Could rates really rise three time? May 3, 2024

27:01So if you say, we're passing an act to reduce inflation, and we go, oh, that's good. We're passing an act to make things in Australia. Oh, that's good. Sorry, I don't want to steal your thunder. I just, you know, we shouldn't pretend. But it is being done under that name. Yes, correct. And journalists from very serious publications are repeating this verbatim. That's also true. There's more than a few people banging their head against the wall going, that is like saying, Doctor, I've got this mother of all hangovers. And he goes, you know what, have some to kill her. That's what, almost literally what is happening here.

27:36No, well, you can kick the can, right? Let's talk about something else now. They have to stop drinking at some point. The Japanese stopped, well, they thought they would they would try and normalize rates a little bit. This is going back to my point, what we're able to do here relative to the rest of the world. Japan's the third largest economy in the world. They had negative real rates since like the 90s. And the first time in like a gazillion years, they increased interest rates. And the central bank there stopped trying to manage the FX rates. And the currency collapsed and then they intervened.

28:17what do you do i mean again it's sort of like you laugh or it's like we're not going to do this anymore because this is clearly unsustainable yes we should really stop doing this okay uh okay we tried that for five minutes let's not do that again right like and and and why is that a big deal well the japanese are massive buyers of of u.s debt right it's called the carry trade i can borrow if i'm japanese i can borrow for virtually nothing in fact you're paying me in real terms to give me money. I'm going to go over to the US. I'm going to buy, quote unquote, the world's safest asset, which again, it's hard to say with a straight face.

28:52I'm going to buy the world's safest asset with it, which is nominally giving me like what, 4 % something yield. I mean, it is free money from that perspective. And that doesn't work with a normalized rates and a much weaker currency. And so again, this is like, we live in a highly interconnected world here. And all of these decisions have consequences and i feel as though i know it's not the direction you want to go in here but i feel as if every everything that we in the media discuss with it we talk about very peripheral relatively short-term factors you know it's it's it's like it's like god forbid being diagnosed with cancer and then trying to fit you know trying to you've had hair fall out because of your therapy and it's just like, I really need to go fix this.

29:44I'm going to go and find a better wig manufacturer. It's like, well, it kind of solves part of your issue, but you're really not getting at the fundamental cause of what's going on here. And I feel as though, I mean, it's a terrible analogy. I regret that instantly, but. It wouldn't be a Botley for Money podcast if you didn't ramble, let's be honest. Just shooting from the hip. You know what you're getting here. No, I listen to that one. I get exactly what you're saying. You know what I mean? And look, we've dealt with it in our family. It's a horrible thing. I don't want to make light of it or anything like that because it is truly a disgusting, horrible disease.

30:14But my point being is that no one is having an intelligent, objective conversation about these broader things. You're right. There's no easy solution. And even if I was made king of the world, things would get very dark for a good five or 10 years, right? Very dark. But I would argue that we would have a more prosperous society longer term. But this is why I get so cynical because the trouble with kicking cans down the road is it gets to a point that it's sort of like you aren't left with any feasible solutions. And certainly none that are politically palatable. And that's the challenge. That's where you and I have a different – we get there in a different way.

31:02Yeah. But for all of our disagreement, we're absolutely in line with, A, where we need to get to, and B, the fact that our politicians thus far have been completely unprepared and are willing to actually make some hard decisions to get us to those places. I don't think they get it either. I don't even think they're being cynical. I don't think they get it. I don't think they get it a lot of the time. I can't believe they're knocking someone who's – there's an advisor somewhere who's knocked on the treasurer's treasurer. I need you to know this thing. I would like to believe you're true because that would restore a little bit of my faith.

31:30I'm less cynical than you are. But, you know, if it was like, oh, no one's ever had that conversation. Oh, okay. Thank God. Well, now, you know, you can fix it. I'm like, yeah, the chances that somebody somewhere has had that conversation with someone in power who can make that decision at some point in the last decade. And I don't know. Well, see, that's even more. I'd argue that's more cynical, right? It's worse. No, I agree. That's what I'm saying. And you're still not doing it. That's what I'm saying. I'd rather not be cynical. But I just, I can't not be. Because I just, I find the odds of them genuinely not having had that conversation with somebody at some point.

31:58maybe they've heard they don't want to believe it maybe they've been told it's not credible maybe they don't want to know maybe they haven't listened I just you think about your treasurer right and no one ever has pulled you aside and said mate can we just have I can just need two minutes of your time for a second can I tell you this thing I find that hard to believe no one's actually raised that conversation at some point with him I don't know about Trump in particular but could have been a Frydenberg before him and actually said dude here's what's going on I yeah I agree I agree hence full circle interest rates aren't going up Breathe a sigh of relief.

32:29The party will continue. Well, or it won't, right? If the economy falls into a funk and we don't raise rates because we don't need to, as opposed to we need to and we're not doing it. I'm not sure which is, again, which is the better or more cynical outcome. Well, they're both – they're different types of pain. Yes, great. But, I mean, again, everything's 30 % more expensive or whatever the number is than it was a few years ago. That is real pain. And you can have some boffin from a bank in an expensive suit tell you that the economy is going really well, unemployment's low look at this what are you complaining about i was like dude i am poorer i'm barely keeping my head above water i can't afford a house you know anymore unless i go live in the middle of the desert somewhere it's just things are bad things are really bad for a lot of people and again the exception being those that have assets those that have a lot of decent assets they're fine because all of this i mean they're fine in the sense that their their wealth and purchasing power has been preserved.

