: we have to have all the lines of Keating's famous commentary,
Speaker 2: and there are parallels. They had very strong inflation for years,
Speaker 2: probably the ninety one recession. Unfortunately, unemployment rose dramatically. I
Speaker 2: was the unemployments at four point three percent, exactly the
Speaker 2: same as the US. It's historically low, very super low,
Speaker 2: and it's been much lower than the RBA expect. But
Speaker 2: here's the rub. The RBA, and being politically compromised by
Speaker 2: their government of the day, has overridden So they've overridden
Speaker 2: the staff analysis of what the natural rate of unemployment is?
Speaker 1: What is it?
Speaker 2: So the staff believes it's four point nine percent.
Speaker 1: Oh wow, it's gone for it's four point five. But
Speaker 1: when she was deputy she had it at four point five.
Speaker 2: Yeah, so well they actually the board said we think
Speaker 2: the natural rate might be in the high threes to
Speaker 2: low force. So the board ran this experiment. So what we.
Speaker 1: Backtracked I call it the experiment too. I'm glad you
Speaker 1: said that thing.
Speaker 2: The big mistake they made was actually in twenty twenty.
Speaker 1: Three, Yeah, but that was that was a treasures for
Speaker 1: he introduced this new part of the mandate unemployment and
Speaker 1: no inflation.
Speaker 2: One hundred percent. Yeah, so they changed the mandate kind
Speaker 2: of he he kind of rigged the mandate to make
Speaker 2: the RBA more dubbish.
Speaker 1: It's not her fault, by the way, she's just running
Speaker 1: to what she's been told to do one hundred percent.
Speaker 2: And although you could argue that she's a statutory into
Speaker 2: beending institution, so she can actually do whatever she wants.
Speaker 2: But the kind of key policy mistake that they made
Speaker 2: amongst a few, but the key one was in late
Speaker 2: twenty twenty three, the rest of the world went to
Speaker 2: between five and five and a half percent, and New Zealand, Canada,
Speaker 2: the US, UK, we stopped at four point three five.
Speaker 2: And they've been open saying, well, the reason we stopped
Speaker 2: at only four point three five despite the fact that
Speaker 2: the RBA's own model said rates needed to go to
Speaker 2: five right. The Martin model of the macro economy which
Speaker 2: we run, which is the RBA's model, said they should
Speaker 2: have hiked much higher, and they stopped because they wanted
Speaker 2: to run an experiment with the idea that the natural
Speaker 2: rate of joblessness or the natural rate of unemployment in
Speaker 2: Australian economy had fallen dramatically, which means you could run
Speaker 2: the economy a lot hotter, you could have all this
Speaker 2: government's been, you could have all this immigration, there'd be
Speaker 2: no inflation problem. Right, And they thought that actually the
Speaker 2: natural rate might be high threes, all low four. They
Speaker 2: said this repeatedly, and the staff were like, no, no, no, no,
Speaker 2: you know the eight hundred analysts the IRBI are like, no, no, no, no,
Speaker 2: it's mid to high force. The current numbers four point nine, and.
Speaker 1: That's where they believe it should be. The current number.
Speaker 2: Staff. I felt it was the board overrode the staff
Speaker 2: said it could be high three slow falls, and therefore
Speaker 2: we can run rates lower and a hotterer economy. We
Speaker 2: don't need to have all these hikes. And they used
Speaker 2: talk about this threading the needle, and they thought they
Speaker 2: were of economic geniuses in delivering low inflation, high growth
Speaker 2: and much lower unemployment.
Speaker 1: Well, June last year they got there, Yeah, June last year.
Speaker 1: What if the headline and were two point one or
Speaker 1: something like that.
Speaker 2: The core got to two point seven in June, so
Speaker 2: still slightly above target.
Speaker 1: But around the turffy but one quarter. Yeah, I can't
Speaker 1: understand that. Yeah, but I think they were sort of celebrating.
Speaker 2: They were declaring victory because you know, the core inflation
Speaker 2: printed two point seven in June last year, and they're like, hey,
Speaker 2: we're basically at target.
Speaker 1: Yeah, with unemployment as well, because unemployment was four point.
Speaker 2: Two exactly, so they thought they threaded the needle, but
Speaker 2: they hadn't at all. And so what they should have
Speaker 2: done is gone to five and really crushed inflation, but
Speaker 2: they didn't do that, so inflation remained sort of untrammeled.
Speaker 2: And now they've capitulated on their natural rate view, so
Speaker 2: they've basically said, we got it wrong. It's not low threes,
Speaker 2: and it's not it's not high threes and low fours.
Speaker 2: They're now saying, I think it's a four point six.
Speaker 2: So the board has a view around four point six.
Speaker 2: The staff is still at four point nine. But let's
Speaker 2: get back to the kind of meaty toppy, which is
Speaker 2: recession and unemployment. Basically the quality of consequence of all this, folks,
Speaker 2: is the RBA to get inflation under control has to
Speaker 2: lift unemployment, right, it has to go from four point
Speaker 2: three to basically five, just to get it back to normal. Now,
Speaker 2: normally you overshoot with these things. So in New Zealand,
Speaker 2: where they're much tougher, and they went to five and
Speaker 2: a half and they did have a recession, the unemployment
Speaker 2: rate went from threes to five point four. Right, So
Speaker 2: I think you're going to see unemployment in Australia increase
Speaker 2: quite meaningfully in order to create the extra room in
Speaker 2: the economy for all the government spending and all the immigration.
Speaker 2: Now another choices. Of course, you can crush population growth
Speaker 2: and that will be deflationary, and you can crush government spending,
Speaker 2: which will also be deflacering. But whether the politicians have
Speaker 2: the metal to do that open question. But all roads
Speaker 2: lead to one way or another a recession.
