How does an investor respond to ongoing inflation? May 19, 2023

0:07Welcome to Motley Fool Money, the podcast that promises not to go into default. I'm Scott Phillips from The Motley Fool. He is Andrew Page from strawman.com. From doesn't even really justify it, does it, Andrew? You're not just from. You are strawman. You are the brains behind it. Strawman is your baby. This is the passion of your life. This is the thing you always wanted to do. You left The Motley Fool, and we still hate you for it. You created this thing called strawman. You're now a multi-trillionaire. What is the best way to describe your life and strawman these days? Mate, you are... Good morning, by the way.

0:42you are you are the king of hyperbole i will say it's just it's brilliant the king of wishful thinking thank you mate i like to i like to kind of keep it fresh keep it real keep it new sure you are from did you happen to see the um the uh description of last week's podcast well i i didn't until someone screenshotted it and tweeted it i thought you wouldn't have seen it i thought i thought well played was my first response what was the what was the thing that It was well played. So in the show notes summary, it started off with what is straw man? Is that there every week? Or am I finding out about this?

1:19I don't know if you've literally never checked. No, because one of the listeners actually, remember it was one of the questions we had from one of our listeners was firstly, what is straw man? I thought, well, the listener asked the question. It's a genuine question from a genuine listener. Therefore, I can put it on the top of the show notes, which I then did just for my own amusement. And hopefully the amusement of at least a couple other people. And one person at least did hit us up and say, well done. So I did. He's a quality troll, my friend. Well played. I can only tip my hat. On Twitter.

1:43Thank you. Well played. A bit of fun. A bit of fun. By the way, while we're here, if you are going to jump on the socials, we would love you to follow us. So let's do this now. Fool, sorry, again. I am TMF Scott P on Twitter and Insta. At The Motley Fool AU is our corporate account. Andrew is at Sage underscore Simeon and at Strawman Invest exclusively on Elon's health site. you can get me also on facebook facebook.com forward slash scott phillips money or we'll get to this later but if you have a mailbag question for sunday or for a well not for this sunday it'll be recorded by then but if you have a question for us for any sunday and by the way i'm having some holidays soon so really really keen to get many questions if we can we'll try and get some uh we always try and get the episodes done regardless whether we're here or not so please do that uh hit us up uh info at fool.com.au is the email address as well uh so i guess i guess all that's left to ask is what what is strongman we're a private online investment club i would never have known you go um a big week in finance this week uh we've had some conference presentations from glenn stevens the former rba governor who rarely speaks these days um there are continued concerns about u.s inflation but everything new is old again everything old is new again because when now again because politicians are just mad and obviously hate us talking again about the u.s debt ceiling, this ridiculous administrative debacle that is there in place because someone thought it was a clever political tool and neither party in opposition is prepared to get rid of it because they can whack the government of the day over it.

3:16And so it's just this charade, this circus that we keep going through. Well, it was actually, it was like, no, I'll be a bit fairer than that. I think it was introduced way back in the day to sort of keep a check on treasury to make sure that they just can't spend willy nilly. There's got to be some constraints. Yes, you can spend more than this or borrow more than this, but it needs to be approved by a separate arm of government. I'm generally a fan of not concentrating too much power in any one area, but you are 100 % right. It has become a political theatre. I don't mind that defence, mate.

3:52It's probably fair, except that anyone with a year eight, well, whatever grade it was back then, education would know that setting a nominal debt ceiling in a growing economy, let alone inflation, inflation aside, a growing economy generally, a growing budget, I don't think any of them really thought, you know what, this will be enough and it won't be a problem. Maybe they were naive. Maybe I'll give them that. But if they'd said, look, it can't be more than 23 % of GDP or the budget deficit can't be more than X % of government spending or something, I would have given them some credit for it.

