Have shares become decoupled from the real economy? June 7, 2024

In short

Podcast Summary: Motley Fool Money - Episode "Have shares become decoupled from the real economy?" (June 7, 2024)

Episode Overview In this episode, hosts Scott Phillips and Andrew Page delve into the current economic climate, discussing the recent GDP figures, the implications of per-capita income, the potential for stagflation, and whether the stock market has become disconnected from the real economy.

Key Themes and Discussions

Economic Performance

GDP Figures:
Australia's GDP growth was reported at 0.1% for the March quarter, following a 0.2% growth in December.
This marks a trend toward stagnation, with discussions around possible negative growth in the coming quarters.
Treasurer's Remarks:
Treasurer Jim Chalmers characterized the economic situation as "similarly difficult," hinting at potential negative growth ahead.

Per-Capita GDP

Importance of Per-Capita Metrics:
The hosts emphasize the significance of per-capita GDP as a more relevant measure of economic health, as it reflects individual economic well-being.
The economy may show growth while per capita figures indicate a decline, highlighting disparities in wealth distribution.

Inflation and Stagflation

Inflation Rates:
Current inflation sits at 3.6%, which has sparked discussions about stagflation—a period of slow economic growth accompanied by inflation.
Stagflation Concerns:
The hosts debate whether the current economic climate meets the criteria for stagflation, expressing skepticism about labeling it as such too early.

The Disparity Between Wealth and Economic Health

Wealth Inequality:
The hosts discuss the bifurcation of the economy, where those with assets benefit from rising market valuations, while others struggle amid high living costs.
Savings Rate Decline:
A noticeable decline in the savings rate indicates that many individuals are depleting their savings to maintain living standards, raising concerns about future economic stability.

Market Dynamics

Stock Market Performance:
Despite poor GDP figures, the stock market has seen record highs, prompting questions about the disconnect between market performance and economic reality.
Investor Behavior:
The hosts speculate that investors may be driven by the urgency to preserve value in an inflationary environment, leading to increased investment in stocks over traditional savings.

Policy Implications

Government Intervention:
The hosts discuss the ineffectiveness of government measures to stimulate the economy without addressing deeper structural issues.
Calls for Better Economic Policy:
There is a consensus that policymakers need to engineer solutions that mitigate the impact of economic downturns while ensuring corporate accountability.

Key Takeaways

Caution Against Overoptimism:
While the current stock market may seem strong, the underlying economic indicators suggest caution.

Need for Structural Change:
The podcast emphasizes the necessity for policymakers to create sustainable economic frameworks that prioritize long-term growth rather than short-term fixes.

Individual Economic Agency:
Listeners are encouraged to consider their own financial situations, emphasizing the importance of understanding per-capita metrics and their implications on personal well-being.

Final Thoughts The episode concludes with a reflective tone, suggesting that while challenges abound in the current economic landscape, informed investing and prudent financial decision-making can help individuals navigate these turbulent times. The hosts advocate for a bottom-up investment approach and underscore the importance of critical thinking in both economic understanding and investment strategies.

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Transcript

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0:28A listener production. Well, your introduction there, mate, I was just thinking positive. I don't know. Maybe you could be the positive side of the pair. That's a very good point, actually. I'm going to try and rain on all kinds of parades here today. I did occur to me that because GDP was so low, we had any more positive than that, then you're right. That's a good point. I hadn't thought about you at all. But I don't have a sense of more positive than GDP. The other one is permanent recession. Is that a better way to go with it? That's the way to go. When we record this, when we do this properly, when we record it later, that's the intro I'll use, and analysts will never know any different.

0:59so it should be good. I like it. Oh, dear. Mates, oh, yeah. So, well, let's start with that then, I guess, and let you rain on various parades as you all want to do, the proverbial black cloud. We had GDP gross domestic product out this week. The March quarter, by the way, we're almost at the end of the June quarter already. The data won't come out for a couple of months, but we are almost end of June. But the March quarter data came out after growing at 0.2 % in December quarter. The economy grew at 0.1 % in the March quarter, which is as low as it gets before things go negative, which is clearly not a good, well, I suppose it goes to zero before it goes negative, so maybe it's not exactly as low as it gets.

1:39There's always another decimal, like we can go 0.01, can we? What's the level of precision that they go to? Well, that's the thing, right? There's every chance that this is a flat number anyway because the margin of error is not big enough. It was a very, very ordinary result. Better than NAB had forecast. They reckoned it was going to be dead flat. So I guess, you know, if you're looking for a silver lining or a glass being, if not entirely empty, maybe a little bit, a couple of drops at the bottom, it wasn't as bad as it could have been or some did predict. Still a very, very, very ordinary result, mate.

2:12I mean, so a couple of things, I suppose. First is Treasurer Chalmers has already come out and said the June quarter is going to be, I think the quote was, similarly difficult, which I think as politicians speak for, oh, God, it could be negative and I'm going to have to stand up and explain it. can I say Jim Chalmers is the most optimistic man in the world or has the world's best speech writer because he said oh it's a really good result in the circumstances and there's a bit of chutzpah there because like the economy is the circumstances that's kind of the point it's like you know it's like saying I didn't run I ran reasonably quickly considering I run slowly it's like that's still running slowly dude you don't get to say you know the economy's going well considering the circumstances like that's literally it that's the circumstances which I thought was you know again if you can stand up honestly tell everyone that the sun's shining and there's no rain and everything's wonderful.

2:59At this sort of number, it's pretty ordinary. The other thing, mate, we've had people use the S word, stagflation. We're not using the R word yet. Well, I'll get back to that in a sec. Stagflation, inflation at 3.6, effectively the economy stalled, i.e. stagnant. I don't know there is a, there's never an official term for any of these things, those accepted definitions of things like corrections in the stock market and stuff. I don't know what stagflation needs to be. 3.6 % doesn't seem like high enough inflation to kind of give it the stag. It's like a bit higher than the RBA wants, but it's not that much higher.

3:27I mean, for all of the challenges, I don't know, it doesn't, stagflation feels like people reaching for a, people have a crisis. Some people just love a crisis. They love to kind of be able to say, look how bad it all is, stagflation. And I don't know. So I'm not there. The last one is, we are now having the fifth quarter in a row of per capita recession. I guess the recession starts up to two quarters, maybe. So in other words, Five quarters in a row now of negative GDP per person. So the pie is getting slightly larger. Our slices, the size of our slices has fallen every single quarter for the last five.

4:05I'm the optimist here. I haven't given anyone any reason to cheer. Things are pretty rugged. Yeah. I mean, look, just on that per capita versus the overall number, is we've mentioned it previously, but it bears repeating. I mean, it only makes sense to look at the per capita number. Right. Literally. Yeah. Well, so I will only for the sake of – I've had this conversation on Tudor before. The response is things like employment, for example, depend on total business volumes and stuff. So Woolies would employ fewer people if the economy was going back because people were buying fewer – it was a bad example because it's staples or retailer, but I don't know, So an airline or a clothes shop will employ less people if they're having less money go through the till.

4:50So there is arguably some element of total market growth does kind of matter. The per capita bit, though, means per person. The population element of that is also true. If you had fewer people coming in, again, so think about per capita, right? Economic output divided by population. If the decline is because population is growing too fast, then having fewer people would mean fewer unemployed people because the people still would keep their jobs. So it's a bit of a double-edged sword. There's no, by the way, there's no perfect answer to any of these things, as you well know. No, you can't do the cause and effect perfectly because it just doesn't happen.

5:22So maybe there's a slight benefit for employment, for example. There might be a slight benefit for the size of the economy in terms of, you know, the government revenues. They can then spend more on social service or infrastructure or something else. But I'm being generous. I actually fundamentally agree with your point, which is totally irrelevant other than at the margins. If you're going to start with one and say, and there's other reasons for considering the other one. You wouldn't start with total GDP and say, oh, by the way, we're sure to talk about GDP per capita. You'd start with GDP per capita and say, but just remember there might be a couple of benefits of a total number being larger.

5:53Yeah, I'm sure there's a Yogi Berra quote that's relevant here. There always is. As there often is. Yeah, it's something like, I'm not hungry. I'm not that hungry. Just cut the pizza into four slices. Yeah, that's right. Something like that. I'll have a big piece. I'll just have two small pieces, please. Yeah, yeah. I mean, as I've mentioned before, I think investors get it in the sense of if all of a sudden a company had to raise money and they issued a bunch of new shares, we'd all be like, hang on, wait a second. You know, my proportional ownership of the company has just gone down. This is not a good thing, right?