33:27The riches that they see are largely nominal and not real. But, I mean, given the choice, right? Correct, yeah. Given the choice, I'll take that. Held in line in real terms compared to food being 20 % more expensive in real terms. You take the former rather than the latter. I mean, we all look at things through our own lens. I'm very fortunate. I'm far more fortunate than a lot of people. but I mean having yeah having having dealt with it more directly at least on the housing front you know you use it is super hard out there it is really hard and I can just I can just and I bet you a very significant portion of our listenership right now is going yeah I don't this Warren Hogan God bless him he can say whatever he likes but if I hear one more person tell me how good I've got it I don't I don't have it better things have gotten worse for me And I'm not just talking about that 4 % of the population that might always be able to make that argument.

34:23I'm talking very, very significant numbers of people. It comes up in the number of, you know, people taking advantage of whether it's food banks or sleeping rough or defaults on loans or collapsing retail sales. The numbers are there, right, in a lot of ways. And it's because we, again, have this bifurcation of the economy. Those that are in a much stronger balance sheet situation can also look at it and go, no, I'm actually – things are great. What are you talking about? My property is up 30%. This is fantastic. I would just put the rent up for the eighth time in six months. Like, you know, it is – and both parties are right here.

35:03But we need to – so I guess we just need to acknowledge that. And I feel as though often the people who are prognosticating about a lot of this kind of stuff are extremely well-paid people who work at large financial organizations that are there telling everyone else how good it is after they've just gotten their third pay rise in so many years and are fine no matter what kind of happens. It's a little bit too distant, I think, from what's happening on the ground for a lot of people. I think that's true. I'm going to do it on the other hand, mate, just for balance, because I think you've painted a very bleak picture.

35:38And I think there's a couple of things that are worth – Sorry. No, no, no. So bleak, but it fires me up. I'm not sure you're wrong. But I also think that when we start with a view, we can proceed on that view. And I'm always going to be guilty of the Pollyanna side of the fence. I'm glad you're here to drag me back into reality sometimes. I think – so there's a couple of things. Firstly, I think the fact that unemployment is 3 point something percent is a remarkable benefit. it and societally we might in different circumstances choose to say i don't mind if some people are not as well off as they might have otherwise been or less well off than they were because we've got x hundred thousand more people in work so there's there's that as a as a societal trade-off and it's easy for me to say that harder if you're you know maxed out to the eyeballs with a mortgage saying dude i hear what you're saying but i can't cop another rate increase you know i'm sorry jack down the road hasn't got a job but i you know i'm happy to kind of put him you know push him out of the car on the way past so I can have a few dollars off my mortgage.

36:34So that's a trade-off, right? There is a cause and effect that, as I said, we kind of started with that, which is, you know, interest rates and employment are negatively correlated. They just are. And that impact or positively correlated, you know what I mean? One is not the cause of the other necessarily, but they move in opposite directions. And so that's important in terms of what we think about. The other thing I think it's worth probably highlighting, it goes back to COVID And you and I have a different view, I think, on what government should or shouldn't have done. And we certainly are aligned on what the government should have done after the pandemic in terms of getting stuff kind of sorted and fixed again.

37:07I almost said another word other than stuff then. That was close. But I think, you know, the other thing is, you know, where would we or could we have been? Does it suck relative to this time last year or this time four years ago? Yes. Do we know the counterfactual? No. And maybe the counterfactual is actually it would have been fine and better. That's a very plausible possible counterfactual. The other is we did hit 16 % unemployment and property prices did fall 40%. And the economy is now three years into a five-year recession and everything is terrible. And again, at that point, the people who say, gee, I'd rather not pay 20 % more for my groceries, me too.

37:41Gee, I'm glad I've got a job though. Again, there's those traders who don't necessarily see. And I don't know what would have happened. I'm not here to say they did the right things. They definitely didn't do the right things. I think what we made a massive mistake of is if you look at the numbers during COVID, I don't necessarily blame the government or the opposition for getting this wrong because it was one of those, let's build the plane where we're flying at things. But we know national savings went through the roof. National income actually rose during COVID. I think it's very, very clear, at least in hindsight, maybe at the time, but certainly in hindsight, that what they didn't allow for, and your point about retail is exactly the right point.

38:16There was so much money sloshing around that we actually got too much stimulus, too much support. and hindsight 2020 hey how much money do you really need to live in a world where you're in your house well i don't need to go out don't need taxis don't need trains don't need petrol don't need new couches the amount i don't need it if i'm working from home on 250 000 a year right like that was also the thing i was like i'm not i'm not saying like throw everyone to the walls correct you know investment banker that's got his like home office set up with four screens and i'm like you you never had it better i'm not why am i buying you your kids school shoes with my taxes Like that's madness.

38:51The person who's lost their job and can't eat. Correct. Different conversation. And that's my point. I think we threw, again, hindsight's always 20-20, right? No, that was foresight. I think Blind Freddy could have seen that one. There's going to be implications of giving someone who's cashed up and fully employed free money. Probably. I'm more generous because it needed to be big, fast, and brutal at the time. Just get the money out the door, keep confidence in the economy. The second time, it's a bit like JobKeeper, right? How many of you gets too much? I go and share for what matters. If they get too much money the first time around, okay, well, we had to do it.

39:22We had three weeks to do it. We've got it announced. We've got it out. It was done. Thereafter, you're entitled to learn from those lessons and they clearly didn't. And the mess that was kind of left behind was the result of that. So I'm not defending some of what was done. I'm just making the point, mate, that versus where we could have otherwise been, there was a range of counterfactuals, a range of outcomes that we'll never know. Anywhere from it would have been fine, save you money, to, oh my God, this is a hellscape. We should have done a bit more. and the RBA has kind of said itself we didn't know how bad it was going to get so we kind of threw it all at the wall and worked out what would stick turned out a lot of it stuck and that's kind of what's caused these problems you're absolutely right and that's where we get back to the same point is that's where we've got to and it is an absolute lack of in my opinion frankly serious people making serious decisions in government both the previous government and the current lot to say okay well here's where we got to how do we fix this properly and there's been no attempt really made to fix zero, literally zero attempt at a government level to fix the problem.