4:23Setting a nominal number and saying, you know, it needs to be 13 pounds and four shillings and tuppence. it's like well things were probably going to grow i don't know it's insane no you're right you're right the intent i guess the intent like so many it's the unintended consequences because the actual intent was was a good one yeah um you know what drives it screw it up it just drives me crazy we do this in so many different areas where we do it a certain way because we've just done it we've always done it that way like change it we can it's a human rule right yeah exactly We created it. We can change it.

4:56You know, and this is a classic example of that. Doesn't need to be. But anyway, it is what it is. It is what it is. And they're up against it. And so the long and short of it is they might not be able to pay their bills. They'll default on their debt. Can you imagine that? The world's reserve currency, the biggest economy in the world, just saying, you know, all that money that you lent us? We're just not going to pay you back. And by the way, all you government employees, which I'm going to forget the exact number, but it's a significant portion of the federal budget. You're not going to pay you from park rangers to bureaucrats there, you know, everything through the system.

5:35It's a big deal. Most of Washington DC is actually paid by the federal government because it's a special administrative centre. It's not a state, it's a district of Columbia. Literally, most of those are federal government funded, a bit like the ACT in part, actually. yeah um part of the act is the canberra kind of you know territory government the other part is the national capital authority um same same kind of approach let's let's just break it down before we come back to it so effectively what congress had said some point in the past is debt may not exceed x dollars i don't know what the current limit is doesn't really matter for our purposes quite a big number when if you're running a deficit budget and the stupid thing about this is you pass a budget and this is why it's political theater right when they passed the budget back in whenever they knew the sequence of laws every legislator knows that the net result of all of the spending we've just planned is that debt will increase and the maths was going to be simple years ago that here was the here was the trend here was the how is that it was going to net out maybe it wasn't exactly may 2023 maybe it was going to be due maybe it's going to be april maybe it's going to be august if you're really really lucky but it was going to be some in some in some way shape or form if you're running a deficit budget you're going to increase the amount of debt you have that was always going to hit a ceiling the self-imposed debt ceiling at that point the u.s government is not allowed to borrow more money to pay the deficit so they've got spending plans and revenue plans and like your wife with our credit card limit it's like well we have to kind of stop spending then or if the revenue maybe they get a little bit extra revenue coming in but you know effectively that's it the bank says you can't borrow any more money not only that here's the challenge not only does it mean you can't pay the workers as you've already highlighted but you can't pay the interest of some of your debt because you're relying on effectively and this is strange itself you're taking on more debt to pay the interest on the debt a little bit because the way that the sheer cash in cash out thing works and so that's that's how we get to this point that's why it's a risk of default it's not because the u.s um chooses not to pay the debt or the debt itself isn't being fork isn't being provided and it's not even they don't well some don't want to some do want to it's not the u.s isn't capable of paying the debt in any other way except that congress won't as you said let treasury actually pay those bills because it would go over this this paper number this this you know black ink on white paper number they've written down as well if it goes over that we can't pay the bills there is something kind of a bit bizarre about that made of you know we have the capacity to they've just said in a separate law the other laws all the other laws can buy and say spend all this money and this one law says yeah but don't which i think is also a bit i'm not even sure how that's even kind of internally consistent but it is what it is yeah um and here and here we go now let's get to the default bit because tell me or tell listeners why would it matter if the u.s for a period of time i assume not forever but i guess possible forever you know if the range of maybe congress never passes an increase to the debt ceiling and maybe this continues forever by definition but probably isn't uh so on the first of whatever month the interest payments are due you gotta pay your bondholders and the u.s says um andrew and and uh australian super and you know the calpers pension fund and everyone else you know how we were supposed to give you that that coupon that that that uh interest payment well we're not going to pay you yeah what what does that why does that matter why is it a big deal i mean it's obviously to some people it is a big deal but but kind of go through for us why it's a big deal mate it's a huge deal i mean it's it's i don't want to use the term existential and speaking of being hyperbolic but if you really want to get back to first principles here the whole damn system runs on trust it runs on trust that's all it is i trust that the u.s government will manage its economy pretty well and and that the money will be managed pretty well and i can transact in this i can store my wealth in this it's it's that's what that's what money does yeah and when that trust goes that means that for the u.s to borrow money in the future will be much more difficult it's like if i lend you a bunch of money you stop paying me back i just i'm going to be very reluctant to lend you any more next time yeah that's right and if i do lend you money it's going to be on much much worse terms i'm going to demand a much higher interest rate there is a reason that the argentinian peso isn't the global reserve currency No one trusts it.

