Speaker 1: Hi, Mike Boris and this is straight talk, Chris Joy,
Speaker 1: Well do straight talk.
Speaker 2: Thanks for having me, mate.
Speaker 1: So, yeah, you're still there, you know, Like I know
Speaker 1: you're downplay it, but you know you're a portfolio manager.
Speaker 1: There's which loads to describe yourself as, amongst many other
Speaker 1: millions of things that I know you do, which we won't
Speaker 1: talk about today. Portfolio manager at Cooler Bar. Tell me
Speaker 1: a little bit of a story about Coolerbart and in
Speaker 1: terms of what you are doing now, like what's what's
Speaker 1: Coolerbar doing right now? In terms of intergesters.
Speaker 2: Yeah, so we run fifteen billion across about fifty portfolios.
Speaker 2: I have fifty three professionals around the world. We have
Speaker 2: officers in London, Miami, Auckland, Sydney, in mon I'm smiling
Speaker 2: because you've known me since I was at university and
Speaker 2: you you kind of backed me the whole way along.
Speaker 2: So I really appreciate your support.
Speaker 1: Mark, But it's got nothing to do with me, mate,
Speaker 1: But you've done it all on your own. By the way,
Speaker 1: for those guys who don't know that, this bloke is
Speaker 1: the most dynamic, hard working basket I've ever met my
Speaker 1: wife and he's got a million ideas and the actually
Speaker 1: actually executes on him, which is the reason I backed him.
Speaker 1: I did a purely out of economics. From my appointment,
Speaker 1: I did very well out of him. So don't get
Speaker 1: him wrong, don't miss into it. But but I did
Speaker 1: back him, and I believe in him, and I've known
Speaker 1: his family for a long time too. But mate, what
Speaker 1: are your portfolios covering off now? So originally we didn't
Speaker 1: enhance cash fund but you have a lot more things
Speaker 1: going on now.
Speaker 2: Yeah, So today we run enhanced cash strategies, long short
Speaker 2: credit strategies. I mean, we do everything in fixed income
Speaker 2: sovereign strategies. Today. We're the biggest trader of ossie Commonwealth
Speaker 2: government bonds in the world, so we are about five
Speaker 2: to six percent of the total market turnover. I think
Speaker 2: we're bigger than anyone according to my guys estimates. But
Speaker 2: I have fifty three guys around the world and girls.
Speaker 2: We have twelve traders, nineteen analysts, and we really specialize
Speaker 2: in just pricing the correct or fair value interest rate
Speaker 2: for a bond to pay us Australian assets. Our global global,
Speaker 2: very global. Yeah, so two thirds of our trading. We
Speaker 2: trade about a billion a day last year we bought
Speaker 2: and sold close to one hundred and fifty billion. But
Speaker 2: our edge is we're highly quantitative, so we have eighty
Speaker 2: different bond pricing models we use around the world. But
Speaker 2: really what we're trying to do is conceptually simple, what
Speaker 2: interest rate should CEBA pay us on a three year
Speaker 2: seeing bond, or A and Z pay us on a
Speaker 2: five year subordinated bond, or Australia pass on a ten
Speaker 2: year government bond? And we do that all around the
Speaker 2: world all day. And we're incredibly active, very systematic, very
Speaker 2: quantitative and just very rigorous in figuring out what the
Speaker 2: fair value interest rate is. And what we really want
Speaker 2: to do mate is find a bond paying seven percent
Speaker 2: that only pay six and a half percent, and when
Speaker 2: that interest rate drops down to our fair value target,
Speaker 2: we get a little bit of price appreciation and then
Speaker 2: we rinse and repeat. Yeah capital gate, Yeah, get a
Speaker 2: capital gain exactly. And then today we do offer strategies
Speaker 2: that actually have very high yields as well. We use
Speaker 2: some gearing. So you know our floating at HIG Yield fund,
Speaker 2: which is also available as an ATF. The ticker is
Speaker 2: a WYLDDX. It's paying about a seven and a half
Speaker 2: percent weighted average interestrate on its portfolio, and the portfolio
Speaker 2: is ostensibly very high grade. So the portfolio is seventy
Speaker 2: percent major bank senior ranking bonds and thirty percent major
Speaker 2: bank subordinated bonds. The average credit rating is very higher
Speaker 2: A plus. It's daily liquid, it's floating rate. But we
Speaker 2: use about sixty five percent gearing to boost the interest
Speaker 2: rates to the bonds are paying about five percent and
Speaker 2: we're getting seven and a half percent because we're using
Speaker 2: that gearing to boost the interest round the portfolio. But
Speaker 2: cool by capital Investments we set up in twenty eleven
Speaker 2: with a lot of help from you and your nephew.
Speaker 2: Luke still works for me. We were just talking about
Speaker 2: the fact that, look, if you're listening, made you could
Speaker 2: emulate your uncle's aesthetic appeal and dress sense. Luke's really
Speaker 2: struggles the way he presents himself.
Speaker 1: And that's because if his father is my.
Speaker 2: Yeah, yeah, Adrian, but Luke's our chief operating officer, a
Speaker 2: brilliant boy, and so yeah, that's that's kind of what
Speaker 2: we do. We just trade. We trade more actively in
Speaker 2: austrain fixed income, I think than any other party locally.
Speaker 2: But we are one of the most active traders in
Speaker 2: the world, you know, so over the last twenty four
Speaker 2: hours we probably traded a billion dollars Aussie in the
Speaker 2: US and European bond markets. And that's why we need
Speaker 2: a global team. In global officers. We just opened up
Speaker 2: the Miami office. We've got ten guys in London, five
Speaker 2: traders in London, five analysts in London, and no one
Speaker 2: really does what we do. Like we're very differentiated in
Speaker 2: terms of our approach. Typically in fixed income, it's just
Speaker 2: you hold too maturity, you buy a bond, you get
Speaker 2: the yield on the bond less the fees. You don't
Speaker 2: trade it around. And if you want more yield, you
Speaker 2: take more risk, you take more liquidity risk, or more
Speaker 2: default risk, or more interest rate risk, and we don't
Speaker 2: do that. We focus on super liquid bonds that are
Speaker 2: very low volatilely that are floating rate, that really don't
Speaker 2: have any default risk, and we generate the total return
Speaker 2: through trading. So in the last twelve months, you know,
Speaker 2: our fleeing right how you'd found in a long shore
Speaker 2: credit fun would have returned nine to ten percent after fees,
Speaker 2: and they're currently paying it was around seven seven and
Speaker 2: a half percent.
Speaker 1: So that means by definition, you gotta understand Instagram markets,
Speaker 1: you and your team. That is, so let's talk about
Speaker 1: We'll talk about Australia in the middle of an election period,
Speaker 1: so it's a bit of a bit tricky, but let's
Speaker 1: let's park the election period to the side. You know, today,
Speaker 1: on the day we're doing the podcast, we'd we've got
Speaker 1: as a big board meeting and there's probably no point
Speaker 1: because by the tom this goes THEEAH, there's probably the
Speaker 1: decision is already going to be made. But if we
Speaker 1: look at if I look forward to May, the main meeting,
Speaker 1: which I think is around seventeenth y May, off the
Speaker 1: back of the April numbers, which would be the March
Speaker 1: quarter numbers, which are pretty important to come out. Where
Speaker 1: do you see, as where you guys seeing the official
Speaker 1: rate of interest rates in Australia. I'm not on talking
Speaker 1: about bomb marks, they're not talking about bbs. I'm talking
Speaker 1: about just the official rate which off the back of
Speaker 1: which homeline rates get set. Where do you see official
Speaker 1: rates for the calendar year of twenty five And you
Speaker 1: could be till his subject to this subject, because of
Speaker 1: course we will be subjected to data, where's it going.
Speaker 2: Yeah, So in twenty twenty three and twenty twenty two,
Speaker 2: we argued rates need to go a lot higher, and
Speaker 2: I think some folks were calling for rate cuts in
Speaker 2: twenty twenty three and we said, no, they need to
Speaker 2: go higher, and the RBA only lifted its cash rate
Speaker 2: to four point three five percent, pretty much every other
Speaker 2: developed central bank New Zealand, Canada, the UK US went
Speaker 2: to five five and a half and in twenty twenty
Speaker 2: four there were a lot of calls for rate cuts
Speaker 2: rate hikes. The inflation data was pretty brisk in twenty
Speaker 2: twenty four and actually got revised up. If they'd had
Speaker 2: that information the revisions, they almost certainly would have hiked
Speaker 2: once more in twenty twenty four. But when they had
Speaker 2: that opportunity to hike, they didn't see that revised data.
Speaker 2: But they didn't cut in twenty twenty four, and that
Speaker 2: was that. Our view was they're going to hike in
Speaker 2: twenty two for again again, or they're not going to cut.