40:24They happily said to the RBA, you guys fix it. Sorry, not our job. It's like, well, no, it actually is your job. No, it's worse than that. You guys fix it. You guys pull on that rope over there. Yeah, that's right. We're going to push. Yeah, exactly. What? No, no, no, help us. Yeah, that's right. You put your foot on the brake, I'll pull my foot on the accelerator. Let's see how we go. Yeah, exactly. Let's see how that works out. Yeah. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

40:54The, I'm sorry you have news fairy, Bonza, the latest in a very, very long line of third Australian airlines to finally, actually didn't have that long, go to the wall. The planes were repossessed this morning. Apparently, I'm told by one of my colleagues, while people were on the planes, was like, yep guess what everyone out uh we don't own the planes anymore this thing's over um horrible people who by the way were going to travel one guy on twitter saying this morning that he was especially his daughter for his birthday it's not going to happen now because they've literally just you know been to the flights but uh is this speaking of things you could have predicted i wish someone had given me give me some some decent juicy odds on on australian third airline failing that is that is a that is the safest bet you'll ever get we could have we could have fixed the budget deficit if we just took taking a whole lot of Treasury's money and said, let's find a bookie who'll take the bet that this is going to fold and we'll just pay off the debt with the proceeds because it was about the surest bet in the world, isn't it?

41:49I mean... So, Ansett, Compass 1 and 2, I think there was a third one. Impulse Airlines, I was reminded today. Tiger, which half went broken before Virgin bought it. Ausjet, apparently some mob called Strategic Aviation I'd never heard of. I don't know, mate. If you want to lose a lot of money, you'd start an Australian airline, wouldn't you? Oh, just an airline in general. Yeah, that's probably true. You know, and let's look at the business model. They are diabolically expensive, airplanes. Yes. And if you're buying from Boeing, you're not even getting very good planes these days either. Which is a whole other story.

42:24That's Andrew Page, P-A-G. I'm happy to lean in. I'll put the boot into Boeing. Gosh, talk about taking a, you know, extraordinarily dominant, highly regarded business and just trashing it. You've got to work pretty hard to direct something like that, don't you? They've done a good job. Yeah, but they've got some pretty good margins and profits there. Well, slightly better than they otherwise would have got for a decade or so. So these train crashes, use the right form of transportation in context here, are years in the making. They don't just happen overnight. So let's have a look at Bonzo or any airline.

43:03So, yeah, squillion dollars to get a plane. That's not all, though, right? I need to pay for access to the airports. Now, Bonza didn't fly in and out of Sydney Airport. Sort of like Rockhampton to Tamworth or something, didn't it? Why not? Why wouldn't you want to fly out of Sydney? Well, of course they wanted to. They couldn't afford to. Because you know what Sydney Airport can do? You know what a lot of airports can do? They can charge what they like. You know why? Because they're a monopoly. Yeah, that's right. They're a monopoly. And so, by the way, all this probably says is buy some shares in Sydney Airport.

43:33Correct. Right? Because, and they have been an incredible investment over the years. Not listed anymore though. So before our listeners go and chase them down, they're now owned by private equity and superannuation funds. That's right. Oh, what a shame. Auckland Airport still exists. I have no investment view on it, but that does exist. That's done very well too. That's done very well too. It helps to be a price maker and not a price taker. Exactly. That is rule 101. We talked about that last week about pricing power. No one's got pricing power like an airport. It's really hard for me to stay on track because there's all these interesting other divergences to sort of get into.

44:08But my point is that it's extraordinarily expensive just to get to the starting line. And then like a childcare center or an apartment block, it is an occupancy game. And you need to be sort of, I'm going to make this up, but I heard somewhere, what is it, 70%, 80 % full just to cover, just to break even. And your entire profit is made by filling up that last 20%, 30%. so if you don't feel it by the way you lose a fortune you lose a fortune yeah oh by the way um pretty much any other competitor you're dealing in a commodity product it's an uncomfortable seat with crappy food which one do you want you get to the same you get a different gate in the same airport the experience is literally identical completely commodified product and i don't care if someone's gonna go oh no quintus is fossil but i don't give a crap it is it is ridiculous it is a commodity product and everyone knows it and for most people they would just go with the cheapest option.

45:00So you've got that pressure. Oh, by the way, one of your biggest line items on your income statement is fuel, which is completely massive, like notoriously volatile cost input. Oh, you've got a highly unionized workforce as well. So it's like your other major expense isn't easily controlled. So it's just like, show me one reason as to why anyone would get into airline, unless you just, you know, even if you're Richard Branson, it's all just, it's all vanity, right? Like it's, and that's why most airlines are nationally, like they are supported and propped up by the governments because for some reason we all live in 1940 where having an aeroplane is something special and we feel as though to be a serious country on the world stage, you have to have your own national carrier.

45:48Like it means anything. It's like, look, we've got a really fast choo-choo train. We've arrived. At least we stopped talking about the bloody car industry. But yes, you're right. But we do though, right? I know. I don't even want so many tangents here. But even with the government stopping, who was it, flying into Sydney, Emirates? Qatar. Qatar. Yeah. Qatar. So there's plenty of uncompetitive sort of actions at play. It's not that it was always ones that were destined to fail. But when you look at it. I would have taken the odds. It's like quantum theory allows for me to throw my phone at the wall and there's a slight chance that it goes straight through the wall.