9:48No one trusts it, right? And for good reason, because it just has, you know, hyperinflationary periods because they print money like all buggery. And so this is the core of what it's all about. Once that trust is broken, the US will find that it very rapidly accelerates probably what we're already in, which is a debt spiral, because the cost of borrowing will just go through the roof. and it will probably precipitate or catalyze a shift to some other form of international transaction settlement because it loses credibility at that point, which is why so many people are saying, look, at the end of the day, when all the song and dance is had, they'll just raise it.

10:34And they have to. They have to do it because it is so massive a thing. And that's why I'm firmly in the camp of they will do it, they won't default. And now I'm going to speak out the other side of my mouth, which is they absolutely will default. It's just that there's a difference between what you call a hard default and a soft default. It's like a hard landing and a soft landing, you know? So hard default is, as you say, we just don't pay you, right? That is very real. The other form of default, which they have to, because this is the choice, one of the two, right? The other default is, well, we'll just issue a bunch of bonds.

11:09The Federal Reserve will buy it with freshly printed money. We dilute the currency holders. And we default in that way. And so basically, we all lose purchasing power. That's what will happen. And politically, it's very, very, very difficult. Because on one hand, you would just say, guys, stop it. You're living beyond your means, pull back on spending or raise taxes. And that's just impossible. It's very doable, but it's politically impossible. So So it feels to me, I mean, this is the thing Stanley Druckenmiller is an investor I'm quite fond of. He's got an, Google him, he's got an incredible track record.

11:51Yes, yeah. Makes very substantial bets. Renowned for changing his mind rapidly. And in the 180, which a lot of people hate, I love it. I love the flexibility in his thinking. Anyway, he's made some big sort of statements recently on how bad things are. And the argument is it's just math, as the Americans say. We'd say it's math. But it's just math. And there's not an opinion in here. It's like you said before. They knew that the debt ceiling was going to be breached, not because there was any clairvoyance in there. Just do the math, right? You're spending more than you're taking in. There's a certain limit you're up against.

12:32It is as night follows day predictable. so this is this we are we are living through fascinating times and as we've said before there is really no nice path out of this so i don't know grab the popcorn folks it's going to be interesting except that uh we're not exactly bystanders right because whatever happens to the u.s happens to the world's economy yeah for better or worse yeah it's it's a serious i mean look there is i think with as investors we look at things like recessions and the rest of it and think wow that's really scary end of the world kind of stuff. And yet we tend to, when we do have them, they tend to be far less damaging than the, they tend to do far less damage than is made in the good times.

13:17And we all sort of continue on our way. So it's not like, you know, grab a shotgun and a packet of seeds and a tent and run for the hills. But it is, as we've often said, this whole economy thing, economics thing we talk about, it's just us as society interacting with each other. and we're just doing it in an increasingly fragile, unsustainable way. And someone has to pay the piper at the end of the day. It's unavoidable. And I think we'll all collectively suffer as a result. So we've gone a little bit away from the specific current default circumstance. Sorry, mate. No, no, no, no, no. I think it's a really good conversation.