Speaker 2: And a lot of people the market, for example, the
Speaker 2: financial market and Mark was pricing in quite big rate
Speaker 2: cuts from the RBA last year, and we said that's
Speaker 2: that's all shit. That's not going to happen. You need
Speaker 2: the beginning of the year. Yeah, you're exactly right, like
Speaker 2: at the start of the year. And we look at
Speaker 2: the FED. The start of the year, the market was
Speaker 2: pricing in one hundred and seventy five bases points of
Speaker 2: rate cuts from the FED, and we said, that's beast,
Speaker 2: it's not going to happen. They're going to cut that
Speaker 2: fraction of that, And the market was pricing the FED
Speaker 2: starting to cut in March, and then they had the
Speaker 2: RBA a bit later than that, and of course the
Speaker 2: RBA didn't cut at all, which was the right decision,
Speaker 2: and the FED only started cutting in September and they
Speaker 2: only cut by one hundred and now they're completely on
Speaker 2: the sidelines. But in December this year we started publishing
Speaker 2: in my run, a weekly column for the Financial Review.
Speaker 2: I started saying the AFR that I thought they cut
Speaker 2: in February.
Speaker 1: Why what changed your mind?
Speaker 2: Yeah, so not the data per se. But in December
Speaker 2: the RBA completely changed the tune and they surprise everyone,
Speaker 2: they shifted something called a easing bias for no reason.
Speaker 2: But we thought we figured out why they shifted, and
Speaker 2: that was because we knew in December. The inflation data
Speaker 2: the next month in January, and they met in February
Speaker 2: would be.
Speaker 1: Soft you're talking about the December quarter, Yeah.
Speaker 2: December quarter. Yeah, So we the December quarter data on
Speaker 2: five from me and I think it was very good memory. Yeah,
Speaker 2: so we knew it was going to print point five. Ye, Well,
Speaker 2: that was our forecast and we published that number in December,
Speaker 2: and for statistical reasons, there was good grounds to believe
Speaker 2: the final quarter of twenty twenty four was going to
Speaker 2: be a soft print.
Speaker 1: So just just explain Chris a little bit more about that.
Speaker 1: So just for our audience sake, because he's one of
Speaker 1: the fastest talkers I know, because he's one of the
Speaker 1: fastest things I know. But just to put into context,
Speaker 1: explain why point five for the December quarter and I
Speaker 1: was for the last three months of twenty twenty four,
Speaker 1: giving such an idea, Why is an important relative to
Speaker 1: where the Reserve Bank wanted to be once a bit
Speaker 1: between two and three? Why is that the case that quarter?
Speaker 1: Why is that quarter so important?
Speaker 2: Well that a point five outcome would imply that, you know,
Speaker 2: on a short term basis, the core inflation rate in
Speaker 2: Australia was actually hitting the bottom of the target bad.
Speaker 1: They ran two, yeah, exactly four times point five.
Speaker 2: Because they target officially the midpoint of two to three,
Speaker 2: so they target two and a half and point five
Speaker 2: is actually at the bottom of that range.
Speaker 1: Is that correct it? But historically though, they've been only
Speaker 1: interested on the historical inflation number, which is the point
Speaker 1: the quarter for the sorry, the point five for that quarter,
Speaker 1: but every other quarter before that would have given you
Speaker 1: a three point two correct? Why do they change? Why
Speaker 1: do you think they changed there?
Speaker 2: Well, you know, so this is the little puzzle. Yeah, okay, so.
Speaker 1: This is the puzzle. I ain't get so very easy to.
Speaker 2: Understand what happened. So Michelle Bullock a few weeks before
Speaker 2: the December board meeting had said we need at least
Speaker 2: two quarters of softing fflation data or positive inflation data
Speaker 2: to be comfortable that we can lower rates. And then
Speaker 2: in December we all wake up, and she turns around
Speaker 2: and says in her statement after the board meeting that
Speaker 2: basically they've adopted an easy bias and they're laying the
Speaker 2: groundwork we felt to cut in February, and there was
Speaker 2: only one new data print available between December and the
Speaker 2: February meeting, which was the generary release, which was the
Speaker 2: fourth quarter data, So she kind of had busted her
Speaker 2: own decision making rule that she'd announced only a few
Speaker 2: weeks prior. So you take the fact that you've got
Speaker 2: this inconsistency and their messaging why are they so keen
Speaker 2: to set up the grounds for potential easing in February,
Speaker 2: and the fact that they knew and we knew that
Speaker 2: we were forecasting a point five trim mean print and
Speaker 2: at printed took point five for the fourth quarter, which
Speaker 2: was implying that it was annualizing around two. But crucially,
Speaker 2: the trajetory of the data was heading even though the
Speaker 2: twelve month rate might have been above three, the trajedory
Speaker 2: of that data was heading towards target. And remember, they
Speaker 2: think that the normal or neutral interest rate in Australias
Speaker 2: around three and a half. There have been some recent
Speaker 2: reassessments of that where it might be closer to three.
Speaker 2: But if they're at four point three five and they're
Speaker 2: you know, they think that through the cycle interest rate
Speaker 2: that is neither stimulitary for the economy or contracting is
Speaker 2: around three and a half, you can mount the case
Speaker 2: if you're them, and you want to cut, and near
Speaker 2: a bit dubbish and maybe you're a bit politically compromised
Speaker 2: that it would be pretty nice to kind of punch
Speaker 2: out an interest rate cut in February, knowing that an
Speaker 2: election would be held after then, and that cutting in
Speaker 2: the middle of an election in April would be difficult.
Speaker 2: Right just now, which is now, that's a situation we
Speaker 2: sit in. So we did not think they should cut.
Speaker 2: So I was very clear. I wrote this repeatedly in
Speaker 2: the Financial Review, and I think everyone understands is we said,
Speaker 2: we don't think there's any case to cut, but we
Speaker 2: think but we think they will cut in February, So
Speaker 2: we forecast the February cut. Yeah, yeah, one hundred percent.
Speaker 2: We're very very clear. I wrote it repeatedly. We don't
Speaker 2: think they should cut, but we think they will cut.
Speaker 2: And people were a bit confused because we've been very
Speaker 2: hawkish in twenty twenty four seving no cuts and no
Speaker 2: case for cutting. But I knew people would get confused,
Speaker 2: so we made it very very explicit that we thought
Speaker 2: they would cut in February, but we didn't agree with
Speaker 2: the logic, right because by her own logic, she needed
Speaker 2: two quarters of data and suddenly she's very comfortable with
Speaker 2: one quarter of data. And the key point is the
Speaker 2: point five percent trim MI in print was statistically biased.
Speaker 2: So all the smart forecasters knew that it was going
Speaker 2: to print off for some statistical reasons, right, so it
Speaker 2: wasn't necessarily a high quality signal. And then they cut
Speaker 2: in February. So then this all bigs a question. The
Speaker 2: puzzle was, well, why did they cut? You know, if
Speaker 2: you know what we know, which was maybe it was
Speaker 2: statistically biased. The cost of living subsidies that Jim Chalmers
Speaker 2: has given the community, and that the state governments have
Speaker 2: also replicated, they are sandbagging the inflation data. They're artificially
Speaker 2: suppressing the inflation data. They're doing that deliberately to try
Speaker 2: and get the RBA to cut, and lo and behold
Speaker 2: they've cut. But obviously when they're cost living subsces expired,
Speaker 2: the data pops back up. And you know, my simple
Speaker 2: kind of calculus is Charmer's appointed Bill Michelle Bullock. So
Speaker 2: he single handedly selected her, and it was a controversial
Speaker 2: appointment in the sense that he was expected to appoint
Speaker 2: someone outside of the bank and he went for the inside.
Speaker 2: So he hand selected Michelle Book, he hands selected her
Speaker 2: deputy Houser, and he's appointed a lot of the board members.
Speaker 2: And now there's this new committee that will set interest
Speaker 2: rates that he's also selected.
Speaker 1: So do you think it was politically Do you think
Speaker 1: there was? I don't think. I'm not asking you. Did
Speaker 1: he bring over? So listen, I want to rate reduction,
Speaker 1: but I.
Speaker 2: Have to we now know actually the Financial Reviews published
Speaker 2: a lot of information on this. He's jawbone the heck
Speaker 2: out of the RBA, like he's absolutely put them under
Speaker 2: enormous pressure. And you've got to remember he's his idol
Speaker 2: is Paul Keating. He wrote his phdwn Paul Keating, and
Speaker 2: Paul Keating was famous for jaw boning and haranguing the RBA.
Speaker 2: And so I just think he's pulling straight from the
Speaker 2: por Keating playbook. I actually don't have a huge issue
Speaker 2: with it at all.
Speaker 1: Like you know, Castella is to do it against the banks.
Speaker 2: Yeah, there's you know, people say that the RB he's
Speaker 2: politically independent, the politicians shouldn't give them heat. I agree
Speaker 2: that the politicians shouldn't create too much heat for them.
Speaker 2: But if he wants to have a go and say, hey,
Speaker 2: here are the reasons I think you should cut I
Speaker 2: personally think he's entitled to make that case. So if
Speaker 2: Jim Chalmers is listening, I would just say, dude, I've
Speaker 2: got no problem with you harassing her. But he did, Like,
Speaker 2: that's very clear that I was published a lot of
Speaker 2: stuff showing that. Like you know, mind standing is he
Speaker 2: put a lot of pressure on the board, and he
Speaker 2: has an appointee to the board, his Treasury secretary as well.
Speaker 2: So Steve Kennedy sits on the board.
Speaker 1: But that board won't do But that board didn't meet
Speaker 1: at that meeting though the new board didn't meet. It
Speaker 1: meet the meeting of this meeting at the April meeting.