Speaker 1: I think so on the unemployment number, like you, So
Speaker 1: let's say we go from just argument in an argumented
Speaker 1: or a debate way, that's how we go from four
Speaker 1: point three to four point nine or five, just to
Speaker 1: make it round. Do you get concerned then in terms
Speaker 1: of house prices, because that would indicate to me there's
Speaker 1: going to be a lot of people in default in
Speaker 1: terms of mortgages because most of the people who are
Speaker 1: employed who will no longer be employed, quite a big
Speaker 1: percentage of those are mortgage holders, which means houses will
Speaker 1: go on the MIC because we haven't seen distress selling
Speaker 1: in Australia for a long long time. I have been
Speaker 1: through periods whether it is just stress selling in Australia,
Speaker 1: but we certainly haven't seen it for the last proven
Speaker 1: sentences the GFC, to be honest, like it's been pretty good.
Speaker 1: That could sort of give us just stress selling. I'm
Speaker 1: not saying that people who have to sell the house
Speaker 1: all of a sudden we create a mark where prices
Speaker 1: get deflated. But what happens is real estate agents get
Speaker 1: a little less you know, hawkish or less bullish, and
Speaker 1: they start to say to their vendors, look, you might
Speaker 1: not get the two point one. You might have to
Speaker 1: sort of sell from one point eight. Every they start
Speaker 1: to condition the market, and vendors get conditioned, and vendors
Speaker 1: you know, like unless they're and or purchases get conditioned too,
Speaker 1: by the way, So everyone starts to pay less and
Speaker 1: expect less because right now, We've got a problem. I
Speaker 1: said to you early, I think the problem is right
Speaker 1: now in Australia is that we have a lot of
Speaker 1: vendors who are there's a price expectation, so there's a
Speaker 1: mismatch in the market. Well, there's not a willing by
Speaker 1: a willing sell it. Vendors are saying, look, I've got
Speaker 1: a mortgage, but you know I took it out in
Speaker 1: twenty twenty. I took it at a low rates or
Speaker 1: I had a mortgage prior to that, and during the
Speaker 1: twenty twenty period, I just kept paying off my old
Speaker 1: rate and I've reduced my know, my scheduled repayments quite low.
Speaker 1: Plus the problem has gone up by seven or eighty
Speaker 1: percent since then. You know, I've got plenty of equity.
Speaker 1: I still got a job. I'm in the four I'm
Speaker 1: not in the four point three percent of unemployed. You know,
Speaker 1: I've been well walked after. Therefore I don't need to sell.
Speaker 1: So you buyer who can't borrow as much as you
Speaker 1: used to about to borrow because there's been a couple
Speaker 1: of rate rises and there will be more. There's a mismatch,
Speaker 1: so I'm not going to sell. So we don't don't
Speaker 1: get even.
Speaker 2: Out passed right now, And I think, well, what will
Speaker 2: break that? Yeah, so I think asked you a question
Speaker 2: to false delinquencies and insolvencies. We were seeing some signs
Speaker 2: of stress creeping into the housing market in late twenty
Speaker 2: twenty four, so national house prices had actually started falling.
Speaker 2: This is before the RBA rate cuts. Sydney and Melbourne
Speaker 2: prices were falling, and there were a lot of stories
Speaker 2: about in more affluent suburbs owners who had had you know, two, three,
Speaker 2: four five loans against their property, often funded by private credit,
Speaker 2: getting into strife. And we were seeing, for example, in
Speaker 2: the East and subs of Sydney. I remember on Victoria
Speaker 2: Road one house sold for like ten twenty million, more
Speaker 2: than EXPE originally expected because the guy had five or
Speaker 2: six lines against it from private debt. We're also seeing
Speaker 2: in late twenty four record insolvencies, so just in terms
Speaker 2: of the absolute number of insolventes, all time high, and
Speaker 2: we were definitely seeing a big increase and you would
Speaker 2: have seen it in your book in mortgage defaults. So
Speaker 2: in late twenty four, all of that was bailed out
Speaker 2: by the RBA rate cuts. The RBA cut rates three times.
Speaker 2: What happened, House prices boom nine to ten percent, Bang,
Speaker 2: commercial property valuation started to turn. The private credit guys,
Speaker 2: you know, we're given a stay of execution and all
Speaker 2: these borrowers in distress, we're basically given accommodation. Now we're
Speaker 2: standing down the barrel of a very different situation whereby
Speaker 2: not only is the IBA taking those rate cuts away
Speaker 2: so it's reversing them out embarrassingly, but it's adding probably
Speaker 2: another one or two on top of the first three hikes.
Speaker 2: So you got four to five hikes. That means you're
Speaker 2: going to have a return of all that distress. And
Speaker 2: so I think you're right. You're going to have high defaults,
Speaker 2: high delinquencies, You're going to have much higher insolvencies. And
Speaker 2: in contrast to twenty twenty four and twenty three, we
Speaker 2: had record population growth and also governments still spending like crazy.