13:57I want to bring it back to kind of the now or the what or the how because uh i i actually think this is my suspicion i look i'm i'm generally less um i was gonna say let's get something i'll put a word after this makes it sound like i was contrasting with you i'm not i i i'm generally pretty sanguine about most of these things for two reasons one is they'll sort it out because they need to sort it out because they need to sort it out i think blowing up the u.s government blowing up the you know the trust and full faith of the u.s government is not something that any lawmaker in the u.s is going to eventually do they'll argue they're playing they're playing it it's a it's a it's a you know it's a game of um of who blinks first you know the democrats trying to get the republicans to do it probably trying to get the democrats to do it they'll both push as far as i think they can and then they'll come to a deal so i don't think it's going to happen i would say that actually in the short term even if there was a technical default i am going to say to you i think nobody cares and nothing happens and the reason i say that is because as you say if argentina defaults you're like yeah it defaults for really really significantly like you know country blowing up hyperinflation like reasons that are that are untenable and unrecoverable in any sort of reasonable time frame if the u.s misses a debt payment on the 1st of july and pays it on the 14th of july everyone's like well that's really annoying guys like you idiots but it's you're still the u.s government and you know is it really going to cost any more to get the money probably not because it's not going to really default in sense of you are never ever ever getting paid we're just choosing not to pay you which you know people have done again some of the third world countries i think even russia did at one point just like we're not we're just we're going to refuse to admit that that debt exists we're going to just ignore and pretend it's not there that's the hard default you're talking about i think in this case i really really am not even slightly concerned i might be massively too um too phlegmatic about it but i really don't i just think you know whatever happens the u.s doesn't stop being the world's reserve currency as a result the u.s economy doesn't fail as a result people still look around and go well who else do i lend to maybe i get paid late but at least they get paid because it's the US so they you know I just I'm just not sure I'm really really not sure it matters and I think could it yes absolutely but if your job is to think probabilistically the chance of happening are small the chance of being even even slightly impactful over any medium term six months 12 months I think is exceedingly small is that just too optimistic to uh am I being too kind am I not worrying enough I think I think you're right in the short term but it's this is where it gets tricky as being specific with with predictions i mean it's sort of again the maths is the maths is the mass so i don't yeah i i it the the network effect of the u.s dollar is pretty strong right like i can't see it being replaced i agree with all of that it won't be replaced anytime soon but it directionally it is it is i think it's just a statement of fact to say it's it's unsustainable right so yeah you're right it's not like it just all ends on a given date and then it's mad max fury road kind of world but but exactly we're heading to we're driving towards a cliff at some point it just so and i do think it ultimately does is it just is it just treacle i mean the cliff suggests that there's something that blows up at some point i mean there are there are there are circumstances and there are consequences yeah i'm not sure if it's if a cliff is the right because i take your point there is there is real concern now i don't think it's as inevitable as you do but i think it's probably the most likely path and i think but i think we get through it by by running through treacle rather than hitting a cliff and things blowing up and breaking to the point of unrecognizable mad max fury road to your point no it'll be a it'll be a reset so again it's it it would look history is again a very useful um uh instructor here and we've seen this kind of over the long arc of history we've seen this story play out and generally what happens is it goes in one direction but it plays out over decades so in our day-to-day time frame it does feel as though well it's just not going to happen but again it does and it tends to be a a uh a gradually then suddenly kind of phenomenon like it just it until you sort of reach that point where enough people just really do lose enough faith and credibility in the system where it just things, things move very, very rapidly from there.

18:13And that could be 20 years out. So this is, this, this is, yeah, I'm not, I'm not moving all to gold or anything like that, but I feel as though the most likely scenario is unless there is some structural change in it is that we just basically have very high rates of inflation. And I'm not hyperinflation, hopefully, but that's, that's certainly possible, but you know, it's, going to be sort of like yeah up a single digit kind of i feel as though that's and and that's actually not that anyone would say the quiet part out loud that's kind of the desirable outcome here because how these things get fixed without without without without genuine breakages yeah that is how these things get resolved that's how they get resolved you know but again we all we all get made poorer as a result uh of it and unfortunately i just make the i know i make it all the time but I'll make it before.