Speaker 1: But they didn't. They didn't meet in February meeting.
Speaker 2: No, no, But Steve Kennedy sits on the board. Yeah, who
Speaker 2: works for Charmers. Yeah, Charmers has pressured the RBA much
Speaker 2: more directly than any recent treasures in the nineties. Yeah.
Speaker 2: But by the way, again, i'd say I have no
Speaker 2: problem with that.
Speaker 1: I think it's appropriate.
Speaker 2: My mate John here the fr he appropriately says that
Speaker 2: that's inappropriate. I think I can perfectly understand how people
Speaker 2: think that's inappropriate, But I say fair play to Jim Chalmers,
Speaker 2: Like if I was in his shoes, I'd probably be
Speaker 2: putting pressure on the RBA. I've got no problem he
Speaker 2: can make the intellectual case like it's a you know,
Speaker 2: we have free speech. Sure we recognize their politically independent,
Speaker 2: but there's no problem with politicians prosecuting their intellectual agenda.
Speaker 2: Like you know, I think he should be doing everything
Speaker 2: possible if he honestly believes, and he probably does believe
Speaker 2: that rates should be lower. And our mate Stephen Cook
Speaker 2: Coulis has argued forever and to day rates should be lower.
Speaker 2: He obviously is very sympathetic to the labor cause.
Speaker 1: Although he and I disagreed on that February meeting because
Speaker 1: I said, based on what they've done historically, we should
Speaker 1: not get we will not get a rate reduction in February.
Speaker 1: I think we'll get later on in the year. But
Speaker 1: I didn't know.
Speaker 2: Well he knows. I was consistently like we published relentlessly
Speaker 2: from to He.
Speaker 1: And I discussed it, and I discussed what you're going
Speaker 1: to publish.
Speaker 2: Yeah, so we called the February cuver very very clearly.
Speaker 2: But it come back to I think the interesting thing
Speaker 2: around the political nexus is what we know as charmers
Speaker 2: has put a lot of pressure on directly on Bullock
Speaker 2: and on the board. But I think that's fine, Like
Speaker 2: they can make their case, but the RBA needs to
Speaker 2: be big and strong enough, like we're all grown men
Speaker 2: and women.
Speaker 1: So we're disappointed in the way she come out in
Speaker 1: a press conference after because she then sort of looked
Speaker 1: like she was resolving in a bacular position.
Speaker 2: It's ridiculous. What I'm disappointed in the I was the RBA.
Speaker 2: So the RBA made there was no intellectual or evidentiary
Speaker 2: basis based on their decision making front of it that
Speaker 2: they set up that we need two quarters of data
Speaker 2: a couple of weeks before the December meeting, and then
Speaker 2: suddenly something happened in December where they were laying the
Speaker 2: foundations for a political cut. It was a political cut
Speaker 2: because they knew they were going to get that soft
Speaker 2: print and that was the perfect excuse to cut. And
Speaker 2: as soon as they went to that easy bias, the
Speaker 2: market had it like seventy percent priced, and they know
Speaker 2: that if the market's got a priced then it's very
Speaker 2: hard for them not to cut because they can then
Speaker 2: say well, the whole world thinks we should. Yeah. No,
Speaker 2: but that's that was deliberate because what the RBA says, well,
Speaker 2: market expectations. You know, every bond trader in the planet
Speaker 2: thinks we should cut rates. It's obviously the right thing
Speaker 2: to do. And so they cut rates. And you know,
Speaker 2: by the time they came to the meeting, I think
Speaker 2: it was like eighty percent priced, and they could have
Speaker 2: eviscerated the pricing. Takes thirty seconds for Bullet to stand
Speaker 2: up in jarring and say, oh, we did she has
Speaker 2: no problem and numerous occasions, and she did this after
Speaker 2: the February meeting saying she thought that market pricing was junk.
Speaker 2: So she could have set up that conversation prior in January.
Speaker 2: At any point in time, they could have said, and
Speaker 2: this is another reason why I was very confident they
Speaker 2: were cutting cutting. They did nothing to dispel market pricing,
Speaker 2: and they often do.
Speaker 1: They did no preconditioning.
Speaker 2: No, well, but they just have to give a speech
Speaker 2: and say, well, respectfully, we completely disagree with market pricing,
Speaker 2: and they do that all the time. They didn't engage
Speaker 2: in any of that rhetoric.
Speaker 1: So that's Latin.
Speaker 2: Then, yeah, it was Lad amaze. That's why we were
Speaker 2: kind of like, that's why I was saying, is laid Almazir.
Speaker 2: But interestingly, and this is where it gets all the
Speaker 2: more absurd. After they cut, that's what I'm saying. They
Speaker 2: never cut more than just once. That's just you know,
Speaker 2: an only ones. Yeah, so they only never cut only once.
Speaker 2: I think I said more than once. Yeah, so they
Speaker 2: never only cut once. And after they cut, the most
Speaker 2: ridiculous narrative was, oh, it's kind of more or less
Speaker 2: one and done. And that market pricing, which was for
Speaker 2: a very I thought reasonable and cookiin I would I
Speaker 2: think be at one with this market was only pricing
Speaker 2: two and a half more cuts throughout the whole year
Speaker 2: of twenty twenty five. And she said, you know, market
Speaker 2: pricing was unrealistic, and she and her proxies at the
Speaker 2: RBA had went out on this campaign to completely dismiss
Speaker 2: market pricing. I just think it's madness. So if you're
Speaker 2: going to cut once, presuming with a case like you
Speaker 2: want to move the cash rate meaningfully and materially, and
Speaker 2: twenty five basis points does not mean it's no material
Speaker 2: and does nothing to the inflation data. According to their
Speaker 2: own modeling less.
Speaker 1: Nothing to promote anything.
Speaker 2: Oh, it's not so where it's a little complex and
Speaker 2: nuances is. One cut statistically does nothing right. However, I
Speaker 2: argued prior to the cut, the one cut is meaningful.
Speaker 2: I thought they cut more than once, and I think
Speaker 2: they will cut more than once. I think they'll cut
Speaker 2: in May. This possibly they cut today. I think it's
Speaker 2: less than likely that they We're in the middle of
Speaker 2: a campaign, so they're not going to cut today.
Speaker 1: But none I've done.
Speaker 2: I think there's a good chance they cut in May.
Speaker 1: And can we just look at that just before you
Speaker 1: go in terms of the rest of you, can we
Speaker 1: just look at May? What would what do you want
Speaker 1: to see in the April probably comes out twenty seven
Speaker 1: to twenty eighth word the April numbers for the March quarter.
Speaker 1: What are you looking for? What do you think they're
Speaker 1: going to be looking for more importantly to put to
Speaker 1: justify a cut in May.
Speaker 2: So the kind of question is does cor inflation print
Speaker 2: at point six or point seven? I think it could
Speaker 2: print either. I think the risk is to a lower print,
Speaker 2: and I think they could cut on either. And I
Speaker 2: think there's a good chance they cut. I don't think
Speaker 2: it's sixty seven percent probability they cut. I think market
Speaker 2: pricing is actually there or thereabouts. I think it's yeah,
Speaker 2: And I think there's really interesting dynamics to play with
Speaker 2: the AUSY inflation data. But just before we come back
Speaker 2: to that, I just want to square away this point
Speaker 2: on the single cut. The single cut is meaningful in
Speaker 2: this respect. And I wrote this repeatedly. I don't think
Speaker 2: I wrote it twice in the Financial Review in January.
Speaker 2: It radically changes the atmospherics, the zeitgeist. And what's amazing
Speaker 2: and I expected this to happen, is if you look
Speaker 2: at the house priss data, dude, if you look at
Speaker 2: if you go to core Logic's website and you go
Speaker 2: to house price indices, if you go to the back
Speaker 2: what is called the back series, and there's a chart,
Speaker 2: it's a dynamic chart, and you can de select all cities,
Speaker 2: all select cities, and if you deselect every city about
Speaker 2: Sydney and you look at the chart, what you'll see
Speaker 2: is house prices fell by about two percent soft but
Speaker 2: like house prices rose in Sydney about eighteen percent from
Speaker 2: January twenty three to September twenty four, massive boom right,
Speaker 2: But from September twenty four through to the RBA meeting
Speaker 2: in February they fell two percent, but more or less
Speaker 2: the week they met, they started rising again and they
Speaker 2: look like a straight line. They're rising quite quickly. Now
Speaker 2: house prices are increasing again and exactly the same thing
Speaker 2: has happened with even greater force in Melbourne. So house
Speaker 2: prices in Melbourne only rose five to six percent, very
Speaker 2: different situation between jan twenty three and about March twenty four,
Speaker 2: but they started falling earlier. I mean, Victoria is a
Speaker 2: bit of a failed state like Basket Kay's lots of problems,
Speaker 2: and so the housing market's been much weaker, and so
Speaker 2: house prices in Melbourne I think, Yeah, they started falling
Speaker 2: in March, and they fell all the way through to
Speaker 2: the RBM meeting in February, but almost perfectly synchronously with
Speaker 2: the RAM meeting. If you look at that chart, it
Speaker 2: looks like they're rising there, risen one percent already just
Speaker 2: since February. So the housing market has reacted instantaneously. And
Speaker 2: that's why one cuts meaningful because it changes the narrative
Speaker 2: rather than people debating about hikes or rates remaining high
Speaker 2: for long. Suddenly we're talking about cuts and how many
Speaker 2: cuts is it? Two? Is three? So your question is
Speaker 2: how many this year? I think they'll try and chisel
Speaker 2: out two or three over the course of the year.