46:34The atoms will just line up, right? I want to watch you prove that out on YouTube. I see a big box of phones in front of you. You throw a wall against the wall. No, you're right. For 10 trillion years, you know, 10 trillion times a second. Sooner or later, that phone's going through the wall, right? And sooner or later, someone's going to launch a third carrier that's going to make money. Which is going to happen first, mate? The phone going through the wall or the carrier making money? Yeah, probably the phone going through the wall. Here's the other thing, right? This was started by a Miami-based investment private equity firm called 777 Partners.

47:07Again, the masters of the universe who are supposed to be like whiz-bang financial geniuses. He came to the other side of the world and launched an airline in this market? I was going to say, with every other... Speaking of things that people said, Like someone said to Treasurer Chalmers, hey, this is probably not great. Someone's got to have said, can I just talk to you about Compass, Mark 1, 2, and 3? Can I talk about Ausjet? Can I talk about Impulse? Can I talk about Tiger? I mean, I don't want to impugn anyone's reputation here, mostly because I don't want a lawsuit. But if you're investing someone else's money on their behalf, it makes it easier to use your own money, doesn't it?

47:46Yeah. Just leave it there. Airlines are terrible, terrible, terrible, terrible businesses. The other thing, by the way, we talk about a lot of airlines that went broke. Virgin still exists, but went broke during the GFC and was bought out by Bain. So I've got to say, I actually tweeted about it. Again, I spent a lot of my tweets. I do that because it's what's in my head. I forgot Virgin altogether because it's still here, right? But it went broke and was bought out of receivership. Qantas is regarded as one of the best run airlines in the planet, on the planet. Not a hollow earth theorist, on the planet.

48:19it's flat so it's in or on it's flat so how can it be hollow exactly thank you thank you um it is regarded as one of the best best run and uh and even that has been an absolute dumpster fire over the years uh it just you know and and and talk about covert right like they and and talk about unfair like they were just given free money my money your money everyone's listening your money got into their pockets, right? For nothing in return. And they still, still not doing great for shareholder. I mean, I'm sure someone will pull up a chart and go, well, actually, if you look at it in the last three months.

48:59No, no, no. I'm talking like zoom out here. Look at the actual cash flows. Look at the, even just look at the share price if you go over a long enough timeframe. And it's a disaster. I mean, you could have bought shares at$582 today. I could have bought it at 2007 at that price, right? Yeah. $19.99 at that price or just below. Interestingly enough, just to draw your comparison, Qantas is the same price as it was in August 1999, roughly. It's a tiny bit high. It's about 10 % higher. And this is the best. Auckland Airport up 600 % over that same time period. You said the other day, right? Find the supply chain and find the strongest link in that chain.

49:39That is where you invest. And maybe I haven't made the point. I think I've made the point before, but if you look at the airline industry, it's the caterers and the ticketing systems. And the airports. Yeah, exactly. So everyone else does not do well. Oh, actually, well, consumers do well because we get to fly relatively cheap. That's the other thing, right? I think as much as it feels expensive and it is, when you're a customer of a business not making any money, you know you're getting the best deal out there, right? You're not paying for anyone's Mercedes. This is borderline break-even stuff.

50:11Alan Joyce has probably got a Mercedes or two. Shareholders don't have Mercedes. Put it that way. Maybe there's a lesson there too. Don't own an airline. Go and run one. Oh, man. Mate, speaking of owning and running airlines, BHP wants to own and run a massive copper operation. Anglo-American, they're bidding$56 billion, if you don't mind, to pick up Anglo's copper business. And I think it's just fascinating. Well, the numbers themselves are just bonkers big. There's a$200 billion business wanting to spend$56 billion. They're going to use shares to do it. So not spending the money literally, but giving the Anglo shareholders some BHP shares for the deal.

50:47Fascinating for a couple of reasons, mate. It's a really, really sizable deal, and it kind of says a few things because this is largely not exactly a brand. BHP's got a different range of assets, but effectively this is they're bolting on an enormous copper operation to what BHP currently is, increasing the size of the business by 25 % in doing so. That's how big this is as a proportion of their current operations. And it's just interesting for a couple of different ways. I thought I'd just throw them out there and get your thoughts. I mean, first, just the sheer size of it, as I said. But in terms of the commodities, BHP has really remade itself.

51:19It's kind of turned 90 degrees, not 180 degrees, but 90 degrees. It used to have a whole big oil and gas business. It flogged that off to Woodside, and Woodside kind of recapitalized itself as the old Woodside plus BHP's oil and gas. So BHP goes, yep, we're out of that. And then it goes off and says, okay, no, what we'd like to do is be in copper in a meaningful way. And I – so a couple of things. I suppose there's the ethical investing slash ESG slash the protesters please go away angle on this one. There is the investment angle, i.e. maybe oil and gas was terrible. BHP, of course, it was a wonderful thing for both sets of shareholders because you're obliged to do that when you do these deals.

51:56But they got out of oil and gas for investment reasons or ESG reasons or both. They're getting into copper. Again, similarly, copper being seen as, they call it Dr. Copper, which I just hate the jargon. But the idea of, you know, it kind of tells about the health of the world economy. More so these days because EVs and batteries in general are going to use an absolute truckload of copper. So if you're taking a macro view, and I don't, you don't, but BHP wants us. Actually, we want to be in copper for the next 10, 20, 30, 40, 50 years. Then that tells you something. The other one, I guess, mate, just to finish this one off and throw it over to you to try and make sense of, is they're really having an iron ore.