6:30It's exactly the same thing. It's exactly the same thing. No one would cheer market capitalization getting larger if there were twice as many shares on issue. Yes. Exactly. And yet that's what we do. Yeah. Yep, it's exactly what we do. So that's the first point to make. Nice, thank you. The other point, again, all we do is repeat ourselves here, so why not lean into it? This is the same podcast. AI events is going to re-scramble our words and publish us again. Pretty much. I'm very – I just – maybe to the man with the hammer, everything looks like a nail, but I just – I feel as though it's this bifurcation of the economy.

7:05There are people out there that are doing it very well. If you've got a bunch of assets and not a lot of debt, it's actually, this is what's interesting. Five quarters of negative of GDP per capita growth. Stock markets at record highs, property markets breaking all kinds of records. Yeah, inflation's up, but my investment portfolio is up 15 % or whatever it happens to be or however you've weighted it. It's sort of like, it's never been better. It's like, despite the increased cost of living because I'm worth more, right? But for those that don't have assets, it's never been harder. So we're looking at something which you think, well, that's a pretty ordinary per capita figure.

7:47Well, if you happen to be on the side of the equation where you actually don't have, you're not benefiting from these asset price appreciation, it's actually far worse than that as well. There was other interesting stuff within the data as well is that the savings rate is falling significantly, which is what you would expect for those that are, I mean, I'm not, I'm, I'm, I save when I've got a surplus, right? By definition, that's the definition of saving, I suppose. I can't do it. So I'm having to save less or in many cases eat into my savings. And that's, that's what savings, you know, a big part of what they're for.

8:25It's that sort of rainy day kind of thing, but, but they, they will run out at some point as well. So it's hard to understand how this kind of resolves in a way that is equitable, I think, and in a way that really going to make a difference on a real term basis. As I like to constantly point out, we're all 20 something percent poorer than we were pre-pandemic in terms of our purchasing power. And I think stagflation is a real threat here. I mean, it is really low growth with prices going up, which is another fancy way of saying whatever unit of measurement you want to use for the monetary yardstick, we're all getting – well, on aggregate, we're all getting poorer.

9:12Yes. No, I just contradict my earlier point. But in aggregate, we are all getting poorer. Yes. And for some of us, we're getting much more poorer than others. And it's that – usually when you look at history and you sort of see these ends of these big debt cycles, it's all the same things that play out we're seeing it now a widening wealth disparity rampant inflation lower living standards all of these kinds of things are kind of playing out it just sort of what I wonder is is how do we get it back on track and there's no easy answer to that I think that the first level thought is well let's just live within our means you think okay What's that mean?

9:57Well, that's austerity is what they call it. So it means we're just going to like spend a lot less in terms of the government. It's like, yeah, but that's probably going to have implications as well, which is probably going to lower tax receipts, which is you kind of get into these sort of death spirals that's there saying, okay, well, that's not going to work. Well, let's just default on all our debts. It's like, well, you can. Countries happen to do that all the time. But then no one trusts you No one wants to buy your debt anymore, which means you can't raise money, which just, again, that collapses on itself.

10:32It kills your currency as well. So all of a sudden every import becomes stupidly expensive. The standard of living falls dramatically because anything we want to buy from overseas, cars, computers, TVs, phones, I mean, that's just the manufacturing, food, literally everything coming in will cost a much, much larger amount of money. Yep, so that's not going to work. The best option, if we can somehow engineer this, would be to grow our way out of it, which is we just all become super productive and we just make a lot more stuff with a lot less and we use that productivity boost to pay off our debt and square things back up without having to suffer the big fall in standard of living.

11:12And that could happen, but it's not something that I would rely on and just hope that it happens because we all know what the story is with productivity lately. And I just, it's like, it could happen, but explain to me why it will happen. That's a very different story, but maybe, maybe that happens. Or we just run at very, very high levels of inflation. Let me be less hyperbolic. We run at levels of inflation that are above what we would consider ideal for a long time. And we just inflate all of our debt away. And we sort of have a very slow, painful reset in that sense. usually what that means though is that the lower half of society really eats it well so it's so it has all kinds of social implications it's like really bad implications in terms of everything from domestic violence to depression and you know it's we we abstract a lot of this stuff in the economy to numbers and that but there are there are real consequences here um and it feels as like that last option is usually the way it goes um and so i i don't know i don't know how we get out of it easily.

12:23What will probably happen is the government will try, this is where you get into real down the rabbit hole kind of stuff was like, we're having all this inflation and not enough growth, but let's spend our way out of it. Like what? A, you don't have the money. Where's the money come from? So we've got all this debt and problems. You're going to borrow more. That's not going to help the debt situation. You're going to spend more. Well, that's probably not going to help the inflation situation. You know, so it's sort of, it's probably which way it will go, which means that things tend, you know, it's like the alcoholic delaying the hangover by drinking more kind of thing.

12:57And just means you get the mother of all hangovers when it eventually sort of hits. So I don't know, there's a bit of doomerism for you. Maybe you need to fill the cup up a bit. What do you say? I will fill the cup a little bit, but you're not wrong in the concerns or potential outcomes. I think, I was saying to you before we started recording, there were a lot of people on the Twitters and everywhere else who either love to kind of bathe in this negative stuff and kind of everything's doom and gloom and just they see it everywhere or there's another group who are like oh let's just get it over and done with you know it's almost like you know you know when you're a kid you just you can't wait for something to happen it's like you know you sit to the principal's go sit outside the old sandwich you sit there like i don't care what it is just give me the punishment so i just i just know what's coming right and there's a lot of people on Twitter i think and again elsewhere who are like surely there's a massive recession and just clean everything out and get it done and then we can move forward.

13:44It's like, well, yeah, but that's the kid who says, you know, what if you go to the principal's office and he says, actually, I'm not going to cane you. I'm just going to give you a stern talking to. It's like, oh, that was worth waiting for. Rather than saying, okay, principal, cane me now. Just hit me now. Hit me now. Get it over there. It's like, it wasn't going to be that bad, but okay, if that's what you want, you know. And so there is just that, and you've made that as your last point, which is, you know, there are potentially really bad consequences depending on how this rolls out, right?

14:11and we can't avoid them. We're a rubbish position. I've been banging on forever. You've been banging on forever about this stuff. We're running an irresponsible economy at a personal and a government level and we will, to some degree, cop the results of that, whether we like it or not. But to some degree, and the results are open to question, right? And I think there are ways of minimising the impact on individuals so that we don't. You know, would it be easier to kind of go, you know what, end of 2024, let's just put a rule on under it, blow the whole thing up and see what's left and you can do that and you have 15 unemployment so well let's give the number of recession or or at least it's just over now isn't that great and those extra you know x million australians are like um i kind of would have preferred the little bit poorer option and so my job please that would actually be okay and it's not again it's not i don't mean it's just they're either the only two options there's nothing binary about any of this is just how do you engineer the least worst outcome uh and and frankly the biggest problem as as you alluded to didn't say directly it's just i don't know that policymakers i don't really talk about the rba here i'm talking about the governments uh and oppositions and state governments as well by the way we haven't talked about those they're running up triclides of debt uh get out of victoria by the way you guys are just you know getting smashed um that you know that's that that to me that's the that's the big issue is not so much could we not find a way out of it yeah we could serious people with serious intent would find a way out of this with with minimal pain are they prepared to do they want to are they going to there is no sense that frankly let's go back to the budget and the budget reply speeches there is there is no there is no serious attempt to fix any of this um there's lots of soundbites lots of platitudes and lots of chillers for their favorite political party will say oh jim charmer's got it solved or angus harley's got it solved um there is no independent objective observer with any degree of expertise can look at this and say gee that feels like they're really they got their finger on the pulse they're doing the right thing uh and that i think that remains that remains the challenge.