Speaker 2: What I can be looking for, and I think the
Speaker 2: risk is they do more. Yeah, And I think the
Speaker 2: game changer for my view is the election of Donald Trump.
Speaker 2: So I had no strong view on who would win
Speaker 2: the US election. We didn't that's not our wheelhouse. We
Speaker 2: don't do political forecasting, so we just trade, you know,
Speaker 2: the data as it materializes. But once Trump was elected,
Speaker 2: we had very strong views. Those views are first in
Speaker 2: and this was a very contrary view. We told everyone
Speaker 2: who would listen. I've written a million times in the
Speaker 2: AFAR he's dead freaking serious on tariffs. He's not negotiating,
Speaker 2: there's no art of the deal. Bullshit Trump and it's
Speaker 2: quite complicated. And I'll come back to why he's dead
Speaker 2: serious on the tariffs in a second. But there's big
Speaker 2: implications for Australia, mate, because what's going to happen is
Speaker 2: you're going to have these huge walls erected around the
Speaker 2: US economy, and the Chinese ain't going to be able
Speaker 2: to sell jackshit into the US economy. They're going to
Speaker 2: block China from the US economy completely. So what are
Speaker 2: the Chinese? Our biggest supply of goods into Australia is China.
Speaker 2: And if China can't sel byd cars into the US,
Speaker 2: where do you think they're going to dump the cars
Speaker 2: and all the other goods Little Old Australia and the
Speaker 2: EU and other markets. But we're going to get a
Speaker 2: ton of cheap Chinese goods dumped into Australia. Are we
Speaker 2: going to do anything about it? You know, if they
Speaker 2: are in turn eviscerating our manufacturing. Not that we produce
Speaker 2: cars anymore, but you know, if that's impacting our ability
Speaker 2: to compete against the Chinese, is Olbow done going to
Speaker 2: do anything about it? No chance. We've got no spine
Speaker 2: on this stuff, right, So we're going to have actually
Speaker 2: a lot of I think deflationary forces, cheap goods, cheap
Speaker 2: goods the result from the trade war. So it's counterintuitive
Speaker 2: because you think trade war price is going up inflationy,
Speaker 2: it's very inflationing for the US. But if you look
Speaker 2: at the pedinis and the Institute modeling, and we've I've
Speaker 2: written on this six to twelve months ago. She's not.
Speaker 2: After the November election, I wrote on this the Pizza
Speaker 2: Institute modeling. When we tear apart the data as we've done,
Speaker 2: shows you get deflation. In Australia, price is actually four
Speaker 2: because the cheap goods get dumped on us. So what
Speaker 2: does that mean for the RBA. Well, you've got too thinks.
Speaker 2: China's can you say fucked?
Speaker 1: Is there real life?
Speaker 2: Yeah?
Speaker 1: Cool, it's my podcast.
Speaker 2: Just okay cool. China's funks. Their economy is just like
Speaker 2: we've I've said, Chinese is uninvestable for over a decade,
Speaker 2: you know that, probably about fifteen years I've been arguing that.
Speaker 2: And they're going to get so screwed by this right.
Speaker 2: They're going to be blocked from the entire from most
Speaker 2: Western liberal democratic markets. They're going to be blocked from
Speaker 2: and but particularly from the biggest market, which is the US.
Speaker 2: And so that's not good, frustrating. So you don't have
Speaker 2: the Chinese economy, which is already struggling, that's going to
Speaker 2: be amplified and really exacerbated by Trump. He's going for
Speaker 2: the fucking jugular right. Trump is a killer and literally
Speaker 2: and figuratively because he doesn't mind running those special Forces
Speaker 2: operations taking out guys in yearmen or Solomoni, the Republican general,
Speaker 2: the Iranian who was sitting He was leaving at Bagdaddy
Speaker 2: Airport and Trump flew two hell fire missiles into his
Speaker 2: convoy of cars and assass at him. He likes his
Speaker 2: little assassination programs, Old Trumpy. I'm not saying I agree
Speaker 2: on Disagram. I'm just saying he likes that stuff. You know,
Speaker 2: he's he likes it. You know he was sick. He
Speaker 2: gave an interview the other day and he goes, you
Speaker 2: don't understand I am a bad motherfucker. He didn't use
Speaker 2: the word motherfucker. He's like, I'm a bad Man's funny.
Speaker 2: Another story about Trump. Apparently he was sitting with the
Speaker 2: Taliban leadership in person before they evacuated Afghanistan, and he
Speaker 2: looks the head of Taliban in the eye and he says,
Speaker 2: we're gonna leave Afghanistan. But if there's one hair on
Speaker 2: one head of one American soldier that's in any way
Speaker 2: adversely impacted. And he pulls out a photograph. He said,
Speaker 2: this is your home, this is where your wife and
Speaker 2: children live. We're taking them all out and apparently they
Speaker 2: didn't did this squad, So that's a segue.
Speaker 1: But and some people like that, yeah that's shop strength.
Speaker 2: Yeah yeah they do. Yeah, they definitely do.
Speaker 1: An American So you're you're saying that Trump's Trump's norm
Speaker 1: negotiable on the on the tariffs, the Towers is going
Speaker 1: to build a war around America and make everything much
Speaker 1: more expensive in America.
Speaker 2: But for Australia. So you come out to Australia, so
Speaker 2: the Chinese economy is going to really get pounded, and
Speaker 2: that's bad news for Australia.
Speaker 1: Now why is the bad news of everything arrives you're cheaper.
Speaker 2: Well, that's positive. But you know, if we're she's a
Speaker 2: number one trade partner, we have to export. If we're
Speaker 2: exporting commodities to China, then that's not very good.
Speaker 1: For our Seventy percent of our stuff goes to China,
Speaker 1: so resources I'm talking about. So what you're saying is
Speaker 1: that of China's struggling, we will our export will start
Speaker 1: to suffer.
Speaker 2: Correct, Now, she may try and stimulate so present she
Speaker 2: may try and compensate for this, which paradoxally could increase
Speaker 2: demand for commodities. But you know, the way the RBA,
Speaker 2: I think we'll look at this is this is not
Speaker 2: positive for Australia like China, you know, having a quasi
Speaker 2: recession of sorts is can't be positive for Australia. And
Speaker 2: then the other thing is you're going to get a
Speaker 2: deflationary impulse, so the prices of goods will be lower
Speaker 2: than they otherwise would be. And I think it's already
Speaker 2: starting to happen. And so what that means is for
Speaker 2: the IMBA, they could cut in May quite comfortably. The
Speaker 2: inflation data could start surprising on the downside, particularly if
Speaker 2: they extend these costs of living subsces, which they seem
Speaker 2: to be doing. And yeah, you could get a decent
Speaker 2: number of RBO rate cuts, but two to three I
Speaker 2: think as a minimum makes sense for this year in total.
Speaker 1: So a lot of people talk about, you know, the
Speaker 1: cash rate, which you mentioned a bit earlier, but like
Speaker 1: sort of cash rate which sort of settles down around
Speaker 1: three and a half percent, you know, and let's say
Speaker 1: inflation is like two and a half percent. In the
Speaker 1: old that used to be a concept of net zero
Speaker 1: or something close to zero. But the difference between the
Speaker 1: inflation rate and the cash rate, and then unemployment is
Speaker 1: sort of around let's say four. Yeah, can you see
Speaker 1: a period like this is a bit weird to me,
Speaker 1: Like it said, a bit weird to me, But then
Speaker 1: wage growth is the same about three point two four
Speaker 1: point two around that territory. It seems to me that
Speaker 1: we've sort of got a restructure of where all our
Speaker 1: numbers are sitting. They're all sitting, They're all going to
Speaker 1: sit somewhere between three and a half and four and
Speaker 1: a half unemployment, wage growth, inflation, cash rate, blah blah blah.
Speaker 1: I mean a cashree might get to do it up,
Speaker 1: but it's going to bounce around a little bit. I've
Speaker 1: never really seen that before in the past. Do you
Speaker 1: think we've as a result of COVID, we will we
Speaker 1: have a restructured statistical environment or is this just a
Speaker 1: reaction to what happened during COVID and we will go
Speaker 1: back to our old system, our our old structure that
Speaker 1: we used to have in the past. So twenty or
Speaker 1: thirty years of inflation on average between two and three
Speaker 1: since since ninety six, I think it was someone around
Speaker 1: that territory we had like nearly twenty five years of
Speaker 1: inflation around that number.
Speaker 2: I definitely feel like we're in a more inflationary environment globally,
Speaker 2: and I think that will actually ultimately reassert itself in Australia.