Speaker 2: I think this time around and you can see less
Speaker 2: government spending and reduce population growth again, which implies even
Speaker 2: higher to false delinquencies and insolvencies. So I think we're
Speaker 2: going to see the worst default cycle and the worst
Speaker 2: insolvency cycle since either the GFC or since nine ninety one,
Speaker 2: could it be a perfect storm? Was that could this
Speaker 2: be a perfect storm? Relations Yeah, the key is, you
Speaker 2: know the idea that we won't have population growth. It's
Speaker 2: hugely important to Australia to ship in half million people
Speaker 2: a year to boost spending, boost demand, keep the economy
Speaker 2: trucking along. And obviously then you know this addiction to
Speaker 2: governments spending money to try and buy votes. The Dan
Speaker 2: Andrews playbook, which he pioneered with, by the way, the
Speaker 2: impromato of the RBA during the pandemic, because the RBA
Speaker 2: in the pandemic said to all these state and federal
Speaker 2: governments in the in the politicians defense, the RBA feel
Speaker 2: low came out and said, hey, spend as much as
Speaker 2: you possibly can. We need you to inject cash into
Speaker 2: the economy to support us during a plague. Right, but
Speaker 2: once you let that giney out of the bottle, you've
Speaker 2: never been able to get back in. You know, we
Speaker 2: wrack up AI and ey billion dollars a debt and
Speaker 2: we now have this huge inflation problem. So I think
Speaker 2: I think my prediction is it's going to be difficult
Speaker 2: at the inflation under control, particularly in the stow with
Speaker 2: there is no productivity growth, I think you see much
Speaker 2: higher unemployment. So i'd see unemployment going to the fibes.
Speaker 2: I think you can see an RBA cash rate into
Speaker 2: the high force and possibly fivees. I think it could
Speaker 2: be a multi year hiking cycle and a multi year malaise.
Speaker 2: And I think it's going to animate a very vigorous
Speaker 2: political debate because now everyone wants to blame somebody, right,
Speaker 2: the man on the street, the farmer saying why am
Speaker 2: I getting smashed by this inflation? Why am I getting
Speaker 2: smashed by these interest throates because I'm working my tits off, right,
Speaker 2: Like who is to blame?
Speaker 1: Is all?
Speaker 2: This ndis probably you know NBN, all these the eighty billion,
Speaker 2: the deaths of the year. Probably is it that half
Speaker 2: a million foreigners who are landing this rate? Yes, So
Speaker 2: that's going to really set the seeds of this much
Speaker 2: more vigorous political debate. And I said last year you
Speaker 2: watched the crossairs, We'll turn to government spending and fiscal policy,
Speaker 2: and it's really told territory. I think for one nation,
Speaker 2: I think I haven't followed the whole one nation shift
Speaker 2: recently at all closely, but I think one nation are
Speaker 2: really focusing on the NDIS as people should do, because
Speaker 2: you know it's choc a block full of extreme corruption.
Speaker 1: Do you feel as though in the upcoming budget that
Speaker 1: may budget the charmers is going to also hit us
Speaker 1: on the head again in relation to taxes relative to
Speaker 1: property and what effects are you guys thinking that's going
Speaker 1: to have on property prices.
Speaker 2: Yeah, it looks like we're going to get higher capital
Speaker 2: gains taxes and that's undoubtedly going to whack property prices further.
Speaker 2: But again, how you can get away with mid term
Speaker 2: announcing new taxes that you never campaigned on.
Speaker 1: Well, you said the weren't going to happen. Yeah, you
Speaker 1: said weren't going to happen. You never consulted the community about.
Speaker 1: And the rational for hoisting all these taxes up is
Speaker 1: the idea that you've got this huge spending problem that
Speaker 1: you're responsible for, and you want to take more of
Speaker 1: our tax payers, our hard earned cash. You want to
Speaker 1: take more of that to resolve your spending problem. It's
Speaker 1: like going to a guy that's addicted to Pokey's and
Speaker 1: saying you've got a Pokey's problem. We're going to give
Speaker 1: you a bit more cash to make you feel feel better. Well,
Speaker 1: he's going to sell it, because he's a genius of
Speaker 1: selling these things. He'll say. It's an intergenerational unfairness issue.
Speaker 1: You know, people who are young people are being affected
Speaker 1: by these older people who are you know, wroughting the
Speaker 1: negative gearing and getting a couple of gains tax discounts
Speaker 1: on the profits that they make, and that you young
Speaker 1: people are being denied the opportunity to buy real estate.
Speaker 1: That's why real estate is so expensive. Bull shit, Just
Speaker 1: spend less mote.
Speaker 2: It's easy, right, you know, you're you've got a spending
Speaker 2: problem by the guy at the poking machine, and he
Speaker 2: just needs to stop playing the pokes and you've got
Speaker 2: to stop playing with our money. It's very simple, I think,
Speaker 2: and unfortunately it's been relentless because there's been no cost
Speaker 2: associated with extreme spending. Rates were low, money was basically free.
Speaker 2: There wasn't, you know, an inflation crisis to explain, and
Speaker 2: there were interest rates also incredibly low, and taxes weren't
Speaker 2: necessarily increasing. But when all those things shift, I think
Speaker 2: the cross swing back to the essential source of the problem.
Speaker 2: So when people again my contention is when mum and
Speaker 2: dad link immigration and the NDIS and government spending and
Speaker 2: higher taxes and high cost of living, high inflation, high rates.
Speaker 2: When they link all that together, I think we'll get
Speaker 2: policy change. Whoever wins the election.
Speaker 1: Do you think what about the younger people though, I mean,
Speaker 1: like that we're talking twenty to thirty is the big voters.
Speaker 2: I mean most of them have been very It's funny
Speaker 2: in life, I was talking to someone about this this morning.
Speaker 2: We all start center left, we all start idealistic. I
Speaker 2: don't know how you felt, Yeah, I was. You knew
Speaker 2: me when I was in my twenties, Like I wanted
Speaker 2: to come up with every government policy under the sun
Speaker 2: to make the water better place. My entire twenties were
Speaker 2: spent thinking about radical policy ideas to improve the welfare
Speaker 2: of the country. So when you're a kid, you have
Speaker 2: these really idellic aspirations for making positive change. Then you
Speaker 2: realize that by the time an idea gets completely tortured
Speaker 2: and corrupted by the political process, there's really balancing probabilities.