16:03Mate, can I take you back to the investing thing? Because you kind of mentioned that in passing and you're right to use it to illustrate the haves and have nots. A couple of things. Firstly, I saw someone mentioned online yesterday before. I'm not convinced and I'm happy to stand corrected and be convinced. I'm not convinced there's any different to the 90s recessions or any others before that in the sense that this is how these things always tend to play out. It doesn't make it okay. And I don't for a second mean to say, well, it's always been this way therefore it should be this way but i also think because it's been 30 years it's a proper recession in australia people are going oh what oh that doesn't seem right yeah you know and and and frankly the generation wars which i just despise you know the the the gen whatever number we're up to now double a or you know one two three four whatever generation is are saying oh we're getting screwed those old boomers they don't care about us our bloody boomers the boomers were the people getting screwed blaming their parents or their grandparents in the 90s and and and in the 70s and and and kind of it's always been that way and again i don't want to for a second say it's okay or should ignore it or we don't shouldn't resolve it we absolutely should do all those things um but i'm just i'm just mindful that there is some element of kind of this is not the new normal right this is the old norm this is this is cyclical economics as we've always had it the fact we didn't have a cycle for 30 years was lovely um but this is kind of where we find ourselves that being said you're right about this is a really weird market because we are at or near all-time highs i don't know about you but the motley fool we're not having people knock down at all to come and join our services right if they're getting rich now i would suspect that's because when i was got any spare money you're talking about the savings rates okay well i want to but i can't that's part of it frankly um by the same token though companies are more expensive to buy i.e share prices are up market capitalizations are up uh and there is a really strange part of where the money's being spent there was an article in the in the fin today we're recording this on on Thursday the 6th of June, about the fact that economists are now worried, they always should have been, they were stupid not to, that tax free, say tax cuts should be spent, not saved.

18:06I don't know who the hell thought they'd be saved. And they're highlighting big overseas travel and other stuff. And it is still the haves that are out there spending. And that's kind of what's happening in the economy. Yeah. Yeah. What do I want to say? One thing I would say, with the 90s recession, one thing was different there, that the level of overall debt was very low compared to what it is now. So just as if you get into a bit of a difficult spot as an individual and you've got very little debt, I mean, it's still difficult, but it's not nearly as bad if you go into a difficult patch with mountains of debt, you know, every credit card maxed up and personal loan, car loan, all that kind of stuff.

18:50Leverage just exacerbates things on the upside and on the downside. Correct. That's right. So I think that's what's different now. I think part of it, there's been a, and I think that you're right to point out that time frame there as well. It's easy to look at a long-term chart and go, oh yeah, look at that. But then you remember that again, there are people in their fifties or around the 50 mark who've never had a recession in their working lives. So it feels like something that just doesn't happen anymore. Historically, it used to happen every six, seven years. And I guess my, part of it is, I think we've tried to, Gordon Brown in the UK was famous for saying that we've fixed the economic cycle.

19:28God love them. I mean, it was ridiculous at the time. It's even more ridiculous in hindsight. And again, just repeat myself, I think it doesn't make you popular saying this, but the reality is you need a bit of pain every now and again. And that's very easy to say in an armchair when it's other people that should experience the pain and not me. I don't want to experience the pain. But I think we all do. It's the manga, you know, capitalism without failure is like, you know, Christianity without hell. And I think there's just a huge amount of wisdom and truth in that. And so, you know, we kind of didn't suffer too much in the dot-com busts.

20:16We didn't suffer too much in the GFC, the sovereign European crisis, the Asian crisis. You know, we kind of patched over it. And in doing so, we loaded ourselves up on debt. We failed, we missed an opportunity for lessons to be learned, which is to play stupid games, win stupid prizes. You know, so we have things where people were buying monkey NFTs NFTs and meme stocks and all kinds of crazy, you know, VC funds funding businesses that have no business model, not even a product. And this isn't some obscure reference that you can find out. There's a few instances of that. It was like systematic almost.

20:59You remember a few years ago, like just how nuts it was. And again, by doing all this, we paper over the cracks and we just create for ourselves a far, far bigger problem. So I'm saying this not entirely seriously, but there is a part of me that kind of thinks let it play out as it should. Let's stop bailing people out. Now, I've got to be careful with that, right? Yeah, right. Because when I say it, I mean stop bailing out the idiot investment bankers and VCs and the rich people that are largely responsible for this. You know, that's not saying let's not help the underprivileged and those that have been done over by a cruel and unfair system.

21:45So there is nuance with that, and I really want to emphasise that. I'm not just saying let's throw everyone to the wolves. But I do think there are a lot of people out there who just haven't faced their just deserts for doing silly things that just get bailed out, you know. What did the Qantas experience teach corporate Australia during COVID? To what you like. And your next job, join an airline. Yeah. Throw a bit of jingoism in there and you'll be fine, mate. You know, flying kangaroo. Like what the heck? National carrier. Exactly, yeah. You know, it's when the bailouts happen. It's the big end of time.

22:21It's the classic capitalism on the way up, socialism on the way down, you know. And I think a lot of business leaders, a lot of big institutions, need to learn some painful lessons. and they need to be reminded of consequences. And not just to be mean or spiteful or you're richer than me and therefore I want you to suffer. It's absolutely not that. But capitalism really works best when there is incentive to try and experiment and to deliver new things, take risks, because when you get it right there is reward for you. But when you get it wrong there has to be punishment as well. You know, there has to be a pain associated with it.

23:06It's going to make the capital allocation decisions more thoughtful. It's going to make people tread more carefully. Throw a bunch of free money at the world and you're just going to make all kinds of mess, right? And then when it all goes inevitably pear-shaped and all you do is just bail out the people who made the big decisions that had the systemic implications, then just classic moral hazard territory. and I feel as though we're kind of, we're getting to the point where it's like all of these things that we're experiencing aren't just things that are a result of factors from the last five quarters.

23:43It's a consequence of things that have been playing out over decades and, you know, am I being too harsh here? Do you get where I'm going with that? I think you're, look, you're not a slightly different, a slightly different approach to it. I think you're 100 % right conceptually. I think where the real value ends up being is the conversation about how do you make that happen. And as you said, because you want to have the right people punished and not the wrong people. I guess, mate, the other thing, just at a pragmatic level, I think I want to believe you're right, but I also don't think that our economic memories are long enough, which is exactly where we get to now, to get to that situation.

24:22I think there's, you know, when we say companies have to be taught a lesson, whatever lesson you teach them, they'll forget in five years' time anyway. You know, we say that the cycles of economic excess happen regularly, not because there are no lessons, but because the lessons are never learned. And so I have to say, a part of me is like, you know, it's like the kid. If I teach you this lesson once, then you'll never make that same mistake. You never do the wrong thing again. I'm just going to teach this once. Once you've learned it, then you'll be okay. And sometimes I get through and sometimes the kid goes, oh, good point.

24:49Other times it's like second, third, fourth, fifth. Have we talked about this already? Oh, yeah, sorry, Dad. You know, maybe I'm just referring to myself here. but yeah there's just that that's my only my only it's not that you're wrong about the diagnosis i just don't have a massive amount of faith in the the uh institutional memory or social memory frankly that'll actually change anything next time around whatever happens at the end of this this cycle we'll have another cycle with other problems to your point you made the you know happened in the late 70s happened in the early 80s happened in the late 80s happened in the late 90s happened in 2006 to 7 with housing you know like there's no there's no lack of there's no lack of examples there's just a lack of some combination of comprehension and I don't know, it's not going to happen to me, it won't happen this time, this time it's different.

25:32Choose your reason for disbelief. But it's, yeah, I don't know, use the religion example. It's almost like showing someone hell and saying, you get up here, it's like, oh, no, maybe I won't. I'll just give it a go or I'll repent later, right? Give me chastity but not yet. I don't know which one of those applies, but I do wonder whether that's part of the challenge is whatever lessons we think we learn, and this is why policies are really, really important, you know. The policy makers are the ones in theory, both the public servants and the politicians are the ones who should be saying, all right, animal spirits will be animal spirits.

26:08If we believe there is a need to legislate or regulate an area, we do it such that we don't have these problems eventuate because the implications, the consequences of these problems are worse than stopping them happening in the first place. And so it's that interaction of what do you regulate and what do you allow to happen? What do you, you know, and again, thinking about those who suffer, I am still on record as saying I think for whatever it's worth, the money thrown at the corporates, which was excessive and badly designed with the JobKeeper stuff, kept a whole lot of people in work who otherwise would have been thrown down on unemployment.

26:40The saving of the auto companies in the US, whether it was done deliberately or for purely craven, you know, donor satisfying reasons, saved a whole lot of jobs. And so you kind of got to work out who is actually going to pay the price. Is it really – the auto companies fail. Aha, I told you guys, except you've got your$15 million payout packages and your$85 million mansions, and the bloke on the production line can't get another job in Detroit because Ford shuts down. It's like, see, I told you, you guys suffered. You learned a lesson, didn't you? It's like, well, no, I'm still drinking champagne.

27:12I've had a down trade from 15 bottles to 14 bottles, but I'll make do. And the bloke who used to have a job doesn't have one. That's the sort of second, third-order impact that I've always – just really mindful of not wanting. I think it's easier to kind of go top line. They should pay. Ha ha, they've paid. Good, I'm done. The second order of thinking of actually, but what were the total consequences? Who suffered more? What could I avoid or should I have avoided? That's where I just, I think there's some details and nuance in there. Oh, no, no, I'm not a mile away from you there. I mean, it needs to be thought of, you know, broader holistic context of what other welfare safety nets are.