Speaker 2: So the tariff impact on inflation is temporary, and so
Speaker 2: therefore the deflationing impulse that we've been talking about in
Speaker 2: response to the tariffs could also be temporary. But I
Speaker 2: think it's you know, the prevailing kind of atmospherics for
Speaker 2: twenty twenty five are going to be potentially quite friendly
Speaker 2: for the RBA in the context of giving it the
Speaker 2: capacity to cut rates. But I think what's changed since
Speaker 2: the pandemic is the size of government. Government spending as
Speaker 2: a share of the economy is the biggest since World
Speaker 2: War Two, basically instrope. And you know, if you look
Speaker 2: at jobs, fifty seven percent of jobs growth in Australia
Speaker 2: over the last few years has been accounted for by
Speaker 2: public sector. Yeah, well not just the public secttion. Just
Speaker 2: three sectors within the public sector, health, education and public
Speaker 2: administration alone have powered almost sixty percent of all jobs
Speaker 2: growth and there's no change in that dynamic. So what's fascinating,
Speaker 2: I think for around the world to not just you,
Speaker 2: I mean globally yeah, globally, but what and that's a
Speaker 2: key point. The difference in the US is they've had
Speaker 2: some cathartic crises. They had arguably a tougher pandemic. They
Speaker 2: definitely had a much tougher two thousand and eight crisis
Speaker 2: like that, a huge in cristal unemployment, unemployment barely budge.
Speaker 2: We didn't even have a recession in Australia. They had
Speaker 2: a much, much tougher two thousand and one recession. In
Speaker 2: the US we haven't had a proper recession since twenty one.
Speaker 2: But the key point is Australians, I think, are really
Speaker 2: in the throes of Dutch disease or what it is
Speaker 2: known as moral hazard, which basically means we've been this
Speaker 2: wonder down Under that's been incredibly fortunate for a crazy
Speaker 2: amount of time. And that good fortune has been driven
Speaker 2: by probably three key things. Huge endowments of natural resources
Speaker 2: that have made us very rich because we can sell
Speaker 2: them to the rest of the world for high prices.
Speaker 2: And then at the same time we've been lucky that
Speaker 2: there's been a commodity price boom. Secondly, we've run the
Speaker 2: strongest population growth in the developed world for about thirty years,
Speaker 2: and we continue to run crazy strong population growth, and
Speaker 2: population growth just brings demand in their country initially because
Speaker 2: these guys come with money often and that's a net
Speaker 2: demand shock. In the medium term, the population growth actually
Speaker 2: expands a pool of available workers, and I think this
Speaker 2: is what's happening with the wage In contrast to say
Speaker 2: the US, where they're deporting people and the borders are closing.
Speaker 2: In Australia, we've got people rushing into the country and
Speaker 2: that's actually relieving some of the pressure on labor costs.
Speaker 2: And we needed that because in the pandemic, we'd close
Speaker 2: our borders and you know, the unemployment rate was incredibly low,
Speaker 2: the lowest in half a century or thereabouts. And labour
Speaker 2: costs have obviously accelerated. But resources population growth have been
Speaker 2: the two key drivers of austral and prosperity for a
Speaker 2: long time. But then finally our physical amenity. I mean,
Speaker 2: Australia is the most beautiful country in the world and
Speaker 2: the physical meney is incredible. And then with super now
Speaker 2: taking twalks in our ways is super portus huge amount
Speaker 2: money into infrastructure, as did governments, and the quality of
Speaker 2: oz the infrastructure is like I think coming up to
Speaker 2: you know, it looks second to none. If you look
Speaker 2: at just the Sydney the tunnels, the metro railway, the
Speaker 2: light railway, the way we've equipped our cities, and the
Speaker 2: quality of US cities. You go to America, anyone travels
Speaker 2: to America, you look at the poverty, the crime, the
Speaker 2: just the dilapidated nature of the infrastructure.
Speaker 1: San Francisco is a basketcase.
Speaker 2: Basketcase and this is the point mark in the US
Speaker 2: you've had crisis. So if you look at California, it's
Speaker 2: a failed state, LA and San Francisco increasingly uninhabitable, which
Speaker 2: would be.
Speaker 1: Weird because it's seven large economy in the world as
Speaker 1: a state, and a.
Speaker 2: Huge fiscal crisis like massive budget deficits. Then juxtaposed against that,
Speaker 2: you've got the counterfaction, which is Texas and Florida budget surpluses, thriving,
Speaker 2: low taxes, low taxes, businesses are moving, their population growth
Speaker 2: is strong, low crime. And so I think that that
Speaker 2: contrast between New York, California, the Democrat States, and the
Speaker 2: Republican States has galvanized this this kind of intellectual crisis
Speaker 2: whereby the Trump Musk paradigm is on the ascendency, and
Speaker 2: they amazingly, Musk is probably the only guy in human
Speaker 2: history he could do what he's doing right now because
Speaker 2: he just doesn't give a fuck. It doesn't give a fuck,
Speaker 2: and he's the richest going in the history.
Speaker 1: It doesn't give a fuck.
Speaker 2: Yeah, so was worth over four hundred billion US, but
Speaker 2: he does give a fucking this sense he wants. His
Speaker 2: singular mission is to get to Mars. He wants to
Speaker 2: create an interplanetary species, and he thinks government is the
Speaker 2: key obstacle to getting to Mars. So I think what
Speaker 2: Musks inside has been is government, NASA, everyone, regulation is
Speaker 2: just blocking our progress in our capacity to get the
Speaker 2: human species sort of civilizing Mars. And so therefore, what
Speaker 2: do I need to do. Well, I need to get
Speaker 2: a sympathetic leader, somebody that I'm backing. So he must
Speaker 2: more or less help Trump win the election. And now
Speaker 2: that he looks like he's living in the White House,
Speaker 2: he's permanently appended to Trump's hip, and Musk has the
Speaker 2: solutions to almost all of Trump's policy problems. Trump wants
Speaker 2: to cut taxes, but that costs eight point one trillion
Speaker 2: US over ten years. Now, unless you find revenue to
Speaker 2: pay for the tax cuts. Issuing a point one one
Speaker 2: trillion debt would create a huge debt crisis in the
Speaker 2: sense of just much higher instructs. They can pay the interest,
Speaker 2: but you get a massive increase in US interest rates,
Speaker 2: and that would be potentially catastrophic. So he needs the
Speaker 2: tariffs to pay for the tax cuts. This is what
Speaker 2: people didn't understand. He wasn't bluffing on the tariffs. He's
Speaker 2: dead serious in the Taiks because the tarts he announced
Speaker 2: a date raised about two trillion of revenue.
Speaker 1: Which allows him to give tax cuts to the wages.
Speaker 2: So two trillions of revenue means he's only if the
Speaker 2: tax cuts cost that's over ten years. And if the
Speaker 2: tax cuts only cost eight point one trillion over ten years,
Speaker 2: he only needs to now find six trillion's cut costs. Yeah,
Speaker 2: but the tariffs are important for another reason. Basically, I
Speaker 2: think the US judges that over the last thirty years,
Speaker 2: the Western world took the view of there was a
Speaker 2: lot of vaninglorious, hubrious post World War two, which was
Speaker 2: democracy's defeated socialism, and we have the dominant political and
Speaker 2: business model, and everyone in the world is going to
Speaker 2: bind to that. Model, and they're going to embrace it,
Speaker 2: and they're just going to become accolytes of our belief system.
Speaker 2: So the idea was, we'll trade, We'll do free trade
Speaker 2: with everybody, well, reduce tariffs, we'll get rid of protectionism.
Speaker 2: And the Russians and the Chinese, when they look at
Speaker 2: the prosperity in Europe, the UK, US, Australia, New Zealand, Canada,
Speaker 2: there's no way in the world they can't embrace that prosperity.
Speaker 2: So they're going to trade with us, they're going to
Speaker 2: reduce trade barriers, and they're going to ultimately migrate their
Speaker 2: political systems away from authoritarianism to democracies. Well, the Russians
Speaker 2: and Chinese, basically, I think thought we were pretty gullible,
Speaker 2: and so they just used those free trade opportunities to
Speaker 2: appropriate intellectual property, to use state subsidized firms to build
Speaker 2: market share, control markets, build national champions companies like Hai, Huawei, Byd, etc.
Speaker 2: And basically Western manufacturing shifted to China. The supply chain
Speaker 2: shifted to China. Remember we talk about outsourcing. Outsourcing was
Speaker 2: great for Western companies because you could build it in
Speaker 2: low cost China and bring it back to the US
Speaker 2: and everyone benefit of the Chinese benefit and US consumers
Speaker 2: benefit through lower costs. But at some point the penny
Speaker 2: dropped that the Chinese weren't going to sign up to
Speaker 2: the Western liberal democratic business model softly, and they weren't
Speaker 2: actually playing by the rules they had agreed to play,
Speaker 2: because you know, the Chinese government was giving their firms
Speaker 2: all these unfair competitive advantages. And Musk is the best example.
Speaker 2: He builds a factory or factories in China, assuming he's
Speaker 2: going to sell zillions of Tesla's to the Chinese, the
Speaker 2: biggest consumer market numerically in the world, and the Chinese
Speaker 2: are still the IP and create a bigger, bad, stronger
Speaker 2: EV company called BYD that starts decimating Tesla's market share.
Speaker 2: So Mask's Navy created this monster in the form of BYD.