Speaker 2: Most of the political change is actually suboptimal and destructive
Speaker 2: and often corrupted right, and really very negative, And so
Speaker 2: you become much more jaundice jaded and skeptical people like us,
Speaker 2: so like, well, actually, businesses kind of know what they're doing.
Speaker 2: And if you set the conditions for businesses to flourish
Speaker 2: and thrive and survive, and you give us great incentives
Speaker 2: to build world class product because this is what austraining
Speaker 2: is that we need to build world beating products in
Speaker 2: a world where we're competing now against not just other
Speaker 2: global businesses, but now against global AI. Right, so we
Speaker 2: need to be globally competitive, and that's what the policy
Speaker 2: should focus should beyond in sending folks to innovate and
Speaker 2: build world class companies. And if you do that, I
Speaker 2: think you know, the rest sorts yourself out. It's kind
Speaker 2: of like as an investor, if you've got strong returns, well,
Speaker 2: everything sorts it out. And with an economy, if we've
Speaker 2: got strong intensity, competitive zeal, work ethic and we're building
Speaker 2: the world's best businesses, we have strong growth, we have
Speaker 2: strong productivity. We're going to be able to run a
Speaker 2: high growth economy without having high inflation. We're going to
Speaker 2: be generating a lot of tax revenue which will help
Speaker 2: pay back the debt and everyone's happy. But we're not
Speaker 2: doing that at all. We're actually as you were saying,
Speaker 2: erecting barriers and disincentives to all those things, like why
Speaker 2: would you build a world class business in Australia when
Speaker 2: you can go to Florida or many other countries. You
Speaker 2: can move to Aarba dhaby, you can move to lots
Speaker 2: of different destinations Singapore, yeah, Hong Kong, wherever the case
Speaker 2: may be. But there's many other alternative locations in the
Speaker 2: world which provide much better platforms to build world class businesses.
Speaker 2: And I'm actually seeing it. There's definitely a bit of
Speaker 2: a brain drain right now. You know, the top entrepreneurs
Speaker 2: are looking around the world. Where do I need to
Speaker 2: be based to compete against the AIS?
Speaker 1: Well, I'm seeing the same thing and young people going
Speaker 1: to San Francisco on place like that. Get me out
Speaker 1: of here.
Speaker 2: But coming back to your twenty to thirty question, I'm
Speaker 2: not an expert on this, but my sense has been
Speaker 2: people are starting to say that actually they're some of
Speaker 2: the most discontented members of the community because they're like, actually,
Speaker 2: all this waste hasn't worked out well for us. And
Speaker 2: I don't know if it's right or wrong, But again,
Speaker 2: we start off center left and then when we see
Speaker 2: what the outcome of that effort is, and it's disappointing,
Speaker 2: then we tend to swing to the right.
Speaker 1: I mean, you and I've had this discussions many times
Speaker 1: over a long, long period of time, and we can
Speaker 1: go right back to I remember one stage that we
Speaker 1: went saw Wayne Swan when he was the treasurer, and
Speaker 1: their sensitivity, the lay Party's sensitivity to lobby is like
Speaker 1: out of this world. I mean, it's off the Richter scale.
Speaker 1: Do you think that this government, I'm this sort of
Speaker 1: a little bit outside of what we should be talking about,
Speaker 1: but let's go with different moment. Do you think that
Speaker 1: this government has any possibility, this Labor Party government, and
Speaker 1: we're talking about st it's a federal too, by the way,
Speaker 1: has any possibility of rewriting us, in other words, putting
Speaker 1: us back on the right path.
Speaker 2: Listen, I'm always last hole full, and these guys, as
Speaker 2: much as most politicians, are pretty underwhelming and disappointing. And
Speaker 2: you know everyone in that field tens have pretty narcissistic tendencies.
Speaker 2: If you park all that aside, I'm glass are full.
Speaker 2: There's a lot of smart folks in that space, and
Speaker 2: there's also a lot of good folks.
Speaker 1: Like, look at Daniel Murky. Yeah, both the words.
Speaker 2: Out of my mouth. Yeah, Murky's a beast. He's an
Speaker 2: absolute weapon man.
Speaker 1: But do you think he can get his his influence
Speaker 1: into the Fed?
Speaker 2: So yeah, if you had Murky in the FEDS, it
Speaker 2: would just be world class. Like, he is one of
Speaker 2: the most impressive human beings I've ever met. And very
Speaker 2: practical too, Incredibly practical, incredibly smart, incredibly hard working, and
Speaker 2: he just wants to find the right solutions. I mean,
Speaker 2: Charmin's is absolutely capable of making the right decisions.
Speaker 1: But his ideaological too.
Speaker 2: Yeah, but whether like, whether you know his propensities lead
Speaker 2: him that direction. I have absolutely no idea, But I
Speaker 2: hope because the solutions actually really really freaking simple. Slash
Speaker 2: the size of government, reduce taxes, put the foundations in
Speaker 2: place for ossis to build world class businesses. It's about business.
Speaker 2: It's not about politics, right, it's not about government. It's
Speaker 2: about the private sector. And let you know, individuals hit
Speaker 2: the ball out of the park, and if they do that,
Speaker 2: everything is kind of I think resolved. Inflation disappears, interest
Speaker 2: rates will be much lower, growth will be much higher,
Speaker 2: We'll be able to run a high growth economy with
Speaker 2: much lower unemployment because productivity will be much stronger. So
Speaker 2: it's actually not complex. It's actually almost surprising, astonishingly so
Speaker 2: how complex the process is to get to those sorts
Speaker 2: of solutions. But you do see it around the world,
Speaker 2: and we talked about this once before. It's fascinating what's
Speaker 2: playing out in the US. You got an intellectual civil
Speaker 2: war between California and New York, which are basically looking
Speaker 2: like failed state. It's running huge budget deficits juxtaposed against
Speaker 2: Florida and Texas, which are booming. And you've got massive
Speaker 2: popular shifts out of California into these business friendly states
Speaker 2: which are running budget surpluses, which have got very high growth,
Speaker 2: load taxes. Not only load taxes, they're slashing taxes even further,
Speaker 2: I think in floroughly looking and getting rid of land
Speaker 2: tax altogether. And the playbook is pretty simple.