27:45It's not throwing people to the wolves and it's certainly not throwing people to the wolves who had no part to play in it. You know, the person who's just rocking up to work as a teller at the CBA had nothing to do with their myriad scandals over the years, but maybe they're the ones that suffer. Exactly, exactly. I totally get that. But I still think the point remains. I still think there needs to be consequences. Yeah, no, that's what I'm saying. That's why I agree with you. The nuance for me is just which consequences are the right ones. It's the old 100 guilty men go free of the jail when an innocent man, right?

28:21If a bank CEO doesn't go to jail, but 1 ,000 bank workers keep their jobs, which one do you want? And there's one of those you yell at the clouds things. Well, I want both. I want both. Okay, but that's, you know, and I'm not saying you're saying this, by the way. It's an extreme example. But that's kind of, for me, it's like, they're the trade-offs we're making. You know, we're kind of choosing what's fair. Well, fair is these people don't get screwed over and that guy pays the price. Okay, but if he pays the price, they get screwed over. or he doesn't pay the price and they don't get screwed over.

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28:48Now what do you want? It's the old A-team. You can say if the girlfriend will chase the criminal, which one do you want? She's tied to the railway tracks. He's running away. What are you going to do, hotshot? To me, that's kind of the challenge we've got is the consequences are the consequences. They are wide-ranging. So we're going to have to choose carefully, even if it really, really rubs us off the wrong way that so-and-so gets away with it. Untying the girlfriend from the railway tracks probably wins, I guess. Yeah, but these guys, and I say guys deliberately because they always are, is that they know this, right?

29:22So that's the card they're going to play. It's like, well, it's like Exxon, you know? Like completely screwed over the Gulf of Mexico or whatever. You know, I'm sorry. If you punish me, it's other people are going to suffer. It's only Star Casino right now, mate. Star Casino has been told twice it's not good enough to keep its licence, but there's 3 ,000 people employed there And so the regulator's like, well, this sucks, but okay, you can have it. But then the people who are responsible hide behind that. Of course they do. You know, and that's... But this is the yelling at the clouds thing, mate.

29:54You're still going to make a call at one point. It's like that you're 100 % right, so then what do you do? Do you say, sorry, you're three-year-old, but you need to lose your jobs so I teach that one personal lesson? But I'm not going to make that call. I'm going to say, okay, that really, really, really sucks, but the price they're paying is not fair for his misdeeds, so I'm going to find a way to get around that one such that the total, you know, at a total, there's probably a philosophical or whatever word for this, but, you know, the total pain caused or the total, you know, roll up all the total impacts.

30:27If you press this button, here's what's going to happen to these people. This guy goes to jail, these guys lose their jobs. Or if you don't press the button, he doesn't go to jail, they don't lose their jobs. Are you pressing the button or don't you? I'm not going to press the button. You can and other people will. I just think at some level it's like, I want him to pay a price, but life's not like that. We don't get to exist in the cartoon world where everyone gets their karmic desserts. If he has to kind of get away with it and those people keep their jobs, I'm okay with that. Not because it's right, because it's least wrong.

30:53It's not so much a retribution thing, you know, because I feel slighted and I want someone to suffer and it should be you. Oh, come on, you hate the banks. Come on, let's be honest. I do hate the banks. I could tell you so many stories right now. oh my god sorry I shouldn't have said that but it's a less I agree we put criminals in jail and all this stuff oh it's a deterrent you know why can't that apply more broadly I would probably change rules around director responsibilities and stuff as well I made the point before that they changed the rules to make directors personally responsible, was it personally responsible?

31:36I forget the terminology but make more responsible for health and safety on site. And so lo and behold, they focus a lot of their attention on that. I would imagine if more of their personal fortunes were tied up with the prosperity of the company that they're overseeing, they would – if my downside is I might eventually lose this really cushy role, but that's it. Exactly. I mean, I'm going to shoot for the moon, right? Who cares? I'll probably get away with it for years and years and years. If I lose, I lose much. But it's like, oh, I might go to jail for being irresponsible or I might lose all of my own personal wealth.

32:17My own significant amount of my personal wealth is tied up on that. I mean, I just kind of think that it's the incentives thing, right? I agree with you. All I'm saying is that's the nuance that matters, how you do it rather than let the banks fail because they deserve to. It's like, well, we can't do that because the implications are too big. we have to find a way to change the behaviours. That's what I'm saying about regulations. Exactly my point is you regulate those things so they don't happen or if they do happen, there are serious implications rather than waiting for the market mechanism to do its thing because that's where, if and when it does, that's when the earthquake, the sort of the aftershocks and the kind of the blast radius, I'm mixing my metaphors here, that's where it takes out the innocent people on the way through.

32:59Let us count the ways, right? I looked at this recently, speaking of the banks and speaking of corporate responsibility, 2014, if you cast your mind back 10 years ago, CBA was involved in a financial planning scandal. So they basically - World Commission 2017, fixing the problem. They put all their customers' money into investments they didn't ask for and they had to pay a few million in compensation. I'm sorry. It's like me breaking the law. It's like, you got to pay$10. Yeah. Okay. All right. So that was 2014. 2016 was the common shore scandal. So CBA's insurance, just basically unethical practices left, right, and center.

33:37I'm sorry. I won't do that again. Fast forward, 2017, 2018. This is the chef kiss, like just most beautiful thing. CBA broke any money laundering and counterterrorism financing laws, faced all kinds of civil lawsuit from Ostrak and the rest of it. And that actually did result in a bit of a fine for them. I think it was one of the biggest fines in history. But again, for these guys, chicken feed, right? Didn't make a difference. Which I always laugh whenever I try to send some money to a Bitcoin exchange. They tell, oh, money laundering, terrorism, you know, what? You guys literally did hundreds of millions.

34:16Okay. Exactly. Okay. Stop bothering the chick, yeah. All right. But that's the pot calling the kettle black. That was 2017, 2018. 2018, they rigged interest rates. The bank bill swap rate. They manipulated the benchmark rate in Australia. Reached a settlement with ASIC, paid$25 million in fine. That's crazy, isn't it? You know, fee for no service scandal. Oh, another beautiful one as well, you know. Basically charging heaps of customers, some of them dead, fees for not offering any service. And then just two years ago, they were back in trouble for money laundering again, you know. And it's just sort of like if there's no consequences consequences or the consequences are so tiny i'm just gonna keep doing it because these are only the things that we know about and this is the commonwealth bank this isn't some obscure neo bank operating out of the gold coast or something you know i'm picking on the gold coast there but you know what i mean like it's it's it's sort of like at what point is there is there implications and they turn around and go oh oh but all the all the tellers will lose their jobs that's not, that's, that, that is, that is like a terrorist cell hiding within a hospital.

35:32Right. And we, and, and, and basically using human shields. It's, it's, I think it's, it's ethically equivalent and, and I think people rightly look at that and just despair. Like it's like, what, who, who went to jail for any of that stuff? No one. And if you want to say if there was a cost, you know, in terms of the penalties that they had. There was no way taking your licence away. You clearly, like five years after paying a$700 million fine for breaching anti-money laundering and counter-terrorism financing laws, you did it again, right? You did it again, like in very short space of time with no consequences that matter.

36:12Like, at what point do we have to say you've got to face up to it? I'm just sorry. And if it's not like a personally heads rolling, it's like you guys don't get to have your license anymore or we're going to dissolve the board and fire all of the – and they're going to lose all your bonuses and you're going to lose all your shares. Why not? Explain to me like a three-year-old why that is not possible to do. All laws are just made up by humans, right? We can make up that one if we want to. Who's against that? I tell you what, 0.001 % of the population who's involved is against it. But 99.99 % of us are like, yeah.

36:51I will lead the parade exactly. Do you know what I mean? And it's just like we wonder why there is so much cynicism in the world. And, you know, it's sort of like there is rules for thee, not for me. And I just find it just makes my blood boil. So while I take your point, I just think it's not fair to hide behind employees. and I would say too, if, if, um, look at what happened to ANSET when that went under different circumstances, right? Okay. But that went under, those people all lost their jobs, right? But then we're reemployed under the, the new entity that was sort of born of that because that's still needed.

37:30Some were, some weren't, but yes. Yeah. Some were, some weren't, but again, right? Like when, when basically we're just going towards pure communism, it's just like, well, it's jobs first before anything else. It's like, yeah, but jobs need to be functionally value creative for the workers for the society. That's the, the, the economic machine needs to work at a larger level to deliver for all of us in terms of, of our improved lifestyles. It's just job for the sake of jobs. Well, why don't I just employ a bunch of people to go out into the Pilbara and like shovel one, you know, patch of sand and pop it in a pile over there.