52:31This materially changes their exposure proportionally, changes shareholders' ownership of those different asset types. and I am left to wonder whether they are, whether copper's great, whether oil was terrible, whether iron ore in itself is maybe questionable so they want to have more diversification internally. Lots and lots and lots of moving parts and a really, really big chunky deal. I should say, we should say it hasn't got it through yet. Anglo-Americans said no, they're still talking. If you get a tag of an offer, you have to say no, that's the first thing you always do so you get some more money out of them, whether it goes ahead or not.

53:01It may do by the time this goes ahead on Friday, but at the moment at least. BHP's still in the hunt, but Anglo's saying no. BHP's got good form in spinning off things there, right? Well, and buying things. The whole, the BHP that you buy Billison, you spin it off the South 32, then you spin off the oil and gas, then you try and buy Anglo. There's a lot going on. I mean, and what a gift Woodside is to someone like BHP. Well, it's not like the assets, yeah. Who's going to be that silly to buy this at this price? Hmm. Oh, here's a company. Talk about shares that haven't moved, right? I can go back goodness knows how long.

53:37You know, 20 years and the share price was above where it is now with Woodside and various incarnations over the years. It's also a man with a hammer, right? If what you do is oil and gas, what are you going to do? Well, more oil and gas. That's why I'll dip my hat to BHP because they did it. And they go, no thanks. Writing's on the wall, right? And they're thinking strategically over decades. Do you reckon that's why? I guess that's my question. Do you think it's the case of, right. Yeah. Well, I can only guess, but I suspect. And by the way, I'm not anyone who thinks that hydrocarbons are going away anytime soon.

54:09No matter how fast we accelerate things, there's going to be a lag effect that's there. So I'm sure they can make some really good money out of that for a while. But again, you're developing resources. Mines are fascinating entities. Like they cost squillions to sort of set up. But once they're set up, there's a lot of sunk cost in that. So you can look at it just from the operational side of things. What's the old static? It takes 10 times as many people to establish a mine as to run a mine. Yeah, that's so true. Once you've got the pit dug and the terminal - Especially these days with all the machines and everything else.

54:41It's all robots. Yeah. Yeah, it's like five engineers. They drive all the trains and the whole lot. Yeah. A couple of welders and some boiler. You know, it's an incredibly high-tech operation, incredibly high-tech. But they take - Ask Woodside how long it takes to develop a project, you know, and see how often it lands on budget and on time. and you're going to do that into an area where, I'm not saying it's going away, but they're headwinds, right? And right or wrong, there's huge ESG pressures and there's all kinds of political risks. That's what I'm, right, exactly, yeah. You know, and I feel as though, and again, if it was anyone else, maybe I'd have a different view, but they seem to have got a good eye for what the world is likely to need and where they want to be.

55:27And when you're playing this game, you need to think in decades. Not that many do, but you need to. And they do. We should, right? Because the mine life, you need to think at least in the context of the mine life. We've either spent this much money or we're going to buy it. We're going to spend this much money to dig the hole or we're going to buy a hole that's already been dug, which is worth this amount of money. I'm going to work out of the life. This is, we talk about net present value a lot. That's literally, this is a finite resource. So all you got to do is you plug it in and say, right, for how long can we keep bringing stuff out of the ground?

55:54How much of that can we bring out of the ground every year? what price am I likely to get for it? God knows, by the way, and good luck to you. But that is the only maths. Per mine, per potential exploration site, that's all that matters is just what does it cost me to do, how much can I get from it, and how much am I going to sell it for? It's deceptively simple for a very, very complex geological expedition. The maths is pretty straightforward. Oh, yeah, absolutely. Oh, well, the maths is straightforward, but knowing what assumptions to use. The calculations are straightforward. Sorry, the calculations are, yes, But picking the right variables is diabolically difficult.

56:28But, I mean, copper is a wonderful metal. It's got all kinds of characteristics that make it extraordinarily valuable and versatile. It will have and it does and will continue to play a big role in the electrification of everything, which I think, you know, wherever the electricity is sort of generated, that we are going to a more electrified economy. They're doing the right thing. I would think where this goes wrong. As long as the price stays high. You beat me to it. I'll go. Well, we're a slightly different point, which is related, which is as long as they don't overpay. And that's the risk here.

57:06In their desperation to do it, they just bid themselves up to a point where it's like, it just wasn't that economic to kind of do. So I think the general direction makes sense. Obviously, I haven't done the numbers, and I would need like 400 McKinsey experts probably to help me even begin to start doing the numbers. And they'd still be wrong because no one knows the future. And they'd still be wrong because, Kinsey. No, I was just thinking, but no one knows the future. But go on. Well, you don't. Get me in trouble. We could do a whole episode on consultancy. But, yeah, no, but that's the risk.

57:40And I know that there is a dance to be danced. And they need to show restraint on that because it's not something that makes sense at any price. Yeah, correct. I wonder though too, mate, this is the other thing just quickly. They're using shares to do this. Now, Warren Buffett has talked a lot about the fact that he very rarely uses shares for Berkshire because he's giving away too much in value relative to what he's buying. I am, as you say, they've done pretty well this one. They probably deserve some rope on it, frankly. But I'm going to also tighten that rope because you're giving away effectively a quarter of the company in terms of new shares that would need to be issued.