19:02It's the least able to absorb the pain that cop it. Because generally, if you've got your money in good quality assets in inflationary periods, they tend to do pretty well. When I say do well, they go up in nominal terms. Like, oh, look how well I've done. In purchasing power terms, they just basically preserve the purchasing power, which is a great outcome in an inflationary environment, right? So if you've got a bit of money, you're sort of the upper 30, 40 % and you've got some of these assets, it's kind of like, it's a sucky in situation for all, but at least, at least as the, as the money is being inflated away, your assets sort of match up with that.

19:39Those that don't have assets, property, shares, everything else, they just, they just get pushed to the wall. And this is why, this is why generally speaking, when you look at very serious social and political upheavals, there's usually an economic reason for them yeah um uh you don't you don't revolt until what you stand to lose is more than what you stand to keep that's that's why the western society is very rarely do this because you know other than meaningful meaningful numbers of massively under what's the right word that's underclass that's a that's a horrible word but you know what i mean when there's large enough groups of people who are getting screwed they'll do it because they well what have i got to lose yeah it's when it's when the the what have i got to what have i got to lose group becomes large enough that's when you end up with those sort of revolts and that's and that's when you end up with populist leaders i mean this is what we are seeing everything we are seeing now is you can draw a direct line to the gfc right which you can draw a direct line to post.com stimulatory measures which you can draw a direct line from you know it just the history is it said is just one damn thing after another right and you can and you can sort of that's a fun line you can you can you can um trace it all back to this why we got trump it's why we got johnson you know it's this is this is where it becomes yeah pretty scary i think and this is this is why the debt ceiling shenanigans i think are actually more interesting this time if interesting is the right word scary is that in the past we've had the political theater and then cooler heads and rationality has sort of prevailed.

21:11But now you've got people in the, you know, Democrats or Republicans who are just happy to watch the world burn because there's some pretty serious ideologues within each camp here. And the world has just moved in that direction. So whereas there was a lot more bipartisanism in a former age, there's not now. And I could, I mean, it's not impossible that someone was like, look, this is going to be really bad news but me personally politically and my agenda my ideology this might actually serve a purpose and i can almost see that kind of stuff happening well i'm pretty depressed we finish it here no i'm kidding i yeah i mean i guess the question is there's the here's the hard part of it right so you can sort of talk about it i know intellectually or whatever but what do i actually do as an investor right well it's exactly exactly that's the hard that is the really hard question um with all of this so what what do you do i i think it well not an easy question right no but it also it also does depend a little bit on how you think it plays out or what you're prepared to prepare for that makes sense yeah um and you've kind of already answered the question i am someone who is shamelessly trying to create as much personal wealth for myself and my family as I can because when people say why do you invest the answer for me is freedom of choice and I can do things that I don't rely on a job for not that I don't love my job I do and I hope to be here for a very long time um but it gives me it gives me optionality gives me choice it gives me it gives me comfort and those things that that's why I invest right it's why I don't need to be a squillionaire um once I've once I've replaced my income I'm like well that's kind of that's enough you know and I'll doesn't mean I won't keep saving I'll probably hopefully give some more money away other things but you know that that's that's the first point and i guess why i say that is because i'm shamelessly doing both at the same time i have it frustrates some hopefully not too many i i go way outside my remit on twitter for example right i comment on on the um i would say politics because i tend not to but policy and not just you know policy on things that make me richer but genuine contributions hopefully that sounds a bit wanky but you know contributions to broader conversations where I think we can be a better society.

23:32Now, I'm doing both those things at the same time, which is why I would say, for example, I would benefit from stage three tax cuts. I don't think stage three tax cuts is a good idea. Those two things can be true. It's not often enough you see people who say, I would benefit from X, but it's bad. And I'm no saint, I'm no angel. I'm not giving, if I get the money, I'll probably invest it. I won't give it back. I'll take the tax cut. I think you said the same thing last week. But the reality is I think you can do both. So long answer to your question. So firstly, I continue to amass whatever capital I can by saving as much as I reasonably can without wrecking my quality of life because you've got to live while you do it.