Speaker 1: And they can do christ because they can slash the
Speaker 1: taxes because the amount of turnover is higher, so they're
Speaker 1: getting the same amount of tax off a higher turnover,
Speaker 1: so therefore reduced the tax rate.
Speaker 2: So the bottom line is the people, not the politicians,
Speaker 2: are the solution for prosperity. So just back to people,
Speaker 2: whereas this idea that government should control everything and we
Speaker 2: should centrally plan the economy and government should provide all
Speaker 2: the services. The classic was this New York mayor who
Speaker 2: decided to make an example of this billionaire in New
Speaker 2: York who was undertaking a six billion dollar project employing
Speaker 2: two and a half thousand New Yorkers, and he vilified him,
Speaker 2: and this guy Ken Griffin said, or at least one
Speaker 2: of his underlings the sea, We're going to basically think
Speaker 2: about shelving the project and moving to Florida because we
Speaker 2: just can't cope with this dude sort of personalizing and
Speaker 2: vilifying entrepreneurial success in this way, which you think New
Speaker 2: York could be a standard bearer for a place to
Speaker 2: build world class businesses, But now tax rates in New
Speaker 2: York prohibitively punitive, sort of fifty to sixty percent total
Speaker 2: tax rates. Similarly, you know you've got a comparable tax burden,
Speaker 2: if not harder, in California. So I think that any
Speaker 2: country that doesn't put itself in a position to encourage
Speaker 2: the development of world class businesses is going to have
Speaker 2: a very very grim future in this intensely competitive AI
Speaker 2: driven environment.
Speaker 1: So we sort of did have that type of thought process.
Speaker 1: I wasn't AI driven, but of that type of thought process.
Speaker 1: We had that in a two thousand and seven terminal,
Speaker 1: the Innovation Nation, Malcolm.
Speaker 2: We've talked about this for decades and like why did
Speaker 2: it fail? Though?
Speaker 1: Like what happened?
Speaker 2: Because it was a great was it too early? I
Speaker 2: think the issue is it was a great idea, it
Speaker 2: was too early, but there was no impetus for change.
Speaker 2: You need a good crisis. This is probably why we
Speaker 2: need to have a recession, because inflation wasn't super high,
Speaker 2: the cost of living wasn't out of control, interest rates
Speaker 2: weren't super high, and the budget wasn't in the deleterious
Speaker 2: crazy position it is right now, and we didn't rack
Speaker 2: up almost a trillion dollars whether of extra debt. So
Speaker 2: now that we've passed through all those processes, people are
Speaker 2: freaking out, understandably, and there's no easy answers now, Mate,
Speaker 2: we've created all these problems. The problems need to be resolved,
Speaker 2: and unfortunately that means basically taking these very good people
Speaker 2: that work in government related sectors. We need to take
Speaker 2: those jobs away from them, and we need to find
Speaker 2: them jobs and even better opportunities in the private sector
Speaker 2: working with world class businesses. I did hear one unbelievably
Speaker 2: interesting idea from somebody in this space, and I don't
Speaker 2: know what you think about this. This person said to me,
Speaker 2: what about creating an alternative tax system? I said, you've
Speaker 2: got to set up a playing field where we can
Speaker 2: attract the best and brightest in the world and foster
Speaker 2: internal talent to be world class, to smash the rest
Speaker 2: of the world in that global competition. And he said,
Speaker 2: we can't kind of debate the current tax system because
Speaker 2: you'll never win that debate. But what happens if we
Speaker 2: actually create an alternative tax system. For example, what happens
Speaker 2: if we said that everyone who starts a business and
Speaker 2: is self employed has a top marginal tax rate of
Speaker 2: hypothetically twenty five percent. And I thought that was genius, Like,
Speaker 2: rather than trying to fix the existing problems, just create
Speaker 2: a new system.
Speaker 1: They run parallel.
Speaker 2: Yeah, they're running parallel, and for those who are self employed,
Speaker 2: they pay no more than twenty five percent tax. And
Speaker 2: you give everyone in the world the incentive to go
Speaker 2: and start businesses, which is what we want to do.
Speaker 2: Create employment create jobs, innovate, build the world's best products,
Speaker 2: which is again what we need.
Speaker 1: You might just open that up a little bit because
Speaker 1: like a lot of people might quite understand the reason
Speaker 1: why that might work. We've got this alternative taxis and
Speaker 1: it's encouraging people to sit up their own business. But
Speaker 1: let's just go through what happens with the employee people
Speaker 1: they're buy inventory, Like, how does that build the economy?
Speaker 2: Well, it gives people a very strong commercial imperative where
Speaker 2: you can move from a top marginal tax rate of
Speaker 2: forty seven percent down to or forty five depending on
Speaker 2: how you calculate, but down to twenty five. And so
Speaker 2: if you're working at CBA A and z NAB and Westpac,
Speaker 2: the four biggest employers in Australia, and you're just an
Speaker 2: employee and you know almost half your income's getting taken
Speaker 2: away by the government. If there's an alternative route where
Speaker 2: if you go out on your own, you're back yourself
Speaker 2: and you decide to create a new product and service
Speaker 2: that can compete globally, and you can establish that firm.