58:18Now, I don't have the exact numbers, so don't make any investment decisions based on my assessment of being a quarter. It's whatever the number is, but something like that. It's$60-odd billion in a markup of$200 billion, so do the maths. But that's a massive chunk of the company. It's not going to be miles away, I don't think, from being almost, I'll say, returns determinants. Can I make up that horribly wordy, ridiculous phrase? I don't if they get this wrong it kind of it's kind of um it's not existential it's not going to break the company but in terms of the returns you get from here if they overpay for this thing it's not worth what they think it's worth yeah you run the risk of taking a very very very very very good iron or asset in in the Pilbara and and I've got to say I am I'm always I'm never sure um as an investor whether I want my companies to be internally diversified or not you know on one level you say it's your job to maximize value for me that's you're a you're a mining company maximize value go and go and do the things that make me most money on the other hand i could also say but leave the diversification to me you do you do iron ore you do that right if i want a copper exposure i'll buy anglo shares myself thank you you know i i want you to be you are a mining company i know what you do now now there is no perfect solution to that you know am i very glad warren buffett diversified new insurance and then of course yes you know if he bought a you know he bought a mill a cotton mill right if you kept doing that the buffett story ends in 1973 we never hear of the bloke again on the other hand we know of businesses that have tried to diversify and absolutely blown themselves up and so i don't know which way to go on this one but it is true i think that this will have a really significant impact for years on the returns that bhp shareholders get just because of the size yep absolutely and more than if it was just cash right because the cash is one off you're ceding a proportion of all of the future profits including from the iron ore business to these new shareholders when they get BHP shares instead of Anglo.

1:00:11Apologies if you've heard me mention this recently, but I rediscovered an essay by Michael Porter, which I encourage anyone to Google and read. It's called What is Strategy? I think he did it for the Harvard Review 20 years ago, ages ago. And in the article, he just sort of like argues for businesses to – Well, the propensity of businesses to broaden, diversify, to do more. And you have this sort of empire building characteristic from board and management because the company as defined by the revenue that it's generating or the profits it's making is a much bigger one. But generally speaking, shareholders can often be far better served by owning smaller, but better and more profitable companies.

1:01:03and what he argues you're arguing the same thing and it's just bears repeating and if you anyone out there and I'd encourage you to do it it's not that long download it read it is each board and I don't care what industry you're in needs to sit down and go what do we do better than anyone else yes what's the thing that we're the best at and any anything that you look to do whether it's an acquisition or an expansion or moving into a new geography has to be viewed through that lens. The amount of shareholder wealth destruction that has happened because a company decided to get into X, Y, and Z just because, you know, it was vertically integrated or something like this nonsense.

1:01:44And I've given the example of a couple of companies I've owned that had these beautiful little segments inside them, continued to go wonderfully well. I've just not done that well as a shareholder because they decided to buy all this other stuff. And I'm like, so the revenue's gone up. profits have gone up this business has done really well yeah that's right yeah but but not on a per share this is just your point on issuing shares not on a per share basis so it's a much bigger company the market cap's much larger but i own a smaller proportion of it and the economics aren't as good as they were so i'm sure it feels great to be this i'd ask me if i'd rather be the ceo of a 10 billion dollar company or a one million dollar company's annual turnover i'll take the bigger one thanks because my pay goes i mean it's just it's just cooler i like i like to go back to the high school reunion and say i run a 10 billion dollar company right like it's it's got we are status-driven animals and it is very understandable and that and it happens all the time but i just think you need you yeah um so a little bit of a divergent now in regard to bhp and looking at it through that lens i'd say it kind of fits on that basis because you are very good at sort of judging sort of these broader macro supply demand relationships between commodities that the world needs and positioning yourself rather effectively for that?

1:03:11Do you know how to dig stuff out of the ground and ship it around the world? Yep. I mean, yeah, you're really good at that. You're one of the best of the world and that kind of stuff. So it kind of all fits within the wheelhouse. And they've done copper before. They've done a lot of copper before. Hey, by the way, for the geologists, well, not for the geologists, for the non-geologists out there, you know what copper is usually found in conjunction with? Gold? Gold. Oh, got that one right. They're very commonly found. If you have a gold mine, you usually have a lot of copper. If you've got a copper mine, you usually have a bit of gold.

1:03:38I just tried to figure out that. You're right, yeah. Yep. And again, I'm guaranteed to get a geologist go, actually. But that's another interesting thing too. Gold's just surging at the moment as well. So there might be an adjacency, as they like to call it, or something that's there. Anyway, I don't know what the point of that ramble was, but, you know, I think... I'll just end by saying I think BHPs, it doesn't strike me as a crazy thing that they'd want to pursue. I just hope that they pay sensibly for it. I think that's my point I was going to make was it's always a fascinating thing when you are a trade buyer buying another listed asset because you are betting not only on the future of the asset itself, but the markets actually misprice what you're buying because you're paying more than the current market price.

1:04:22Now, lots of times that's been great. I mean, as investors, that's what we do all the time. We try and find stuff the market's undervaluing so we can get it and make money when the market realizes it's wrong. BHP is doing that as well with a really, really, really big business, very, very, very well known, highly covered with a globally available copper price. And so there is a, you know, BHP is not just betting on the mine. It's betting against the financial markets. and I've got to say, as much as we talk about mining and digging holes and stuff, mining is at its heart largely a financial exercise.

1:04:54I mean, it's a, you know, it's a mine office, a very physical exercise, obviously, with, you know, ships and trains and whatever else, but massive big Tonka toys. But see, I know everything. When anyone doesn't know about geology, I don't know about mining. Together we're geniuses. But, you know, the reality is it is purely financial because whenever you make that bet, we just talked about the calculations that need to go into it. They are literally betting against the financial markets and saying that Maybe they bring a little bit of know-how. Maybe they can install it in a couple of operations.

1:05:20But it's not like you can go and bring the copper mine over to the Pilbara, put it next to the BHP mine there, and you get some synergies out of it. This is almost entirely different assets in different places. We are only betting on maybe you can bring a little bit of operational excellence, as I said, but you're kind of largely betting the market's wrong about the price of the commodity because that's all that's in it, right? I mean, if the mine's been run badly, okay, you can fix that. Maybe you can negotiate harder with the shipping company because now you've got some more. okay, well, maybe you can add a couple of margin points there.