38:03They're all all jobs. It's not creating any value. It's in fact, destroying value because we're of the massive opportunity cost that's involved, but Hey, they're employed. So I find that there's a, But there's a – it's an argument that is – and it does come back to – so let me go in this direction. I was talking to you off air. It's just, you know, we've got a young teenager and we're going through all the joys of raising a teenager, right? And you just – you – I could say to him and try and explain to him, this is bad, you don't want to do this, and you're, screw you, Dad, I'm going to do it anyway.

38:39Okay, but don't do it again. And guess what? He actually learns a very valuable lesson. Yeah, that's right. Mum and dad are a pushover. I can do what I like. They'll yell at me for a little bit, but I still get to do what I want. So what's he going to do? And I don't know, get into the theory of parenting here, but I would say most people think that for children whose neofrontal cortexes are not developed yet, that you need to – there's no realm in the multi-universe where they go, hmm, dad makes a really good point. Let me reason that through. Yeah, I'm going to change. No. He's my third-year-old Brian, exactly.

39:16Yeah, yeah, yeah. Yeah, there needs to be, but he'll understand having his phone taken away. He'll understand, I hope, he'll understand being grounded, you know, and like it happened to me. I happened to everyone who's listening, right, and it sucked and it was unfair and, you know, mum and dad are idiots. And now they're doing it to their kids as well and so on and so forth, but that's kind of what needs to happen. And you look at those that don't have any boundaries for their kids and they're little snots. And it's kind of the same thing whether you're talking about a teenager or corporate Australia, right?

39:49Like all I'm saying is, and again, I don't want to suggest for a second that it's easy and that there's not a huge amount of nuance and subtlety that's involved with it. But the broader point being is I just, I think the way that it's set up at the moment is that the game theory, I just, I'm reading so much about it lately. I see everything through this lens at the moment. A game theory, just very quick, I'm just throwing words out there without any context. It's just any kind of decision-making scenario where the results are dependent on the decisions of other people, right? And when you see that dynamic, which is everywhere, and you may have seen the Russell Crowe movie, A Beautiful Mind.

40:31That was kind of about Nash, right? Who did a lot of work in this really fascinating mathematical field. Anyway, when you get to game theoretical kind of constructs, which are very rampant out there, and you play them through, you can actually almost mathematically derive the outcome. And in these scenarios with moral hazards and all the rest of it, what does the game theory tell you if I'm a corporate leader? It says heads I win, tails I don't lose too much. Moreover, if I do the right thing because I feel as though that's appropriate, my competitors won't. Because remember, this is a construct where it's the decision of others that impact me.

41:16So now I'm losing market share. Now I can say to my board and to my shareholders, yeah, we're not doing that because we don't think it's responsible and correct. It's like, yeah, but you're bleeding market share. Our revenues are falling. These guys over here, they're not going to admit to doing anything wrong. All I know is I'm losing money. So what do you – every incentive points you into that direction. And it's – again, at a systems level, you can see it as clear as day. And so we need to have policies that factor in that dynamic, that focus on the incentives. It's not about – my worry here is I'll be misconstrued as saying we must just – I'm some kind of socialist that just needs to make anything that's got a tint of capitalism, just they must suffer.

42:02and I think, by the way, I think it's a very understandable view for those that are trying to make sense of the world without having thought too deeply about it or read much history. I mean, I probably at 21, that's that stinky socialist outside the trade station handing out the Green Left Wheat thing, you know, and we all are, right? Well, I was, but you learn, you grow, you evolve and you start realising that while it sounds good in theory, it just doesn't work and there are there are processes and there are things that have shown to have, there's no perfect system for one, but there are systems that are better than others.

42:37And I just think we can improve things a hell of a lot. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

42:49I just want to really just kind of quickly, I think we kind of went off on a bit of a tangent a little bit. Only a 40 minute one. I think you're ending the same place I was starting, but we disagreed on the way through. And I just kind of wanted to bring that back because I'm not for a second saying there should be no consequences for the bank manager who screws up to save the jobs or the casino operator who, like that's absolutely not my view. My view is we should take away the Star's license, by the way, and put another entity in to run the casino and keep those jobs. So there's ways of doing it.

43:18That's almost what I mean about the nuance. The blanket failure is important to capitalism is absolutely true, but it's how we manage, frankly the phase when they happen but also how we stop them from happening with sensible regulation legislation punishments and those things that go with it that don't require the the everything's okay until everything blows up then we say well you deserve that that's what happens in these things let's all reset there there is a there is a middle path which is pragmatically how do we maximize the benefits of capitalism and at the same time benefit minimize the cost that's that's kind of i mean that's government 101 right we're a capitalist society Why do we have a social safety net?

43:54Why do we have Medicare? These things are all, hey, the system works, but it doesn't work perfectly. We can make some changes to harness the power of it without necessarily, you know, we can afford to defray the costs or share the costs or share the burden of those costs. That's all I'm trying to say. That middle ground point is it's not success or failure. It's, okay, success or, you know, the shareholders may lose out because they're taking the capital risk. The managers may have to go to jail. they'll have a monthly money taken away and we're going to try and save as many of those jobs as we can, I think we're clever enough and smart enough and thoughtful enough to, and frankly caring enough, to find that place rather than needing it to be.

44:32Everyone gets off scot-free just in case it's a downside for a worker. Or on the other hand, everyone's going to lose their jobs and hope you can find some new ones. Terribly sorry. That's just the way these things go. Particularly, you know, the answer's a good example. I'm not suggesting for a second government should step in for every corporate failure. But I do think there is some element of if and where we can prevent some of those things. Banking larges is just such an easy one, right? Because it's so easy to regulate the banks. We know they're systemically important. We know that the - We know they're amoral buggers.

45:00Right, right. Exactly. And those things are both true, right? So you say, okay, well, this is - You've literally just defined the phrase necessary evil, right? So in that context, what do you do? That's how you kind of net that out, you know? Yeah. Yep, yep. And the other point I would make here, It's not a retrospective top-down solution. Yes. It's a forward-thinking systems design solution is the way I would put it. Yes, exactly, exactly. And not – I should be careful with the term solution because there is no perfect solution, but at least try and engineer a system where you try and anticipate what could go wrong and make sure that the incentives align towards a desirable outcome.

45:46rather than waiting for things to go bad. And then some politician coming in, giving some populist solution that actually just doesn't really help at all anyway. And then we muddle on until the next one. And there's plenty of, and like we go for the big obvious scandals. Meanwhile, there's like, you know, five dozen other ones in mid cap and small cap land. It's just like, well, just keep your head down for a second. Let this blow over and then let the party continue, which is often what happens as well. You know, speak to Rod Sims, right? The A triple C is like, gosh, we really just have to pick our battles here because there is so much out there that we can't go for.

46:22So we go for the big ones. We go for the obvious ones. We go for them so we can make an example of them where we can be successful. But, you know, if there was better resourcing, there's all kinds of things that they could go after. But I would also say that, again, my point is that's kind of a counterproductive way to sort of do it. It's just like have clearer things in place beforehand. You know, was it some of these nonsensical shareholder demands where it's just like we want independent directors that don't have too much association with the company. You know, as if like having someone in the board with a huge number of shares is a bad thing.

47:11Something terrible. Exactly, that's right. You know, or I'm not articulating it well, but it's just sort of like Blind Freddy can see that this is actually a wonderful thing. It's just like, I mean, Teleb wrote a book on it called Skin in the Game. I'm not a great fan of him for a lot of reasons, but I think he's a great thinker and he's got a lot of really good books. Yeah, that's right. And it's just like, again, it's one of those things that when you understand it, it's just like you put skin in the game, you change the outcomes dramatically, right? In both directions too. The skin goes both ways.

47:40You get the upside, you lose that. after you get the downside, your wealth goes away. Yeah, I've said for many years, mate, all corporate bonuses or incentives to me would be spread over at least five years from the date it's earned and they would be contingent on the subsequent results. So you get a million-dollar bonus, well, guess what? You're going to get$200 ,000 over the next five years, each of those five years, if in that year the return on investment or the ROE or whatever metric you use is going in the right direction. not only does it mean you can't just front load this year and screw next year, you've also got to think carefully about who you're going to employ, who the successor is, how the culture's set up.