Speaker 2: So the Americans basically realized, actually, we need to reshare
Speaker 2: or domesticate all of our manufacturing. We need to bring
Speaker 2: back all the supply chains because now there's also security
Speaker 2: dependencies on the Chinese. I mean, the Chinese are making
Speaker 2: things that we use in our military kit and we
Speaker 2: actually now recognize we have man man up in a
Speaker 2: serious connectic conflict with the Chinese. So Trump's plan with
Speaker 2: the taros is probably if you don't believe in free trade,
Speaker 2: it's the right plan. And the other reason it's the
Speaker 2: right plan, and nobody understands this is the US economy
Speaker 2: is an autarchy, and what that means is doesn't really
Speaker 2: trade with the rest of the world aside from the
Speaker 2: Chinese and their proxies like Mexico. So the US we
Speaker 2: have a statistic called trade intensity, which is exports plus
Speaker 2: imports divided by your economy or GDP, and US trade
Speaker 2: intensity is only about twenty five percent. The average advanced
Speaker 2: economy is sixty to seventy percent, the EU is one
Speaker 2: hundred to one hundred and ten percent. And so the
Speaker 2: US doesn't really need to trade with the rest of
Speaker 2: the world if they bring their manufacturing back, which is
Speaker 2: what they want to do, and Musk has proven with
Speaker 2: SpaceX and Tesla, you can manufacture in the US, particularly
Speaker 2: now that everything's robotic. Labor costs are not such a
Speaker 2: big deal anymore because it's all automated. So that's the plan.
Speaker 2: It's the right plan because the US is the heart
Speaker 2: and harb of all the research, innovation and genuine sort
Speaker 2: of entrepreneurship and commercial and business inside and so it
Speaker 2: makes sense that if you can't trust the Chinese, you
Speaker 2: got to bring your manufacturing back that'll net benefit the US.
Speaker 2: And then basically so they bring up all these tariffs
Speaker 2: and they say the rest of the world, if you
Speaker 2: produce a good in a country outside of the US,
Speaker 2: you won't be able to import it into the US,
Speaker 2: will make you cost ineffective or cost will put you
Speaker 2: in a competitive disadvantage. So I think companies have now
Speaker 2: signed up to two trillion dollars of manufacturing spending in
Speaker 2: the US.
Speaker 1: Now wads move their business to the US.
Speaker 2: They're going to bring all those businesses back to the US.
Speaker 1: Blue Scope is a good example. They produced steel in
Speaker 1: the US US plant so they're not importing or exporting
Speaker 1: to them.
Speaker 2: Yeah, so everyone's going to do that because the tariff
Speaker 2: is going to Otherwise the tariffs will kill their businesses.
Speaker 2: Now so smart, I'm stand super smart. So they're going
Speaker 2: to trade with themselves, erect these huge trade barriers, rebuild
Speaker 2: all the manufacturing capacity. And then at the same time,
Speaker 2: novel the Chinese, which is geostrategically important because the Chinese
Speaker 2: were growing big and powerful because they were stealing Western
Speaker 2: market share and stealing Western clients and innovation and IP.
Speaker 2: Now the final piece of the puzzle is Musk. So
Speaker 2: at the same time, one of the big problems we
Speaker 2: have in society is just the growth of government. Again,
Speaker 2: there's been more jobs growth in Australia the last few
Speaker 2: years in the government sector than the private sector. And
Speaker 2: Musk realizes that there's this massive corruption inside these bureaucracies,
Speaker 2: and there's huge overreach which is crushing innovation. It's crushing entrepreneurship,
Speaker 2: it's crushing idea generation, and it's basically crushing productivity and prosperity.
Speaker 2: So Musk is the only guy in the world, probably
Speaker 2: in human history, got the ability to go in there
Speaker 2: and he did it with x or Twitter. He cut
Speaker 2: apercent of their workforce instantaneously, and he built a better product.
Speaker 2: So because he's the richest man in the world, he
Speaker 2: rocks up and he says, I want to get to Mars,
Speaker 2: but I've got to remove the public obstacles. At the
Speaker 2: same time, I mate Trump has promised a point one
Speaker 2: trillion tax cuts. Well, if I just reduce government spending,
Speaker 2: this is Musk's model. If I reduce government spending by
Speaker 2: fifteen percent, which is not that much. You and I
Speaker 2: have run business. We run businesses. You know, if we
Speaker 2: have to cut costs by fifteen percent, done, done, easy, right,
Speaker 2: if we need to. Now, in the US you've had
Speaker 2: untraveled untraveled, you know, historic unprecedented government growth for decades, right,
Speaker 2: but particularly since the pandemic. So you cut it by
Speaker 2: fifteen percent, you raise a trillion a year of savings. Now,
Speaker 2: the US budget deficit is less than two trillion, so
Speaker 2: you have the budget deficit. So over ten years, you're
Speaker 2: basically generating ten trillion of savings. So Musk's cost cutting
Speaker 2: program alone pays for all the tax cuts and something right.
Speaker 2: And the truth is, like I reckon, they could cut
Speaker 2: government spending by thirty percent, like if they really went hard.
Speaker 2: So fifteen percent is probably just the beginning. Now, the
Speaker 2: problem for the global economy, the problem for interest rates,
Speaker 2: and the problem for Australians is this, and you fear superbalances.
Speaker 2: They've got to do the government spending cuts fast and hard,
Speaker 2: because they've got to do them before the midterm elections
Speaker 2: in November twenty six, because otherwise at that point they
Speaker 2: could lose control.
Speaker 1: Unless you get an extended period, but yeah, they're working
Speaker 1: on that now.
Speaker 2: So they want to the third term. No, this is
Speaker 2: the midterm election, so.
Speaker 1: Yeah, I'm sorry. They've got a short period to get
Speaker 1: all this done.
Speaker 2: As your point out, Yeah, exactly, So they want to
Speaker 2: get it done hard and fast. So the government spinning cuts,
Speaker 2: they've already done one hundred and thirty five billion, and
Speaker 2: so there's obviously a lot more coming. So that comes
Speaker 2: hard and fast. The trillions of dollars a new manufacturing investment,
Speaker 2: which will credit a huge growth engine that's going to
Speaker 2: come later. So you've got this asynchronicity in the timing
Speaker 2: of you get to demand a negative demand shock, So
Speaker 2: they're destroying public spending on the one hand immediately, but
Speaker 2: on the other hand, the growth engine comes later. And
Speaker 2: so what that means you probably get a bit of
Speaker 2: a recession in the US in the next couple of quarters,
Speaker 2: or at least a growth air pocket, and that at
Speaker 2: the same time probably emboldens the FED to start thinking
Speaker 2: about cutting rates. You will get this temporary inflation shock,
Speaker 2: but it is temporary. Yes, consumer inflation expectation is relevated,
Speaker 2: but I think the FED will probably continue cutting rates
Speaker 2: particularly when they see the negative growth data from the
Speaker 2: DOGE initiative run by Musk. And then the other thing
Speaker 2: is the trade wards creating mayhem in markets. So US
Speaker 2: equities have drop ten percent, NOWSAX dropped thirteen percent. People
Speaker 2: are very risk averse, very nervous. So you might say, well,
Speaker 2: what about his tax cuts. Well, chances are people are
Speaker 2: going to save a lot of those tax cuts and
Speaker 2: they won't spend them. So I think in the short
Speaker 2: term this is very bad for markets because markets can't
Speaker 2: see pass their nose. Market's going to focus on the
Speaker 2: growth shock, the fact that companies that service governments are
Speaker 2: not going to be earning nearly as much money. All
Speaker 2: those consulting firms, all those building contractors, I mean, all
Speaker 2: the service providers to the US government are going to
Speaker 2: get but bashed by my Musk. And that's short term
Speaker 2: very negative. But in the long term it's super positive
Speaker 2: because you're going to get this massively revitalized US manufacturing
Speaker 2: industry and trillions of dollars a new investment in productive
Speaker 2: equipment that's going to create a lot of autonomy for
Speaker 2: the US. US won't be relying on anyone by the
Speaker 2: end of this problem.
Speaker 1: So given that, what would you say to Jim Charmers,
Speaker 1: who may well end up getting re elected along with
Speaker 1: his party and what inform of government? Is one question?
Speaker 1: Would Chris Joey asked Jim Chalmers that you would like
Speaker 1: to hear Jim's Chalmers address public? He because Jim is
Speaker 1: going to be here next week and I'm going to ask.
Speaker 2: Him, well, I mean the hard question. The question, of
Speaker 2: course hard questions for Charmers is does he actually care
Speaker 2: about reform or is he really just interested in power?
Speaker 2: He wrote a PhD, but not on economics. He wrote
Speaker 2: a PhD on Paul Keating's politics, his power politics. So
Speaker 2: the first question is does he really care about reform?
Speaker 2: And I think if you judge them on their actions,
Speaker 2: they've massively increased government spending. The budgets lurts from surplus
Speaker 2: to deficit. We have a problem in Australia with government
Speaker 2: spending is now the high since World War Two, and
Speaker 2: interest rates paradoxically would be a hell of a lot
Speaker 2: lower in Australia. We're not for all of this government
Speaker 2: spending correct And the problem here's the really kind of
Speaker 2: far reaching.
Speaker 1: You should you should just because effectively the massive government
Speaker 1: expenders propped up the propped up the economy, which makes
Speaker 1: you look a lot better than it really is.