1:05:48Much past that, you're simply betting that the market is undervaluing the future cash flows from this asset. I mean, on one hand, I'll say you're right. BHP is not stupid to do it. On the other hand, I mean, a$60 billion bet that the market's wrong on copper pricing is a hell of a thing. Yeah, that's an excellent point. I mean, the only mitigating thing there might be that we as BHP enjoy a far lower cost of capital. This was so big, right? So we can borrow at a much more attractive rate. So the economics for us are better. The same asset. That's a good point. But in our hands is better. I don't know if that alone is going to be that much better than Anglo-American, but it's a factor.

1:06:31Yeah. The other advantage you have in terms of size with a miner is that if you own just one mine and the price of your commodity falls below your cost of production, and that's it, right? Like there's nothing else to rely on. When you have multiple assets in multiple geographies in multiple different commodity baskets, you don't want to pursue diversity for diversity's sake, but it allows, it gives you a bit more robustness that should the price of iron ore for, well, at least we've got copper. If copper is not in favor at the moment, well, at least we've got a little bit of this kind of stuff.

1:07:02So there are things that are fundamentally uneconomic and there are things that are periodically uneconomic just due to the natural sort of cycles of commodity pricing and the rest of it. And so there is – I'm really not going against your point. You're exactly right. But I just – there are some circumstances where the same asset in different hands can be viewed as more valuable if you do have sort of inherent competitive advantages available to you. If that makes sense. Yeah, I think that's absolutely right. That is the real question for BHP shelters. Is that big enough to justify the price they're paying?

1:07:37In and of itself, I don't think so. So I think if they get, if the market's right on copper, you might make a couple of points of, you know, cost capital a bit better or whatever else, maybe some value and diversification for shareholders. Again, I'm still not sure where that role of diversification is between the company and the investor, but it's a moot point because they're doing it anyway. But yeah, I think that's a really, really big one. I, again, you know, this is the, well, I'll go back to one point only because BHP's INRS, You made the point about those companies you owned where they had really good little businesses and they just completely managed to screw it up.

1:08:12BHP's iron ore assets are so good. If I'm a BHP shareholder, do I want them doing copper? I don't know that I do. I don't know that it's... Is it likely that... Again, think about the capital employed. We won't get too esoteric at the end of the podcast, but the capital employed is the money they've put into the business. Now, you can get a stonkingly great return on iron ore because it costs teens$13,$14,$15 a ton to get out of the ground. You ship it overseas, you sell for multiple. This is a spectacularly good business. I don't know if it's possible, and again, I'm showing magnate tickets, maybe it is, for the copper business to be that good.

1:08:46And if you are trading some shares in your spectacularly good iron ore business to get access to a pretty good, moderately good, even very good copper business, you're diluting your returns by definition. Anytime you spend money, taking money from a really good business to a less good, even if it's almost as good, if you kind of move down the quality scale, you're kind of costing your shareholders. And that's the bit that, again, I don't know enough about BHP or copper. I don't claim to have any EXPs in copper at all. Maybe it's a spectacular deal because the copper price quadruples and stays there.

1:09:20But, yeah, I think it's a really, really interesting call given how incredibly good that iron ore business is. you'd almost never want them to do anything other than that, albeit it adds some concentration risk to your portfolio. Yeah, it's such a good point. The only time you should ever pursue lower return on invested capital opportunities is where you've just got no other choice. Yeah. And like you just completely maxed. Maybe you maxed out the iron ore thing and it's like, well, this is the next best thing. Even then, don't you return money to shareholders though? Well, the next part was if I'm highly confident and getting a rate of return that is superior than what the average investor could expect.

1:10:01So if I'm getting this sort of a 20 % return on my iron ore assets, and I think I can get a 17 % return on copper, as a shareholder, I say, go for it. Yeah, 100%. Because I mean, it's unrealistic of me to expect that long-term. You've got a good, you know, yes, I am going to be, it would be better if you could focus on 20 % opportunities, but that's maxed out. It's not an opportunity. So that's still good. So this is all Diabolically hard right I don't think anyone Who's holding BHP shares Get to the damn point guys Like is it good Or is it bad Right We don't know And you can't This is Particularly with commodities If it's Coke You can kind of have A reasonable guess right It's still a guess But it's a reasonable guess The range of outcomes Of the commodities For the iron oil business And the copper business Add them together Multiply them out The odds of getting it right Are just getting longer And longer and longer The more you do it The other thing I just want to mention Because we're talking about Capital management here And the other thing is they could pay dividend.

1:10:53The other thing they do is they're getting 20 % returns from the iron ore business. Buy back your shares. Yeah. Again, it depends on the price your shares are trading at. So again, it's not simple and not easy. I'm not saying they should even necessarily do that. But again, you've got to believe that in the range of things you could do. Now, no company wants to buy back their own shares, right? Well, it's too late to podcast. Most want to build an empire. Most want to get bigger, want to buy other things. It's no fun. It's not interesting. It's not impressive to buy back your own shares, right?

1:11:23Because why would you? And some do. I guess my point was going to be, it's also possible to buy back your shares as a mask to look like you're doing something or try and prop up a share price. So there's always going to be questions about motivations and character and trust of management. Candor is important. If you can find a company that's buying back its shares at genuinely good prices, really, really lift that company in your estimation in terms of your view of its business and its management. The company that can look around and say, for all the things I can do, I'm going to do the least exciting, the least empire building.