48:18Isn't it? Like it's really not that hard. And this is where I, you know, this is a massive tangent. It takes me back to the financial advice reforms, right? The poor financial planners who are still doing the job have to produce these 80-page statements of advice, right? And risk profile. And so what happened was, and this is unfortunately typical government, I don't know, I say that in a lowercase g, not the current government or the previous one, just governments in general. You start with an issue which is, hey, financial planners are giving people bad advice because they've got conflicted remuneration.

48:48Okay. So what we're going to do is we're going to put up rules and regulations and statements of advice and forms and disclosures. People are going to sign stuff and we'll check them. It's like, well, but couldn't you have just removed the conflicted remuneration? I don't know. What we're going to do is we're going to... So this entire bureaucratic apparatus created around the idea of conflicted remuneration, instead of just saying, actually, guess what? You know what? If this is a one rule, this is a one sentence law. From this point forward, no financial planner or the organisation for which they work or are related to can accept money from anyone except the client.

49:20Full stop, press send. That's it. The whole problem goes away. And yet, I say poor planners, they're making a lot of money and some of them are dodgy, but most aren't. They are literally spending hours and hours and hours creating these statements of advice to tick the boxes so that they can convince the government that any remuneration they're getting isn't conflicted because there's an X, Y, and Z to prove that it's not. Rather than saying, this is stupid, take the money away. It is just, honestly, it's a one-sentence law. I mean, I'm being a little bit flippant, but not much. Not more than that.

49:51Take that away, the whole problem goes away. And yet we've got these compliance issues, we've got the bloody, you know, it's the same as the old, the financial planners go spend four years at uni. What for? Just so we can say they're qualified, yeah. Do they learn much? Are they going to be better planners? Are there conflicts any less? No, they've got a degree. I'm not against degrees for financial planners, but it's also like, tell me exactly what you're solving here. And all they've done is bureaucratically said, let's create some hurdles and hoops, jump through, rather than actually, you know.

50:17And an added revenue stream for the universities. Rather than working on the problem itself, which is it's the conflict of remuneration, guys. That's the problem, not how you deal with it. It's so obvious. That's the problem. And so to your point about the independent directors and directors, it's like that's, you know, what gets measured gets done or what you're paid for gets done. That's what it comes down to. Mate, so I think the conclusion from this conversation is you and I need to be put in charge of Australia. No, no, no, the world. And I think we'll fix it in six, 12 months and we'll just knock it into shape.

50:53I have said, not even kidding, I would need six months as treasurer and that's all I'd get because no one would ever vote for me again. Some of this stuff is just not hard. Like it's really, really, really... You'd be super unpopular. Of course, yeah. Because everybody who gets their little bit wants their little bit. Now, why is there a diesel fuel rebate? Why is there a self-education deduction? I mean, it's just the stuff that comes with all this crap. I've said before, I've said in the financial planning rules, 95 % of us should not be able to benefit from financial advice by more than the cost of that advice.

51:25Yes. It shouldn't be possible. If you were writing the laws, the fact that we need so many financial planners and accountants is because the law is so stupidly complex because there's a transition to retirement pension and there's a work-from-home deduction and there's a diesel fuel rebate and there's a concessional contribution catch up and there's a whatever. And that's, I mean, we're not personal financial advisor. I'm a general financial advisor. I do this. I give one too many advice, buy the stock or don't. I don't say you personally should do this. So I'm not even in this space. But all that stuff, I should be able to go.

51:54I've actually got to the planner and say, mate, I'll give you a thousand bucks for a financial planning consultation. And 95 % of the time, the planner should say, I'm sorry, I can't earn you more than that. You're wasting your money if you come and see me. That should be the, there is no excuse for the law to be any more complex than that. Except that every time someone's come and knocked on a polly's door and said, I would like this, please, and I'll vote for you. I would like this, please, and I'll donate to you. If you do this, the punters will probably like you. Take all that away. It's only six months.

52:21Rip the whole thing. I know it sounds, I hate the whole, too much red tape. But it's just the tax law is so stupidly complex. One page financial advice. Buy an ETF. Put 10 % of your wage into an ETF. Do that every month for the rest of your life. That's it. That's literally it. Too many stouts in the troughs and vested interest for that to ever happen. And you kind of go, okay, well, that's what won't change. That's also why, once you've done that, every deduction or boondogger you take away is going to annoy somebody. So by the time you finish, two-thirds of the people hate your guts because you've taken something away from them.

52:53But it's just like, it's literally, it's really not hard. It's complete lack of will, not ability or understanding. I'm just thinking we started with GDP. We did. And we ended up here. Very long time ago. I did ask you why you thought the market kind of referred to anyway. Why is the market going so well, despite the fact that GDP is in the toilet? Do you know what my answer is? Tell me. I think the money's broken. I think what happened – and it's not a Bitcoin thing. It's not. It's not. But when – it's a consequence of inflation, right? So again, it's so hard. It's so hard to see because it's like trying an English speaker to not think in English.

53:39It's how you operate and how we have operated since we first learned that to get the ice cream and the toy I need, that dollar. It's so entrenched, right? But it's just a measuring stick, right? It's like trying to build a house where the length of a meter changes on a year-by-year basis. It's going to make it very, very difficult to do. So a genuine answer here, I think the problems of excessive money creation and then the inevitable inflation that results from that, those that have money rationally and intelligently seek to protect it. And so you take something that's increasingly less scarce, i.e.

54:22the actual money, and you put it into things that are scarce, like properties in Double Bay or properties in the wider Sydney Basin or Melbourne or Brisbane, or, you know, like they are scarcer or there's only many CSL shares or Woolies shares. And so money, or let me reframe it, not money, value seeks shelter and assets like property and shares are pretty good areas to seek that shelter. You would have to have, I don't think you'll 100 % agree with me here. You would have to have your head read if you as any kind of person with any kind of wealth said, I'm just going to keep it all in cash under a mattress.

55:04Yeah. Or I'm going to leave it in a business account at the CBA that pays me zero interest. Look it up. I can tell you first then. Business transaction accounts do not pay interest. There is nothing bitter on Andrew's coins at all. Buggers. I would change except when I looked around like they're all the same. Those are the options, exactly. And I'm sure there are some better ones out there. But my point being is that, of course, because even when things are as we desire them to be, that is still making me definitionally 2 % to 3 % poorer each year. So I'm not going to store my wealth in these tokens.

55:45tokens. I'm going to store them in something that is going to, at the very least, maintain my purchasing power. Historically, property has been excellent at that. The share market has been excellent at that, juiced by a little bit of productivity growth and sensible value creation through capital expenditure and allocation. And that's what businesses do. They create value. right so so that's my answer i think you've gone from a world where capital allocators are looking for let me start again the the rate of return for the hurt let me let me start a third time live podcasting there's something called a hurdle rate and it's just a fancy way of saying i need a certain certainty of, of a certain return before I'm going to allocate my money there.

56:39Like why, why I'm not going to do it otherwise. Right now in a benign inflation environment and in an environment where I can reasonably expect the future to be better than the past, you know, I'll, I'll, I'll go out there and I'll happily invest in the share market. If I think I can, on average, get 8 % total return over, over a long period of time, nine, 10%, maybe 11 % if I'm good, you know, that, that makes a lot of sense in an inflationary environment where I can't even store it in debt now because the, the debt's looking really, when I say debt, I mean, government bonds, because who wants to hold us treasuries that are just being paid back in printed dollars.

57:19Right. So, so you, so you seek out, you seek out these other assets and your hurdle rate drops because now I made the point with Woolies before you and I have looked at that for years. I think you've been very validated in that view, by the way. It's just like, great company, 100%. Does it make any sense on a valuation perspective? No, it didn't. And it didn't make any sense because it's like, well, even if they just kind of continue, you extrapolate their historic growth forward, I'm still only getting a four, five, 6 % return with dividends, right? And you think, why does that make sense? Well, it makes sense when on a risk-adjusted basis, that's better than the alternative.

57:56And in fact, I think you can apply this to property as well. There's a lot of foreign money that comes into the country and it's like, and you go, why are they buying this property? It's like, it's a negative yield. It makes no sense. In fact, in a lot of cases, there's not even, I've got to be careful with my words here, not necessarily a lot, but in some cases, there's not even a tenant in there. So how does that make sense? Until you reframe it and go, this isn't about a return. This is about a preservation of capital. I'm not trying to get a return. I just want to protect my money. And I think that is the switch that you see here, writ large, across these major asset classes.