Speaker 2: Employ people, create jobs, generate a new stream of income
Speaker 2: and new sources of growth and innovation. Because you're encouraged
Speaker 2: to do it. Because you're encouraged to it, then you
Speaker 2: might make that leap because I think a lot of
Speaker 2: people would like if you could kind of move from
Speaker 2: a forty five to fifty percent tax rate world to
Speaker 2: one in which you're paying less than or potentially less
Speaker 2: and close to half that, then I think that's pretty
Speaker 2: exciting and enticing. And I thought it was a genius
Speaker 2: idea that rather than trying to re engineer this antiluvering
Speaker 2: and existing system which is going to be death by
Speaker 2: a thousand cuts, just create a parallel system.
Speaker 1: It's still had to change. You're right, Yeah, it's okay.
Speaker 1: How do you think that would work? Yeah, I don't mind.
Speaker 1: The idea is I think probably people will get a
Speaker 1: little bit nervous to this in the early period, the
Speaker 1: start period, like as I'm taking the risk, well, yeah,
Speaker 1: will I have it? Will? I think that probably what
Speaker 1: needs to happen is that there needs to be some
Speaker 1: sort of government encourageable and send if around that a
Speaker 1: bit like the if you remember when they got the
Speaker 1: film industry going here in Austray many years ago. Governments,
Speaker 1: state governments used to contribute to that. There was a
Speaker 1: contribution by the government to you starting up a new business.
Speaker 1: It's sort of like beyond investment some other thing. You know,
Speaker 1: maybe or maybe the money you put into the thing
Speaker 1: is all goes to your investments, so you'll get that
Speaker 1: as a rite off straight away or your everything. Every
Speaker 1: dollar you spend you've got to get I mean, I'm
Speaker 1: in a game where we try and encourage people to
Speaker 1: leave banks that come work with my yellow big rowd business. Right,
Speaker 1: that's the argument we get from them every single time. Yes,
Speaker 1: I want to do that. I'd like to leave the bank.
Speaker 1: I'd like to be in control of my own destiny.
Speaker 1: I know that I can do mortgages. I know I
Speaker 1: can make money, but right now I'm getting paid one
Speaker 1: hundred and fifty grand and are plus a fifty thousand
Speaker 1: dollars bonus or more. I've got a mortgage, I've got
Speaker 1: a family. It's going to take me six to eight
Speaker 1: months to start there, build revenue. How do I exist
Speaker 1: in that period? And that's that's a bit of a
Speaker 1: that's a that's a tough one. And we find them,
Speaker 1: we get we know, we know they want to come
Speaker 1: to us. And it's not just us, but all of
Speaker 1: us that we know they want to change it. We
Speaker 1: know they want autonomy. We know that they know that
Speaker 1: they can earn more money working in it as a broker,
Speaker 1: for example, than they can work in for the bank.
Speaker 1: They like the hours, like the ability to stop at
Speaker 1: three o'clock and go back at six o'clock. They can
Speaker 1: go home and do things with their kids and all
Speaker 1: that sort of stuff. But that six to twelve months
Speaker 1: call it period where they're not earning any money, that's
Speaker 1: the difficult part. And you know, in our case, we
Speaker 1: lend them the money, we fund them, and they can
Speaker 1: pay us back out of the commissions. But generally speaking,
Speaker 1: and I'd say this would have cut across all all industries.
Speaker 1: Most people have mortgage. These aspirational people, they're aspiracial people.
Speaker 1: They've got they've already got a mortgage, they've got two,
Speaker 1: three kids or a kid, and they're not in a
Speaker 1: sort of the fortunate position of you know, super stars
Speaker 1: like yourself. I mean they're not, you know, they can't.
Speaker 1: They don't have anything saved up. Everything's in the house.
Speaker 1: So I think I think it would work if the
Speaker 1: government could somehow create the incident, create the incident in
Speaker 1: the initial stages.
Speaker 2: We do need to kind of resolve the fact that
Speaker 2: the economy is in the groups of these big oligopolies.
Speaker 2: And whether it's the major banks, Cole's, Woolies in Australia.
Speaker 1: It's companies that tells all of.
Speaker 2: Them, Yeah, they're all oligopolies or an oligarchy so to speak.
Speaker 2: And if we can encourage people to back themselves, start
Speaker 2: new businesses, encourage small business, then I think that would
Speaker 2: be very, very positive. But I love the idea of
Speaker 2: creating an alternative tax system where your top marginal rate
Speaker 2: for an entrepreneurs twenty five percent. I mean, that's kind
Speaker 2: of up there with well beating.
Speaker 1: I love being talking for a long time about changing
Speaker 1: the top rate attacks. I mean across the board. I
Speaker 1: just say the view that if you if you either
Speaker 1: change the top rate attack or alternately you change the
Speaker 1: point at which the top rate tax kicks in, we'll
Speaker 1: both will have more turnover, more money will be made
Speaker 1: and therefore to be more tax gathered.
Speaker 2: You're seeing this in the US in Florida, and it's
Speaker 2: just crazy with lower taxes.
Speaker 1: I mean, I know that you've got to travel, so
Speaker 1: I just want to finish off. Mate, where do you
Speaker 1: think will be in the next between here in December.
Speaker 1: And how long do you think this tough period will last.
Speaker 2: I think it's a multi year. I think getting governments
Speaker 2: to do what they need to do is going to
Speaker 2: be very tough.
Speaker 1: But how long will before GP becomes such a shitty
Speaker 1: number and a recession does kick in? And I'm talking
Speaker 1: about an unemployment recession, not just you know, like not
Speaker 1: the typical GDP recession.