1:11:56In fact, the empire gets smaller because I buy back the shares and they go away. There's fewer shares out there. The values can still go up, of course. But I could go and buy Anglo-American. I could go and do this. I could launch that. I could try this. I could put advertising. I'm going to buy back. I'm going to do the most boring thing I could possibly find. I'm not paying dividends. Shares aren't going to be happy because they get cash. No shareholder gets any money. I'm just buying, well, the ones that sell to, I'm buying back my own shares. If they're doing that for genuinely good reasons at genuinely good prices, really be impressed by that business because it's one that is genuinely trying hard to manage its capital the best possible way and avoiding the temptations of those other things.

1:12:31Yeah, buyback is a deceptive term, isn't it? Yeah. It should really be, we talk about dilution on equity raises. We should probably refer to them as more like a, I don't know, exercising concentration. Yeah, I like that. You know, because it's like the value prop here is that we're not going to give you any cash. Yeah, yeah. But we're going to make sure that you own more of the business. Yep. You don't give us any cash either, to be clear. Yes, that's right. No one's giving anyone cash. But you are going to own more of this business. And assuming it's a good business, that's a pretty good thing, you know.

1:13:07And in context of what else the money could have been used for. But, yeah, it's far more common overseas. and the reason being is that they don't have franking incentives that we do. So in Australia, it's just like if you've got a franking balance, it's generally far superior to go that way. But yeah, it makes imminent sense. Just as Buffett himself has said publicly, what is it when we get to or if ever we get to below 1.2 times book value, our net asset value, buy shares. Yeah. Because it's just too good an opportunity to pass up. I will say quickly, he didn't actually say that. what he said was we will buy back our own shares at that point, which is exactly his way of saying, hey, if it's good enough for me.

1:13:48If you buy what Buffett's buying, that's a good idea. So he's never said you should buy these back, as far as I know, but he's definitely said the board has authorized me to buy back this at 1.2 because we think that's cheap. It's like, okay, well, that's about as good as you need, right? Buy what Warren's buying, especially when he's buying back his own shares. I'm a Berkshire Hathaway shareholder, of course. Oh, man, gosh, there's so many things to say there as well because there'll be a lot of people listening to that going, wait a second, for every dollar of net assets, you're going to pay$1.20?

1:14:14Yes, that's right. That's good value? Yeah. Right, well, it's the carrying value of the assets. What they're really worth is a whole other story. And the cash flow they get from them, right? Yes. It'd be like we're talking about bonds. Bonds, how am I going? What, an hour and 15 minutes in? If you can buy back your shares, if you buy back a dollar of assets for$1.20, but that dollar of assets generates 25 % returns, then you're still buying, you're getting a 20 % return buying shares at$1.20. You are still absolutely creaming it. So it's because you're getting that proportional exposure to the earnings, not just the hard assets themselves, but you're increasing your exposure to what earnings rate, which is astonishingly good.

1:14:53And that's the other thing, by the way, people are already buying those shares at that price. More than that, that's the point, right? They're trying for more than that. Normally, why? Because a business is worth more than just the wind-up value of its assets. And that's, again, just a whole other thing, but it's an important point to make. Well, and that's another thing too. Wind-up value is very different to carrying value. Yes, correct. Way, way back in the day. Firesale stuff. The dividend investor service for Motley Fool. First recommendation out the door was what's called a vent now, but they had a bunch of - Oh, it was too.

1:15:19Remember? Amalgamated holdings. Amalgamated holdings. And they had a bunch of property on there that they had bought in 19-dickety-doo or whatever and was being carried on the books. It was like, no, no, no, no, no. They try and sell that. They are getting many multiples of what their accountants have said. No, sorry, that's not true. Not what their accountants have said, what their accountants have been compelled. Yes, the orders have made them say. Exactly. Because the accounting rules, and it gets very arcane very quickly, but you can't mark to market certain assets. And the opportunities aren't very common these days because people have cottoned onto it.

1:15:58But it's a nice little thing to sort of look for when you're looking at book value or net asset value and you're looking down the balance sheet, just be careful to think about, is that really the value of those assets? Yeah, yeah. And now more often than not, it's not like amalgamated or now event. It's, look at a lot of listed property trusts, right? Like they got some things on their books, which I guarantee you they are not getting anywhere near what they say they are worth. Because particularly for some of the US listed property trusts, oh my goodness. And it's, you know, things that have been 80 % drops in value in the last three or four years.

1:16:37So it's, anyway, all I'm saying is that it pays to turn over a few stones and think about, don't just take these numbers as gospel truth. More often than not, some independent valuer, independent, quote unquote, just to bring some cynicism back into the equation, has come and sucked their thumb and gone, yep, it's worth this amount. and then we're all basing our calculations off it when, yeah, sometimes it just pays to think for yourself. Yes, it does indeed. Mate, we have gone way too long, but it's a fascinating conversation. I hope our listeners have enjoyed it. To the left, not including our mothers and wives who have already switched off hours ago.

1:17:14Definitely don't even start listening. No, they don't. That's true. But thank you for spending a bit of time with us. Will you come back Sunday, mate? Yeah, looking forward to it. Why don't you get to say no? And I'm not going to say next. But because you've already said yes, I'm going to take that as gospel. After you finish your ultramarathon and your ocean swim from Melbourne to Geelong, we will reconvene with a mailbag episode. Until then, enjoy your weekend and Fool on. Cheers. The Motley Fool and people appearing in this program may have positions in the companies mentioned. General advice only.

1:17:46Please speak to your financial professional to understand how it may pertain to your situation. Subscribe to the free newsletter at fool.com.au forward slash listener. The Motley Fool operates under Financial Services Licence 400691.