58:35And again, it happens towards the end of every debt cycle. Historically, it was gold way back in the day. It was this lump of shiny metal. Why? Because it's like, well, not easy to make any more of it. It's really easy to make more dollars. I'm going to hold this rock, right? Am I going to get a real return? No, it doesn't even have a yield. It doesn't even have cashflow, but there's only a certain amount of it. And at least it's something that I can store my value in, even if I don't get a return. So yeah, I'll buy that dog box in the sky for$2 million. Probably won't make me much of a return in real terms, but at least more or less five, 10 years down the track, my purchasing power might more or less be maintained And you know what?

59:19That's good enough because the alternative is just having my purchasing power completely eroded. So I fundamentally disagree, actually. Oh, hit me. Well, I should be careful here. I'm less certain that you're right. It's probably a better way to put it. Oh, I'm not certain I'm right either, by the way. Only because I think you and I are unusual people and there is a decent number of us unusual people, but not that many of us to move the dial that much. I think it would be very, very reasonable for someone to have gone through exactly the thought process you identified and invest accordingly. You've had, I don't know how many landlords over the past 10 or 15 years.

59:57I would suspect that none of those, or maybe one, thinks the way you just did. And so I don't know that you are wrong, that people should think that way, or could maybe, if you're listening, maybe you want to think that way. I just don't honestly think there is enough genuine, this, then this, then this, then this thinking to get people to that point where it's like, that's why they're doing what they're doing. Now, maybe the result is subconsciously the same or even the motivation is maybe subconsciously the same if I'm generous. I just don't reckon there's enough people going, you know what?

1:00:30I used to buy shares because I thought I was going to go up and I was going to make some money. Now I'm going to do it to preserve my money because of inflation. I don't think anyone, I don't know. Have you ever had anyone come to you and say, so Andrew, I bought property to preserve my purchasing power? Like anybody ever or shares? I just don't, I don't honestly think. No, no. But you're, no, so you're a very good point. but what they do think it goes up, number go up, NGU, right? But that's an entirely different thing to what you just put out. But it's a nominal thing and it's a relative thing.

1:00:54So it's kind of like, I've got to put my money somewhere. I've got some money. I've got to put it somewhere. This number is going up a lot. I think that'll go up. Now, I would sort of say if your property has gone up 20 % over the last four years, you've actually gone sideways in real terms. Now, so no one's making that connection. Well, it's unfair. Most people aren't making that. Some people aren't making that connection. But they are seeing that nominal value increase. So it's sort of – it manifests in the same way even though – so you're right. No one's got fourth order thinking on this kind of stuff.

1:01:28Yes. But they are thinking number go up. And it just turns out that if you happen to have that thing where the number has gone up, your purchasing power has been protected. Correct. Yeah, but I think that's a very different thing because it's causally not why people are doing it. And it could have been the case that number wouldn't have gone up it went up without inflation going up anyway i just i just think the i think the i don't know the dynamics are actually a function of what you're talking about from a behavioral perspective uh the number has gone up the number has gone up in part because inflation has gone up prices gone up i think that's absolutely true uh but again if you look at so for example i'll just just pull up some numbers for sheer fun of it um the the i use the sp500 pe because i figure i'm using um s p capital iq sorry just boring data but just because um i feel the peas are probably more or useful using the US market rather than ours.

1:02:14The data's not always as good as you well know. Oh, my gosh. Not from S &P necessarily, but from general. The P of the S &P 500 is about what it was in 2018 and back in 2008. Now, there are different circumstances and scenarios, and we know what happened after both those periods and all that kind of stuff. In fact, the P goes up in 2009 because share prices fall so far, which, again, feels counterintuitive, but because the share prices fell so hard, earnings didn't fall as fast. PE goes up rather than down. So it's all over the place. It's been higher. It was massively higher back in middle of 2020, massively lower at the beginning of 2020 for reasons that we all know well and truly about.

1:02:50And again, why did it go higher? Because share prices fell and all that kind of stuff. I just, so I would - But they're not inflation. I've got to think that through. That's a PE. So both earnings and - The earnings component, right? Like, so the earnings may have gone up to normalise that PE, but the earnings are in dollars that are in nominal terms. But so are the earnings, right? So it's only a problem if the earnings don't manage to grow by the rate of inflation. You have to adjust. And look, I'm not making the – the worst thing I ever want anyone to do, including me, is use a chart and say, the chart did this, therefore this is true.

1:03:26I had someone try and send me a chart that was 18 months worth of data and try to prove some point that therefore this was going to happen next. Like, dude, that's 18 months worth of data. But my only point is PEs have kind of, you know, it's higher, the PEs is higher now than most of the last 20 years. So, like, first up. Oh, that proves my point. That's what I'm saying. You're potentially right. Except that it's been higher at different times during that period than it is now. So both are true. And I guess I'm. Draw a trend line, I guess, is the best way to do it, maybe. I would never do that.

1:03:54That's almost my point. Like, I don't think, well, I don't, there's no straight line that suggests that the PEs have followed the money flow, for example, money creation, particularly in the US where QE has been absolutely turbocharged for, when did that start? Was it end of 2009? In honest, yeah, absolutely it did. So anyway, I guess my, so look, why is ship processing going on? I think there's a couple of things going on. I think the reality is that interest rates remain lower than long-term averages, even though they've gone up a lot over the past few years. And so we as an investment community, you talk about the hurdle rate.

1:04:30The only thing we shouldn't talk about because it's really boring at the end of a podcast is the discount rate. It's basically just, what do you do with the maths? The lower the alternative earnings, it's usually treasury bonds and this is really boring real fast. But basically, as you said, mate, if you can get X percent in bonds, in government bonds that are theoretically at least completely safe, then you need meaningful more to go and do something else. So interest rates have gone up, absolutely, but they're still much lower than over any time up until about 15 years ago and on average still lower than most of that period.

1:05:02So I think you've got, what I think is interesting is you talk about the haves and the have-nots. My suspicion is that while the economy is flatlining, corporate profits have actually been pretty resilient. And so you've kind of got two things going on. I think there's, you're right about the value of money. So I 100 % agree. You've got more money chasing the same number of things that must push prices up. That's inflation 101. And the same is true of lemons or tradesmen or shares. If there's a set number of them and there's more money chasing the price will go up so i think you're million percent right not necessarily about the behavioral choices of why but the dynamics that flow from both those arguments which is simply just more chasing the same means higher prices i think you've got profits that continue to climb despite what's happening economically and by the way my so what is it may not last if profits don't stay high if the economy does falter so be mindful of that um so i think you've got profits growing you've got more money chasing the same number of shares and you've got to some degree that question of relative valuation and it's still pretty attractive relative to most of the past um we talk about the you know 90s interest rates and debt burdens you mentioned the debt burden earlier we all know famously that mortgage rates went to 17 you're paying 4 now and on Matt's bigger debt I'm not making that comparison but I am making the comparison that if you're going to buy shares you know I when I first started saving, I used to get 7 % in a passbook account with the State Building Society of New South Wales.

1:06:24That's how old I am. It was a physical passbook. You got 7 or 8%. I thought, this saving thing is great. I'm sure that's largely why I'm doing this job, frankly. It was like, oh my God, money makes money. That's amazing. I want more of that. But the hurdle, so why would you buy shares? If you could get 7 % from the State Building Society, why take the risk of buying any shares, let alone riskier shares? Right now, in a passbook, you might get half a percent, one percent, one and a half percent if you're lucky. So it makes other things more attractive. So I think there is a – despite the inflationary environment, and partly because of it, the rates you can get elsewhere are still relatively low, and it does make shares and, frankly, property more attractive in relative and absolute terms because inflation is so high.

1:07:05So they're my thoughts. No, no, I don't think we're a million miles away. One wrinkle – Please. Well, I'm shooting from the hip here. I tried to find it while you were speaking. I couldn't though. But one of the interesting dynamics in recent years has been when you look at the – you talk about the S &P 500. So one of the things that you notice is that if you take the Magnificent 7 out of that – Yes, yes, yes. Thank you. It's a dog's breakfast. Thank you. That was the only thing I was going to mention actually. Go on. Yeah. Yeah, which potentially explains – so again, which I often love to bring up with this aggregate data, be it economic or corporate or whatever.

1:07:47Yes, yes. You lose a lot of detail. And so while what you're saying is true, I do wonder that if you were to tease that apart, just in the same way that the economy is not that bad in aggregate but some people have never had it worse and some people have never had it better. You've got in America particularly – and actually not too different here, I don't think – where all of the heavy lifting is being done by the NVIDIAs, the Apples, the big power. Every other company is struggling. And if you took those seven companies, they just went for whatever reason out of business, then it's a disaster.