24:09So I'm not one of those absolute frugal, living on toast so I can put an extra$1.50 in the investing account. But I'm not doing anything stupid either. So I'm trying to put money aside. I'm trying to grow my wealth. But where are you putting that money? Where are you putting that money? Well, I think that's... I've got to say to you, I don't invest with a lens of I need to be ready for the Armageddon scenario. So really honestly, I'm probably the wrong person to ask given where you finish your comment because I don't really, maybe blindly, maybe not. I don't think, yeah, the old saying, I think it's a Morgan Housel one, more money is lost preparing for the next crash than in the next crash.

24:47Peter Lynch. You know, Peter Lynch. I've heard Housel say that. I used it the other day. Nice. So honestly, that's why I am not trying to, I am trying to create wealth through productive assets. Generally speaking, thus far, that's been shares. Could it be property at some point? Yes, probably. I don't imagine myself ever buying cropland like Buffett or Bill Gates. Anything's possible. But, you know, so that's the honest answer, mate. I'm not preparing for hyperinflation. I'm not preparing specifically for a high inflation environment. I have always, though, tried to invest in businesses that have pricing power and benefit, not benefit from, can withstand higher inflation environments by definition.

25:25i think i wrote the other day mate you can you can the easiest way to maximize your upside is to pick the longest shot you can find that's going to pay you a squillion to one because if it's right you make a fortune if you if you said how do i what's what bet would maximize my upside is that one except if you then say well but on the range of probabilities if you look at expected value i what's the chance of that happening then you do something very different so the honest answer to you is i have not made a single investment based on a macro factor including but not not only what might happen with inflation what might happen with debt ceilings or defaults.

25:56I am buying great businesses that I think will be bigger and better in five, 10, 15 years. That's just literally what I do. So that's my approach. So it's not a direct answer to your question as to what do you do about this thing because I'm not as worried about the thing relative to the money I might, you know, if I can, we know money doubles every seven years, right? If you get 10 % a year, the rule is 72. Now if I can, maybe it's not 10 % a year, but you know what I mean. If it's 20 years away, well, okay, I can double and double and double again. then that's a pretty nice edge against what it becomes next, right?

26:26If I end up with eight times my money by then, well, I can afford for that to drop, but I've still got four times my money. So honestly, I think rather than, we're talking about preparing, not predicting, that's my answer. What's yours? Mine's actually remarkably similar. Yeah, I think that's an excellent answer. Back to the point of the productive enterprises, scarce quality assets just tend to be very resistant to inflation. So I don't invest, I don't wholesale shift my approach because of looming macro factors. But I, as you say, prepare, not predict. So it's just I'd like to, I mean, I've got some pretty spicy things in my portfolio.

27:02Let's be honest. Go into that why. But I generally think that is just always a lens that you look through. on top of that though I think a couple other comments I think there are a couple of features that you might want to be more biased towards if this is something that's worrying you I think very strong balance sheets are a must you know the companies that get wiped out or effectively wiped out just through dilution are those that just you know get wiped out because of their debt load or they can't service it, they need to raise cash, all these horrible things happen. And so I think that's a must.

27:48You want a business that, as you say, has a degree of sort of pricing power and reliability with cash flows, I think that's another very, very strong protection mechanism. I don't like the idea of, and this is, well, maybe it's not controversial isn't the right word, but I know it's going to rub a lot of people the wrong way. Go on. You hate that. You're sort of like who never wants to cause offense, which I like about you, mate. I was MC for the ASA, the Show and Shareholders Conference last week. Oh, nice. And gold came up there. And gold is the natural go-to during these sort of times. And you can buy physical gold.

28:28You can buy a gold ETF. You can buy a gold miner. You can get exposure in all kinds of different ways. But it feels as though that narrative's gaining a bit of traction. and I – you notice there's been a lot of takeover activity in the gold mining space recently too, which seems – it seems to me as though the trouble with that strategy – to your earlier point, if you're buying this gold company because you feel as though it's got good prospects, good cash flow, all that, fine, knock yourself out. If you've got a particular near-term macro worry and this is the way that you protect or cover yourself for that worry, I don't think it works too well because the narratives can change very, very quickly.