Speaker 2: So I'd say in the next one to two years
Speaker 2: and we should expect to see a recession. I think
Speaker 2: we should unemployment should increase. I think we are subject
Speaker 2: to possibly the fact that the election will be in
Speaker 2: twenty twenty eight, Is that right? Yep, yeah, So you know,
Speaker 2: depending on the political will and impulses come into the election,
Speaker 2: you might see some of the things they need to
Speaker 2: do dissipate an atrophy. So, like my central conviction is
Speaker 2: it's going to be multi year. It could be very elongated,
Speaker 2: it could be much longer than what I've just described.
Speaker 2: But in the central case, let's assume they go to
Speaker 2: close to five percent in terms of the RBA cash
Speaker 2: rate from three point six, possibly drift higher. You can
Speaker 2: see house prices for commercial property prices for much higher defaults, delinquencies, insolvencies.
Speaker 2: If government spending is constrained at the margin, and crucially,
Speaker 2: and this is really really important, there's a radical reduction
Speaker 2: in immigration, which I think there needs to be, then
Speaker 2: you're very likely going to have a recession and unemployment
Speaker 2: will increase. So I would say over the next couple
Speaker 2: of years, if we don't get a big reduction in
Speaker 2: immigration and we don't get a big or material shift
Speaker 2: in political spending, then the problem is you can have
Speaker 2: this ongoing bat one. I don't know if we've or
Speaker 2: I've expressed this clearly, but really what you have now
Speaker 2: is a battle between the central bank and the politicians.
Speaker 2: So politicians want population growth, in immigration and political spinning.
Speaker 2: The central bank wants lower inflation. The two things are
Speaker 2: butting heads and it's seat of intractable. So somebody has
Speaker 2: to give. The central bank ain't going to give because
Speaker 2: it's data dependence. The races is going to continue climbing high.
Speaker 2: Now the central bank will get a bit year bitch,
Speaker 2: because this central bank is a bit whipped by charmers,
Speaker 2: like they hiked in February and instead of saying, hey,
Speaker 2: we're sitting up for a hiking cycle, and you were
Speaker 2: talking about central bank's conditioning expectation expectations. Normally there's this
Speaker 2: thing known as moral suasion, where they will signal and say, hey,
Speaker 2: we've hiked rates in February, but guess what, there's another
Speaker 2: three or forecoming, so you better pull your horns in.
Speaker 2: And they can, through their words, affect behavior. They can
Speaker 2: convince people to be more prudent, to spend less, recklessly,
Speaker 2: reduce activity, reduce inflationary pressures. And if they had any
Speaker 2: balls and they actually said to charmers and the government,
Speaker 2: you're to blame for a big part of this problem,
Speaker 2: and you need to pull in your purse strings, I
Speaker 2: mean you'd see an immediate political I think immediate political way. No,
Speaker 2: but they won't. But if they did, and they could have,
Speaker 2: and they haven't, And what this means is mate that
Speaker 2: the whole process is stretched out. So instead, what happened
Speaker 2: was Bullock got up there the government of the RBA
Speaker 2: and said we're hiking and we might be one and done.
Speaker 2: Absolutely preposterous. They immediately hiked the next month that they met.
Speaker 2: And so the suboptimal central bank behaviors because they're politically compromised,
Speaker 2: means this whole thing could get stretched out. And if
Speaker 2: Chalmers doesn't change, it's going to get stretched out. And
Speaker 2: if we don't get a big reduction of immigration or
Speaker 2: get stretched out, so it could be three to five
Speaker 2: year plus process, depending on whether we see those changes. Well.
Speaker 2: But by the way, is anyone that you're talking to
Speaker 2: talking about recession right now? Or okay? Interesting? I mean
Speaker 2: it's like no one's walking about ate hugs and.
Speaker 1: I am, but I am, but no one else is.
Speaker 2: Yeah, yeah, I mean like last year, no one was
Speaker 2: talking about a double hiking cycle. I find really interesting
Speaker 2: how people like it seems to be steering us. You know,
Speaker 2: it's like you got core inflation running it almost four percent,
Speaker 2: record immigration, record government spending, and the only solution is
Speaker 2: high rates and a recession. Because the very what people
Speaker 2: need to understand is the RBA has to lift unemployment
Speaker 2: to that circle five percent levels at four point three
Speaker 2: right now, which would basically satisfy the test for a recession.
Speaker 2: It has to get unemployment up just to get back
Speaker 2: to the maths of being able to run an economy
Speaker 2: without inflation. Because they viewers and listeners might not understand this,
Speaker 2: but in the RBA's mathematical models, unless you get unemployment
Speaker 2: back to its natural rate, you will get unsustainable strong inflation,
Speaker 2: and again in unemployments so low because the political spending
Speaker 2: and immigration. So it seems really obvious to me that
Speaker 2: the idea that we can just thread the needle and
Speaker 2: push rates up and not reduce house prices and not
Speaker 2: increase unemployment and get inflation back to target absolutely preposterous.
Speaker 1: Warren Hogan has been a bit very much along your line,
Speaker 1: and I noticed Lucy ellis recently much more again a
Speaker 1: much more favorite, more much more predictive around many more
Speaker 1: hikes and also getting close to recession.
Speaker 2: One's famous economist, and Lucy works Westpac used to work
Speaker 2: at the RBA.
Speaker 1: And she's chief economists now west Pain. Yeah, yeah, so
Speaker 1: she's now come around like she actually changed.
Speaker 2: Her view about three weeks ago. But and markets are
Speaker 2: pricing in two three hikes, so the markets are there.
Speaker 2: So I think the future for Australia, mate is very
Speaker 2: very grim. And this idea of thinking about the economy
Speaker 2: without population growth is super important because it will impact everything.
Speaker 2: Commercial property, REZI. You know, those two asset classes have
Speaker 2: been massively boosted by the world's strongest population growth rates.
Speaker 1: We are we are one of the world's strongest population growth.