Speaker 2: If the public sector wasn't accounting for most of the
Speaker 2: jobs growth, then unemployment would be much higher, wage growth
Speaker 2: would be much weaker, inflation would be low. But the
Speaker 2: demand I mean obviously economic growth has for the in
Speaker 2: recent years been mostly accounted, if not one hundred percent,
Speaker 2: driven by public spending. So the problem for Australians is
Speaker 2: we have no productivity and Charmas has no solutions as
Speaker 2: to how he's going to grow productivity and what is
Speaker 2: productivity because productivity sounds like economist jargon. Productivity is just entrepreneurship, innovation,
Speaker 2: idea generation. Productivity is just doing business smarter.
Speaker 1: Encourage you people to take risks.
Speaker 2: It's basically producing more with fewer resources. That's what productivity
Speaker 2: is and one hundred percent encouraging people to take risks
Speaker 2: to establish a disruptive business that's going to produce more
Speaker 2: or the same amount that other people's less for less.
Speaker 2: So therefore you can produce more cheaply, and therefore you
Speaker 2: you can undercut your competitors and appropriate market share. So
Speaker 2: the problem that Charmers has is he has no solution
Speaker 2: to the fact that we have the worst productivity in
Speaker 2: decades and Australia is mired in a massive productivity problem
Speaker 2: and in the long run that's disastrous. It's kind of
Speaker 2: like Dan Andrews. Dan Andrews, and Victoria spends crazy amounts
Speaker 2: of money. In twenty nineteen, just before the pandemic, the
Speaker 2: Victorians only owed the West of the world fifty to
Speaker 2: sixty billion. Today or within a few years they were
Speaker 2: close to three hundred billion. Well back in twenty twenty,
Speaker 2: when Victorians borrowed money as a government, they paid an
Speaker 2: interest rate that was very similar to what the cokmalp
Speaker 2: pays today. They now pay one hundred basis points in
Speaker 2: extra interest. Because no one wants to buy Victorian government
Speaker 2: bonds and they're likely to be downgraded. Queensland is likely
Speaker 2: to be a dangrade in our view. New said, Wales
Speaker 2: is likely to be dangraded. And because we haven't had
Speaker 2: a cathetic crisis, because we don't have yet a California,
Speaker 2: although Victoria is heading that way, or a San Francisco,
Speaker 2: there's no counterfactuals. And because there's so much public spending,
Speaker 2: the government of the day is actually conflicting economically the
Speaker 2: voters by sharing them with all this cash. But they're
Speaker 2: making Australians very complacent, very very lazy. And this is
Speaker 2: the Dutch disease that we're talking about earlier. The fact
Speaker 2: that we've got really dumb growth in the form of
Speaker 2: huge commodity exports coupled with really very primitive population growth.
Speaker 2: None of that is productivity, and productivity is the only
Speaker 2: thing that can grow wealth. And again I don't even
Speaker 2: like the word productivity in entrepreneurship and innovation is what
Speaker 2: drives prosperity, and we don't have that in Australia. Tax
Speaker 2: rates are going up, not down, arguably at the margin,
Speaker 2: particularly once you're adjust for indexation or bracket creep, and
Speaker 2: I think what you'll see over the next few decades
Speaker 2: is that Australian businesses will leave Australia because we're going
Speaker 2: to become so uncompetitive to the rest of the world.
Speaker 2: You'd be much better setting up in Singapore to buy
Speaker 2: Abu Dhabi, Italy, Portugal, all these ascendant countries are doing
Speaker 2: tax deals to attract the best and brightest businesses and
Speaker 2: brains and people are moving like you know, Nico Okaine,
Speaker 2: I think his name is. He was the top guy
Speaker 2: at mcquarybank. They paid him over fifty million a year.
Speaker 2: He resigned to take a job in Dubai. Why because
Speaker 2: presumably he can get much better economic and send him
Speaker 2: in Dubai. So the top McQuary banker doesn't want to
Speaker 2: live in Australia, notwiderstanding. He's a presumably a very proud
Speaker 2: Astraian who loves, like we all do, the amenity of
Speaker 2: living in Australia.
Speaker 1: And I know a lot of people doing exactly the
Speaker 1: same thing. And by the way, you can always buy
Speaker 1: astrain assets too, so it doesn't make much difference. Astrain
Speaker 1: assist with you to buy, but you're operating in a
Speaker 1: different vironm where he paid his tax is much more
Speaker 1: efficient loss, so that's regulated and you have access to
Speaker 1: many other parts of the world as a market economist.
Speaker 1: Just something I was struck me whilst I was talking
Speaker 1: whilst he's talking, was as you know, the regulator in
Speaker 1: Australia requires landers. In Australia, it doesn't require, but suggest
Speaker 1: to lenders Ausralia that a threshold of three percent over
Speaker 1: the prevailing over the lending rate when they're assessing a
Speaker 1: borrower to buy a house, and the suggestion is that, like,
Speaker 1: if you do what we say, then you will have
Speaker 1: to hold less capital. If you don't do what we
Speaker 1: say and your portfolio is you know, you're learning your threshold,
Speaker 1: the extra amount that you look at in terms of
Speaker 1: person's ability to service that loan is so you if
Speaker 1: you only apply two percent, then NUEB As a result
Speaker 1: of that, you know, we might ask you to hold
Speaker 1: a little bit more capital. I guess that because we
Speaker 1: think that loan might be more risky. Whether portfolio loans
Speaker 1: more risky. One of the things I don't really don't like,
Speaker 1: and I know I have a kindred thought process with
Speaker 1: you on this is to some extent that plays right
Speaker 1: into the hands of elitism in Australia because only the
Speaker 1: elite can afford and the elite's kids can afford, which,
Speaker 1: by the way, are our kids to borrow those amounts
Speaker 1: of money because we have to top them up. You know,
Speaker 1: we're always going to be topping them up, which you
Speaker 1: know you expect parents to do if they have a
Speaker 1: capacity to do it. But the problem is, in terms
Speaker 1: of affordability, pability is not just the price of property
Speaker 1: but the ability to pay for the property. You always
Speaker 1: borrow the money to buy the probuct because most people
Speaker 1: borrow anyway. So given the market interest rates at the moment,
Speaker 1: and they're more likely to come down and go up.
Speaker 1: What do you think about the the three percent threshold
Speaker 1: sitting on top of people's ability to borrow and or
Speaker 1: servicing our servicing assessment? I see the Dunton's command set
Speaker 1: is unfair. What do you think about that three percent?
Speaker 2: Listen? I think it's a good example of a situation
Speaker 2: where there are probably much better models that regulators, and
Speaker 2: our regulators have not covered themselves in glory recently, particularly APRO,
Speaker 2: which is responsible for this regulation. There's many more dynamic
Speaker 2: models that could apply that would result in better outcomes
Speaker 2: for everybody. So you know, three percent as an extra
Speaker 2: interest rate buffer the banks apply on your serviceability test
Speaker 2: when figuring out what you can afford to repay?
Speaker 1: How much and how much will lend you therefore?
Speaker 2: Yeah, how much will lend you therefore? And therefore what
Speaker 2: you know? Property you can you can buy purchase. That
Speaker 2: made a lot of sense when the cash rate was
Speaker 2: a zero percent, yeah, because obviously the cash rate could
Speaker 2: have easily increased by as it did. It did, and
Speaker 2: with benefit findsight it increased by four hundred and twenty
Speaker 2: five basis points. But when the cash rates of four
Speaker 2: hundred and twenty five basis points, or at the time
Speaker 2: it was four thirty five, it made no sense, right,
Speaker 2: or very little sense. So it should be dynamic, you
Speaker 2: know that serviceability Baffer. I think should be dynamic, and
Speaker 2: it should be calibrated according to whether the cash rate
Speaker 2: is at any point in time. So I definitely think
Speaker 2: at this point in time there's scope to lower it. Yeah,
Speaker 2: I mean, you know here and now you say prudently
Speaker 2: at least by one hundred basis points.
Speaker 1: Right. They used to do that, but I don't know
Speaker 1: why we haven't changed for so long. And the only
Speaker 1: other question I have for you, But.
Speaker 2: By the way, on that note, I mean, I think
Speaker 2: Jim Charmers and Dunnan should they control a prom and
Speaker 2: they can absolutely say, hey, we don't agree with the
Speaker 2: serviceability Buffy, you should change it.
Speaker 1: We're done. Has said that said, yeah, I start off.
Speaker 2: But opera, you know, sometimes THEA and apron ibe it's
Speaker 2: a little bit different because they are meant to be
Speaker 2: about the independent of the government oppera artists, but certainly
Speaker 2: acic and but app in particular of Lad's made some
Speaker 2: funny decisions, some odd decisions like facing out the hybrid
Speaker 2: market is one which has never been done before anyone
Speaker 2: in the world. And yeah, if I was a smart politician,
Speaker 2: I just say, dude, you know it makes no sense
Speaker 2: to whack three hundred based points on top of a
Speaker 2: four thirty five cash rate. You know, we're going to
Speaker 2: cut it to two hundred see see how things go,
Speaker 2: and potentially will cut it a little bit loud, you know,
Speaker 2: maybe down to one hundred and fifty because.