29:16And it's not exactly a straight line between what you're trying to protect for and what you're actually holding as well. So very counterintuitive kinds of things tend to happen with all of that. So, yeah, I guess I would – I wanted to touch on gold because it naturally comes up in this conversation. I don't think you or I are either big gold bugs. But yeah, it tends to require a bit of a timing element to it. And that's my issue with macro generally. Even you said when you're trying to bet against short-term macro, it's like that in and of itself is not exactly an oxymoron, but that's the hard part.

29:50Even before you say, and therefore I will. So no, go back to the starting point. My view on the short-term macro is, so I'm going to. It's like, just stop it. My view on the short-term macro is and say, you don't know, I don't know, no one knows. which is exactly your point, right? Which is, you know, trying to time this stuff and get it right. Yeah. And that's back to Lynch's thing about more money lost. He doesn't mean lost as in, as in literally share prices going down, although sometimes from a hedge you can lose money. He just means opportunity. Opportunity. Right. Right. It's massive. Yeah.

30:18So, I tell you the one investment I wouldn't hold. Hang on. Cash. Yeah, right. Not on your Nelly. If I've got, if I've got something that I need in the next year, that's a different story. I'll happily wear the 5%, 6%, 7 % loss that I will take on that physical cash in real terms because of that optionality. But anything beyond that, I've actually got a friend who's – his partner had a very – got scammed essentially financially. He's just very skeptical of all of this kind of stuff. So he just puts it all in cash. He earns good income and the rest of it. And it's like, dude, I get your experience and the rest of it.

30:59But that is like the dumbest investment. For someone who's still got 30 years left on this earth, at least, you know, you are going to find that the loss you bear there is phenomenal. So I would not leave it in cash. And it doesn't feel like much. But even if it was 4 % annual inflation, you know, roll that forward three, four, five years, you have significantly kneecapped yourself. So I would definitely not hold cash. I think bonds, the world has probably learned. Well, no, it hasn't. What am I saying? The world has not learned. Correct. But the premium A-grade alpha apex predator of risk-free being government bonds, I think that has been revealed to be actually, no, that's not.

31:44Very short-dated ones potentially, but anything, if I was, you could point a gun to my head, I am not putting my money in like a five-year US treasury. It's just like, I don't know what's going to happen over that period of time. And not that because I'm worried of any hard default, But it's just sort of, look at the US, UK guilt. You know, that is like the best, they call it paper, the best quality paper on the planet. And we've had pension funds and very large investors wear 30, 40 % drawdowns in very short spaces of time. So again, I think they are something I would avoid like the plague as well.

32:17High quality, scarce assets. That's what you want. Yeah. I think we've talked, and we've talked before about, you know, it's a nice reminder, just going a little bit broader, but also you know just kind of not going too far from the topic when you buy debt when in other words when you're lending money to the government and getting a fixed return that's the most you'll ever get now you'll also get no nominal loss of capital unless we do have a hard default which again as long as you're buying it for a reasonable government it's not going to happen yeah but the money can be eroded away and so you say well hang on my maximum upside is what two three four percent and yes you'll get your hundred dollars back but that hundred dollars is worth 90 or 80 or 70 by the time you get it back because of inflation you've actually gone backwards as you said made in real terms.