Speaker 2: So I have been for decades. But literally we've had
Speaker 2: the strongest population growth in the OECD for decades. Australia
Speaker 2: has I mean, think about the Aussie that we grew
Speaker 2: up in Sydney and Melbourne just ethnically looked radically different
Speaker 2: like we. You know, our two biggest sources of migration
Speaker 2: are China and India. That's great, you know, and actually
Speaker 2: immigrants are long term very powerful for productivity, but in
Speaker 2: the short term it creates a huge demand shock and
Speaker 2: if you have too much immigration, the economy can really
Speaker 2: struggle to cope and you get price pressures, which is
Speaker 2: exactly what's happening.
Speaker 1: The long term immigration of I think was closer to
Speaker 1: two seventy thousand, yeah. Yeah.
Speaker 2: Historically we ran about I think, you know, two hundred yeah,
Speaker 2: so we're running double basically double. Yeah.
Speaker 1: And what's interesting is they're all they all come to
Speaker 1: where the jobs are and then between a city Melbourn, Risbane.
Speaker 1: And it's interesting that I don't but I just know
Speaker 1: it's the traffic. Every year, the traffic seed is a
Speaker 1: double and it's like it's and the intensity, it's an
Speaker 1: intense environment to live here. Now it's Sydney in terms
Speaker 1: of density. Density is a big issue for me anyway personally,
Speaker 1: and it makes who sell cars like the big in
Speaker 1: the car industry, like the biggest in the currentistry. And
Speaker 1: they tell me that the number of cars is selling
Speaker 1: is ridiculous because everybody comes to the country news a
Speaker 1: carp Yeah.
Speaker 2: Yeah, Australia today it just looks literally looks very very
Speaker 2: different to what it did thirty to forty years ago.
Speaker 2: And it is very very different. And that's a good
Speaker 2: thing because we're the most multicultural country in the OCD
Speaker 2: and you know, one in three of us wasn't born here,
Speaker 2: so that brings with lots of positives, but it also
Speaker 2: brings with it challenges. And one of those challenges is
Speaker 2: a massive you know but basically amongst the world's highest
Speaker 2: inflation rates and highest cost of living rates, and now
Speaker 2: we're actually seeing one of the highest interest rates in
Speaker 2: the developed world because the ABA is hiking ahead of
Speaker 2: everyone else because you know, they've got bigger problems than
Speaker 2: everyone else.
Speaker 1: So and you're always doing those road shows around the world.
Speaker 1: I mean, you know, doing and raising money for your funds.
Speaker 1: You're very various successful funds here in Australia, What do
Speaker 1: they say? What are all the roads of people say?
Speaker 1: The people you're presenting to, they're.
Speaker 2: Not really focused on Australia. I think Australia feels like
Speaker 2: he's in a bit of time. One thing I noticed
Speaker 2: coming back here is we're very disconnected from I think
Speaker 2: leading analysis on what's happening in the world, like our
Speaker 2: views and attitudes towards, for example, Trump, dated and stale.
Speaker 2: Whereas if you go to the UK, where they don't
Speaker 2: love Trump, but they would nonetheless consider him a formidable
Speaker 2: sort of policy and intellectual adversary for what they may
Speaker 2: believe in, and they take him very seriously, whereas in
Speaker 2: Australia there tends to be a reflex to consider he's
Speaker 2: just this cartoonish characature, which is not like the guy
Speaker 2: has completely single handedly re engineered defense policy in Europe,
Speaker 2: foreign policy in Europe, policy in the Middle East, the
Speaker 2: the organizational and political administrations in the Middle East. He's
Speaker 2: re engineering all of the the balance of power and
Speaker 2: the leadership regimes in South America, the Caribbean. So this
Speaker 2: guy's had a profound impact on our world. He's probably
Speaker 2: been the most influential political leader since World War Two, possibly,
Speaker 2: And so I would say things I noticed are just
Speaker 2: that disconnect between the rest of the world and us.
Speaker 2: We're in a bit of a time walk where you know,
Speaker 2: in a bit of a bubble.
Speaker 1: Is it too easy for us?
Speaker 2: You know, they're wonder down under the lucky tea. It's interesting.
Speaker 2: I was in New Zealand last week and they kept
Speaker 2: on referring to Australia as the Lucky country. Right. You know,
Speaker 2: you've got all these resource endowments, you've had this great
Speaker 2: population growth, you've got all this government spending, but the
Speaker 2: Lucky Country has become the Lazy Land. And I've said
Speaker 2: this before. You know, we're basically on a track, on
Speaker 2: a path to becoming asias at Betha where we just
Speaker 2: sell our physical amenities, you know, our beaches, our budgies,
Speaker 2: our bikinis, and our natural resource endowments. And so we
Speaker 2: both know that when you get lucky, you tend to
Speaker 2: get complacent and you tend to suffer from hubris. And
Speaker 2: we've all kind of suffered from it at various points
Speaker 2: in time because we all get lucky by birth, whatever
Speaker 2: the case may be. And so yeah, Australia's lost its mojo.
Speaker 2: There's just absolutely no doubt about it. And it's sad
Speaker 2: because we were like the world's most competitive country at
Speaker 2: one point, the world's one of the world's richest countries,
Speaker 2: and we were world beaters. Like you know, my recollection
Speaker 2: grandup as a kid was Ossie's in every domain where
Speaker 2: the you know, it was the cricket, the rugby, the Olympics,
Speaker 2: Rupert Murdoch. We were just winners. Yeah we're not. We're
Speaker 2: losers right now.
Speaker 1: Well that's where I'm going to stop right there, and
Speaker 1: I hope you have a say flight mate, and I'll
Speaker 1: see when you get back.
Speaker 2: Thanks.
Speaker 1: Thanks mate,