1:08:23It's a bear market. It's a recession. It's all of those kinds of things. Not only that, those companies' share prices are growing faster than their earnings. So we're talking about growing PE. A large part of actually the growing PE is actually not market, broad market. It's not even broad market multiples. It's just, I'm going to pay a squillion dollars for NVIDIA because it's NVIDIA. It's like, that doesn't, I mean, maybe it's worth it, right? I'm not going to speculate on the future of Nvidia, but you look at those numbers and go, well, that's what people are paying. The PE may well come down through, for everything else we just talked about, it may just be investors are getting stupid excited about seven companies.

1:08:53That might be the entire description. And that probably is why, frankly, also, too, think about why people are more excited about it, because unless you hold those companies, you're not feeling the joy that everyone else is feeling when it comes to this. We'll wrap this up, but I want to share really quickly. some data. CompSec's got to, if you never get the right part of their site, I'm just going to do this live as we talk. They've got a little heat map, they call it, red and green in terms of what things are doing. Over the past 12 months, I'm going to, just for fun, let's play this game. What do you reckon is the best performing sector on the ASX?

1:09:26The last 12 months? Yep. Sorry, very unfair, but just for fun. You know, when everyone, anytime someone asks you a question like that, you know it's going to be the unexpected answer. So I'm tempted to guess the unexpected answer. Maybe it's not. Well, I don't know. Before you guess, I'm not trying to trick you. Let me at least give you that. There's no trick here. I don't know if you guessed the answer or not, but there's no... Is it technology? It is technology. Well done. Okay. So IT is up 29 % over the past year, right? Which is extraordinary. Now for comparison, I'm doing this literally live.

1:10:05the All Lords over the past year is up 10%. So IT has tripled the return of the All Lords. We reckon the worst performing sector is. This is harder. Commodities? Yeah, energy. Down at 7%. So again, you say, well, you know, and this is where your point of the mechanism is really important, right? We say, well, obviously shares are all up because of X, Y, Z. I'm saying inflation, you're saying money, I'm saying, you know, whatever. They're not. They're not all up. So let me do a quick run through. IT up 30%. Financials up 25%. Consumer discretionary stocks up 20%. And what's going on there? That's because I was down so far because people, again, as they always do, fore-ran or front-ran, the downturn they expected, and now they're front-running the recovery even though the downturn hasn't finally hit.

1:10:54Real estate up 20%. Consumer discretionary I did already. It goes down from there. Communication services down 3%, largely just Telstra. and consumer staples down 5.6%. Again, coming up for high, so the discretionary staples doing the reverse things. So yeah, I think you're right, man. I think this is where we also kind of say what's happening with the market. It's really important to say, actually, the market is, as we've said many, many times, just the roll-up of everything's happening underneath the surface and trying to have one reason, one definition, one whatever, is a really, really tough one.

1:11:26I do think, though, I will go back to the fact, I think why are people more excited about it? They haven't got the money. They just don't have the money. You mentioned the savings rate. Why rates have taken so long to have an impact is because the savings rate coming out of COVID was 20%, which goes to your point about whether it's money creation or government largesse in terms of more debt. It's effectively the same thing in the short term, more demand being thrown into the economy. We were saving 20 % of our incomes in 2020, 21. It's taken three years to get us down to 0.9 % was the GDP number that came out this week.

1:11:55And why is the economy only now stalling? Why is the RBA finally having an impact? because they had to burn through those savings. That was exactly their point because you can't change behaviours until you make people change what they're doing. It doesn't have an impact. Now, government should have done more, as we've said many times, but I honestly think that's why we're waited to now. And for all of the RBAs too slow, they probably were. Too late, they probably were. But they had a lot of dry powder to try and burn up before they got to actually having an impact. Anyway, mate, I reckon we've probably done well and truly enough of that to finish one podcast.

1:12:30Maybe that's the point. Maybe the point is because the market has been so all over the place, and I say the point like it's a new revelation, if you listen to this podcast in any one of the last 18 million episodes we've done, we're going to come back to actually be a bottom-up investor. For all the things that could be happening, for all the reasons they might be happening, for all the possible implications, I won't speak on your behalf, Ram, but I'm reasonably sure I know your view. Had you said, these things are going to happen, so I'm going to buy energy stocks, you're down 7%, right? So I think the market's up 10 and IT's up 30.

1:13:02But I thought, and similarly, if you'd expected terrible things, you might have been right on energy but wrong on IT or the market overall. So maybe, and I say maybe almost in quotes, because I think that is just kind of the point, right, for all of the, and why, you know, it's funny. We spend a lot of time talking about macro. I think it's important because I think understanding the world matters, and I think it matters for tourism. It matters as an investor to think about the world we're operating in. I hope if you want to make money it matters a hell of a lot right and I hope to some degree too I will I will put us on a not a pedestal but I will put us on a a higher plane and say part of what we actually are trying to do is help uncover explain illustrate open some eyes not in a kind of evangelistic kind of way just in like a this is the way things work and Ram and I don't have all the answers we don't even have the same answers but that idea of just kind of like these are important issues and they're also important and we talk about banks for other things it's important for society not just for stocks, right?

1:13:59And I guess some people want us to finance. I get unfollowed every now and again on Twitter because someone says, I just followed you for the finance. If you don't do enough of that, you do other things. I don't want to follow you. It's like, that's cool. But I'm not just that person. And if that, well, if you're still listening to the podcast now, you know that we're not those people. But it kind of matters, right? Yes, it matters as an investor. I don't know. I said before, but I reckon it matters more as a person and as someone who kind of wants to have a functioning society that actually looks after people and leaves things better than where we started.

1:14:24That's kind of part of what we're trying to do with this podcast, I suppose. Yeah. I mean, God, I've made so many dumb mistakes over the years. I'm making a dozen of them right now, I'm sure, but that will become apparent in the future years. So, you know, the great thing about humans is you don't have to learn everything yourself. You can sort of learn from the mistakes of others. And I won't speak for you, but God, I've done some dumb things. Oh, don't speak for me, by all means. I mean, interesting. I remember we've talked about it a lot. Like 2022 was a shocker for me. My portfolio was down 30 % from the high.

1:15:01The last 12 months, I'm up 25%. I'm not saying that to brag, right? Like it's kind of, I'm not, I'm down from the peak of where my portfolio was. It's all public, right? Strawman.com forward slash strawman. You'll see my strawman portfolio. It's a pretty good representation of my real one. And it doesn't have Bitcoin, sadly. so it would be better. But I can't get that. Speaking of data providers, anyway. The point of that is, I guess, with this kind of stuff is that I've had this lesson revealed again and again and again and again. When you look at people who have managed to get a decent long-term track record, it is always punctuated by these brutal periods of underperformance.

1:15:50And then these periods of you're a genius and then you're an idiot. and you're a genius and you're an idiot. And it's really hard. It really will mess with you. And it also is punctuated by lots and lots of dumb mistakes and will always be thus. But hopefully, I guess, in all of that, you can still see the worth of doing that. It's been a year, well, it's been a more than 14 % compound research since 2017. I'm really proud of it, right? Well done. You know, but it could have been a lot better if I really dodged some dumb, dumb mistakes. But that's the kind of point. The other point I wanted to make too is that history doesn't repeat, but it does rhyme to quote, I think it was Mark Twain or it's attributed to him anyway.

1:16:31Do you remember the nifty 50? Yep. I mean, you don't remember it because you weren't alive then, but you know of it. That was a point in time where the US market was held up by 50 industrial conglomerates, you know, and everything else was doing really, really badly. And then that led us into some of the exuberance and hype of the late 60s, early 70s, and then we had that long period of like the lost decade. It's why, again, I'm not saying this anything other than pure speculation and a little bit of fun, but I've said before I wouldn't be surprised if the next 10 years are below average in terms of market performance for no other reason than to mean revert back to what the longer term average sort of has been there.

1:17:20And what you do with that is just, just to come back to your point, is do that bottom-up approach. Don't focus too much. Pay attention to all this other kind of stuff. But really, investing is simple but not easy, to quote Buffett. Good companies, sensible prices, help for the long term. Roll with the punches. Accept your medicine when you need to take it. Learn the lesson. Get over yourself. You don't know everything. You don't know everything. right no matter how firm your views are um and but a little bit of humility a little bit of patience and a little bit of just doing the simple when everyone else is trying to do the complex take you a long long way there you go lovely way i reckon to finish off today's very long podcast hopefully you've enjoyed it hopefully you've had some fun uh will you come back on sunday for us yeah hopefully we've got some good questions looking we have some excellent questions we're gonna hope to get a whole lot more too until then enjoy the first half of your weekend and full on Cheers.

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