32:56And some people will say, yeah, but at least I know I'm getting$100. And I get that. This is definitely a Morgan Houselism, which is, you know, the biggest risk might be not taking enough risk, which is exactly that point, right, of your mate with cash in the bank or people who buy bonds. It's just, and by the way, mate, this is not even a new, not that you're not smart, this is not a new observation. If you go back, I've said this a million times, but not for a while. Look up the Vanguard index chart. This time, not to look at the compound returns for shares but do that but also look at look at bonds i mean there are some times when bonds do fine because circumstances serve but the simple reality is the maximum return you're going to get is some low single digit percentage and that's the maximum you're going to get compared to the long-term returns from almost anything else and potentially the chance you get lapped by inflation i've people say this all the time what bonds should you hold or you know the kind of conservative portfolio stuff i've never ever ever said throw some bonds in i just think i think it's crazy i it's not and not because i expect this is the other thing that it's not even what's interesting is we are re again to your point about no one learns we are really in the same lessons of years ago but not even because we're learning them more significantly because we're in a really weird environment with high rates and massive inflation but even just moderate inflation of back to the 80s and 90s inflation you know you get to that point of like so hang on i'm not really actually making much and this is this was never new this is why bonds have never been part of my portfolio I'm not selling them now because, oops, look at inflation.

34:16Gee, lucky I timed that beautifully and sold them just in time. I've never, ever, ever, ever held bonds. And the numbers are really clear. You just don't get anything like the returns you get on equities. Be diversified, of course, all that stuff. Really, really important. Don't buy one. Don't compare one bond to one company shares. But over time, if you compare all corporate bonds or all government bonds to all companies in the share market rolled together, it's just a no-brainer. Yep. you might get a bit doom and gloomy but you might be forced to hold bonds um one of the one of the mechanisms that governments tend to employ in these situations is what they call financial repression so what they do is i mean when you talk about the big money like here in australia to be super and insurance company floats and the rest of it they'll just mandate that you have to hold a certain percentage in in bonds and that happened a lot in history very recently too in a lot of places as well.

35:07And it's done sort of under a nationalistic kind of guise and the rest of it. But I suspect that for a lot of money, they will just be mandated to, particularly in the US. And it's actually been, again, the quiet part's been said out loud by a number of representatives there. And it's kind of, it won't be done, it'll be done like you've got to support the country here. Are you anti-American? War bonds kind of stuff. And again, I know it's really hard for me to say this without feeling like a crazy person because it's so outside of our listeners making their own judgment oh yeah man but look it's outside of our lived experience but i really think as an investor you know we love to read like finance and investing books and the rest of it but history is just really really informative you know and and um is it great there's a scottish economist i really like called russell napier who talks quite a bit about this as well and and already seeing it in parts of you.

36:01Remember the whole pigs thing from a decade or so back? Portugal, Ireland, Italy, Greece, and Spain. Yeah. By IGS. Yeah. Remember the situation with Greeks defaulting? All this kind of stuff happened around then. You know? Yeah. Western modern economies, you know? So it's sort of, it's really wild. But I guess each to their own, and none of this is people know as financial investment advice, but I'm not holding cash any more than I just sort of need for day-to-day and accounting for the sort of the near term i'm certainly not holding any bonds i feel a bit like john howard you know he famously said the times will suit me and i gotta say and not i've i guess my point is i've changed nothing right i've never held cash because i just i hate the idea not even again because of inflation necessarily i just hate the idea the market's going to go up over time more than it goes down and so statistically every dollar i hold in cash is a dollar that i am not getting a return from and statistically i'm that that's a bet against my fundamental view, which the market will go up over time.

37:00Statistically, I'm better at holding shares than cash, even if sometimes the shares go down after I buy them. Because over time, if I'm adding money regularly, statistically, I'm far, far better having that money invested than not. So again, I've always been a pricing power guy. I've always been a good balance sheet guy. I've always been a, you know, don't hold almost any cash. I've got a little bit from time to time because it's just between investments, but not for any strategic reason, just for kind of laziness and didn't get around to it, whatever. um so i'm again this is and this is i think that's almost my point right like you know generally speaking whether or not you're right whether things are worse or better than you expect you personally in this case i'm talking about because you've you know your thoughts you just shared um generally speaking good investment is actually the best antidote either way and it actually probably doesn't even matter whether your concerns come true or not in the sense that statistically again historically it's still the best way to invest that's the beauty of this you don't have to take a massive bet on if I'm right, I'm right.