Speaker 1: If it all of a sudden increases a massive amount
Speaker 1: of borrowing and house prices, I'm changing it again. You
Speaker 1: can keep put it up to two and a half
Speaker 1: hegaus say you can calibrate. And the only other question
Speaker 1: I had for you is if you don't mind if
Speaker 1: I just grabbed you before before you because I know
Speaker 1: you're busy and I've got to know the podcast as well.
Speaker 2: But like, is.
Speaker 1: You talked about policy? You talk about you know, has
Speaker 1: Jim got serious policy? Does he really want to make
Speaker 1: reform and have changes make changes? What do you think
Speaker 1: about the concept of and a lot of people talking
Speaker 1: about it, and Matt Common has been talking about it.
Speaker 1: I mean a lot of people been talk about for
Speaker 1: a long time. I have to about having an adjustment
Speaker 1: in the GST from ten to say fifteens. But that's
Speaker 1: assume it. It never goes above or below. But you
Speaker 1: adjust the t in lockstep with the RBA making changes
Speaker 1: so that up or down so that everybody gets affected
Speaker 1: and or everybody gets the benefit of it. So you know,
Speaker 1: during a period when we're trying to you know, damp
Speaker 1: and spending, instead of just putting the RBA of the
Speaker 1: RBA putting up the cash rate, which puts up your
Speaker 1: mortgage rate. On top of that, whoever it is, puts
Speaker 1: up the GST rate five base points, two base points,
Speaker 1: twenty base points, what it is trying to make sure
Speaker 1: that they affect everybody, because you know, we have these
Speaker 1: conflicting markets. You know, we have all the people mortgages
Speaker 1: who are paying more. And then say someone like you know,
Speaker 1: your parents who might be so alive, don't have a mortgage.
Speaker 1: You know, I have money in the super fund. Blah
Speaker 1: blah blah. They're not they're not affected, and they're they're
Speaker 1: out spending like drunken sales and taking the trips to
Speaker 1: Ballin and Bali and spending money in.
Speaker 2: Restaurants makes a lot of sense. The RBA was doing it, Yeah.
Speaker 1: RBA should do it. Yeah, what do you think about
Speaker 1: that as a charmer potential charmers policy.
Speaker 2: Yeah, thing's great. Ay, Like, if the RBA was doing it,
Speaker 2: it just gives them more tools, more levers, it would
Speaker 2: be more board based. It probably reduced the amount of
Speaker 2: which they had to increase interest rates create to give
Speaker 2: an impact. I do think that, like we would be
Speaker 2: better off with a higher GST and lower income taxes.
Speaker 2: We're better at having a fair flat, flatter tax regime
Speaker 2: where the guy that works harder than his contemporary chooses
Speaker 2: not to work hard doesn't end up paying He'll always
Speaker 2: pay more taxes, he's earning more income. But how's it
Speaker 2: fair that he actually pays a higher percentage of his
Speaker 2: income in the former tax than the guy that's choosing
Speaker 2: not to work hard. That's kind of perverse. So this
Speaker 2: this tax regime where we get taxed proportionally more the
Speaker 2: harder we work.
Speaker 1: And it was with progressive system.
Speaker 2: Yeah, it is a massive disincentive for innovation. Entrepreneurship and
Speaker 2: productivity and prosperity. So coming back to Charmers, I think
Speaker 2: the problem in Australia have got a huge model, has it.
Speaker 2: I feel like there's a lot of complacency in the community.
Speaker 2: Young kids, you have incredible lives. You know, there's no unemployment,
Speaker 2: wages are very healthy, there's massive amounts of public support.
Speaker 2: NDIS is supporting one in ten kids. And I think
Speaker 2: the problem will be twenty or three years hence, and
Speaker 2: I think there's a little echo of this in Dan
Speaker 2: Andrews in Victoria. So Dan Andrews decides to spend more
Speaker 2: money than any Victorian has in the history of the state,
Speaker 2: and government's a solution to every problem. But now increasingly
Speaker 2: it's looking like a failed state. No one wants to
Speaker 2: live in Victoria and people are leaving. Businesses don't want
Speaker 2: to operate in Victoria. Bauxes taxes are high and rising
Speaker 2: everywhere because they're having to pay for the debt. You know,
Speaker 2: Victoria will shortly be paying about twelve bin a year
Speaker 2: or circle five three to five hospitals worth in interest
Speaker 2: payments align on their debts. So they've gone from again
Speaker 2: fifty to sixty billion a debt to close to three
Speaker 2: hundred million a debt. And yeah, none of these guys
Speaker 2: seem to have any solutions for the long term. They
Speaker 2: just seem to be optimizing for I want to win
Speaker 2: the next selection, I want to become prime minister. I
Speaker 2: want to be maximize my personal power. I think a
Speaker 2: lot of these there's a self selection bias in politics
Speaker 2: where you get a lot of narcissistic individuals who are
Speaker 2: not actually genuinely interested in policy reform. Even the smart guys.
Speaker 2: We don't need to mention him. But but I wasn't
Speaker 2: talking about my mate Malcolm Terrible just to the evouence
Speaker 2: a doubt. There's others on the left side of politics
Speaker 2: that probably fall into that coor. But it's funny. You
Speaker 2: know many more politicians than I do. But I know
Speaker 2: a lot of politicians, and finding the guys that are actually,
Speaker 2: you know, really earnestly committed to making the world a
Speaker 2: better place, it's hard, Jacko. You know, all these guys
Speaker 2: are the kids who are at UNI, who are doing
Speaker 2: student politics, yapping around trying to kind of self promote
Speaker 2: themselves to advance their personal power and control and influence.
Speaker 2: So I think politics is a funny, funny business, like
Speaker 2: I would never want to go into pot.
Speaker 1: I think it's yeah, I think it's wanting.
Speaker 2: Yeah, the choice of candidates as well, Like you just
Speaker 2: think that there'd be more opportunities. It's not like the
Speaker 2: American system has necessarily generated, you know, super compelling candidates.
Speaker 2: And it seems like the compelling candidates in the US
Speaker 2: system are also for whatever reason, you know, they there's
Speaker 2: a lot of attrition, Like guys that want to you know,
Speaker 2: the people that seem to have a lot of ability,
Speaker 2: they seem to flame out for one reason or other.
Speaker 2: You get these highly bificied, bifurcated, polarized environments where you
Speaker 2: get a Biden versus a Trump. But I think Trump's
Speaker 2: I think the difference with Trump this time around. Mate.
Speaker 2: My final comment is, and you know, I'm not politically parties,
Speaker 2: and I don't think myself and I thought Trump Mark
Speaker 2: one was pretty mercurial and campricious and hyperbolic and everything
Speaker 2: that people criticize him for being. But this dude is
Speaker 2: is a year shot off and he's had multiple assassination attempts.
Speaker 2: He's coming up towards eighty, He's only got one term.
Speaker 2: There's no third term at this point. He's not kind
Speaker 2: of doing this to win another election. This is all
Speaker 2: a legacy trade and that's why I think he's going
Speaker 2: for the jugular. He's really serious, and that's why there's
Speaker 2: been no Trump put option for the market. If the
Speaker 2: market keeps on thinking he's going to acquiesce and he's
Speaker 2: going to bend the there and say, oh, it's all okay,
Speaker 2: I'm just trying to negotiate a good deal. But he
Speaker 2: I think, is really really focused on far reaching reform
Speaker 2: that's going to be his personal legacy. He wants to
Speaker 2: change the US. He does want to make the US
Speaker 2: great again, and so I think it could be a
Speaker 2: very turbulent, volatile time and it's certainly an extremely uncertain time.
Speaker 2: So yeah, policy uncertainty is heightened and that makes decision
Speaker 2: making hard. So I think for markets tough for the
Speaker 2: next six to twelve months. At some point that manufacturing
Speaker 2: miracle will assert itself and the markets will start focusing
Speaker 2: on that, and that's where I think you can see
Speaker 2: a recovery. But I think in summary, in twenty twenty five,
Speaker 2: rate cuts from the FED and the RBA, disinflation in
Speaker 2: Australia high inflation in the US. I do think we're
Speaker 2: in the medium term in a higher for longer environment,
Speaker 2: particularly when the manufacturing investment starts coming online. So I
Speaker 2: don't see massive rate cuts. I do think that people
Speaker 2: that are struggling under the weight of high interstrate burdens,
Speaker 2: businesses and households, the marginal borrows are probably going to
Speaker 2: continue to struggle. We've got record high insolvencies in Australia,
Speaker 2: but we also see the same thing in the UK,
Speaker 2: US and New Zealand, and I don't think that's really
Speaker 2: going to change fundamentally. I think we're still living in
Speaker 2: an inflationary world. But there's these cross currents now because
Speaker 2: of the trade Will.
Speaker 1: And where can people follow your updates?
Speaker 2: On Twitter? At cjoy on LinkedIn, we publish our macro
Speaker 2: strategies here and Davies publishes on Live one and then
Speaker 2: I published weekly in the.
Speaker 1: So Lovey dot com is a it's a free service
Speaker 1: because I subscribe to that Coulibar, you had a publication
Speaker 1: at Kolibar.
Speaker 2: We've got that website cool abocapital dot com. And then
Speaker 2: in the Financial Review that article that Columba write publishes
Speaker 2: on Friday and then appiece on the paper on Saturday's
Speaker 2: most weekends.
Speaker 1: Chris Joy, thanks for much made Thanks nice