Inflation up, and tough love from the Gov. June 2, 2023

0:07Welcome to Motley Fool Money, the podcast where the only inflation is our egos and not our prices. I'm Scott Phillips from The Motley Fool. He is Andrew Page from strawman.com. Mr. Page, good morning. Good morning. How are you? I'm exceptionally well. I say you're from strawman.com. I shouldn't say that. I should say you are the managing director. You are the founder. You are the majority shareholder. You are the man who makes the music. You are the man who is the wind beneath your members' wings. I just wonder what strawman is again. I love how you make such a tiny one-man operation. sound so much more significant than what it is.

0:47If I had less care... Go on. Oh, and what it is is an online private investment club. I am surprised. If I had less respect for our listeners, mate, I would sing Bette Midler-Winworth by Wings, but I'm not going to because I care about you and I care about our listeners, and that's important. We appreciate it. Thank you. Mate, I'd ask how you are, I have, but you and I have spoken about 84 times this week as we get through some pre-recorded podcasts for the upcoming holiday I'm going to take. You decided to be a pre-recording. I will take a holiday one. Now, you need to do that, by the way. Yeah, I do.

1:16I really do. Make sure you do that. All work and no play makes Andrew a dull boy and all that kind of stuff. I'll leave that to others to judge. Mate, let's get into it because the how are you thing is probably done by now. Did you see this week, I assume you did, the Australian Bureau of Statistics announcement that inflation in Australia is now back up to 6.8 % for the month of April. It was 6.4 % in March, having been 6.8 % in February. So we're back to the future. Inflation is going the wrong way, mate. It is. And it's sort of, it was interesting. This is the great thing about economic data.

1:56You can kind of carve it up to suit whatever narrative, whatever barrow you want to push. I saw Alan Kohler on the news last night make the point that if you just take the month to month and then annualize, it's actually 3.6 or something like that. so you know glass half full glass half empty exactly yeah but i mean either way look here's the thing with inflation i know i've made the point before but it's a ratchet so whenever we're talking about it it kind of frustrates me a bit rat something else but ratchet yeah a bit of that a bit from column a bit from column b but it is a it is a ratchet so some of the language i think can be confusing because it says oh it's coming down notice the rate of growth that is coming down.

2:39We are never going to see, I can't imagine, for a long, long time, a negative CPI kind of print. And if we do, then that'll probably signal all kinds of other problems on its own. And even if we're doing that slightly negative after a couple of years of 7 % plus, it's a tiny, tiny, tiny, tiny move in the other direction. Oh man, it's just, I had$100 of purchasing power last year. I've got$93 today. It's a big change. and it means that people getting a 7 % return is not bad in the current environment. It's basically breaking even. And more directly, people's pay has gone down. So it's a really, you know why it's talked about all the time.

3:21It's very real. It hits all of us. And as we've discussed, it's a really thorny problem. Yeah. So Alan Cole's comment was interesting actually. I caught the same thing. The only other thing that was interesting in the numbers, And this is why, as you say, you talk about the basket of goods and the ratchet itself as well. There are some really, really, really staggering numbers in some of this stuff. So, for example, clothing, year-on-year up 2%. Dairy, up 14.5%. Fruit and veg, up 3.5%. But bread, up 11%. Rents, up 6.1%. But communications, up 0.2%. I mean, it's across the board. I mean, almost everything is up and up significantly.

4:04but it is a really different experience depending on the category we're talking about. One of those also interesting, mate, is from this data, even putting aside the annualizing the month, which you can and maybe arguably should do, when you look at the actual numbers, almost every single category was down the year to March and then the year to April, so not just the month itself, but the rolling 12-month period. It was down in every category, with the exception of two. The big one was transport. Now, automotive fuel in the last read was minus 8.2 % year on year, up to plus 9.5 % year on year.

4:40And it's also worth thinking when you think about what are we reporting as inflation and what numbers are real and what are volatile and whatever. The one price that does move around a lot, it ratchets higher over time, but is genuinely volatile and reasonably, if not cyclical, at least just all over the giant, is fuel. That 17.7 point turnaround, it was enough. So that fuel was up. The other one was, I'm just trying to scroll through recreation which is up very slightly from 6.1 to 6.4 they're the only two categories are actually up between the two reads and yet that was enough together transport specifically obviously to push the reported cpi up by half a percent just worth kind of thinking through that so you know if you're there is i raise that for a couple of reasons if you're the rba and you want to keep rates on hold you're going to say well inflation is actually coming down on everything except that one global commodity where it's just going to be volatile so can you really draw a line through it?

5:32Probably not. On the other hand, our monthly costs are higher now than they were last year or last month. So that's just true. And it means there is more inflation in the economy. And unfortunately, the other thing is transport. Obviously, fuel is... Unless you're running an EV to deliver your goods and unless you're not using plastics or unless whatever else, the cost of oil is the cost of oil is the cost of oil. It is so ubiquitous that it's also hard to look at that and go, well, that's going to hit other prices some point down the track when they get factored into, you know, high delivery costs or higher, you know, transport costs, wherever else they are.

6:07Manufacturing, it's everything, man. Fuel is the base layer of our entire economy, right? Like it is really, when you really think about it, it might be more distant connections for some items and services than others, but it's always an input to that. So yeah, it's a big deal. Yeah. And it also makes you wonder too what the RBA can do for something that is very non-discretionary. I think fuel is, you know, we need to get from A to B. We need to do all of these kinds of things. So, yeah, it's interesting. It's such a good point you make. I mean, there's this number that we look at. And, you know, maybe you want to look at the trim mean.

6:50Maybe you want the weighted median. Maybe you want something else to sort of strip out and look at it. That's right. And then within that, you've got the fact that, well, someone has or a group of people have got around and said, we think the average consumer looks like this. Yes, exactly. Right. And that view. Yeah. The basket. That view changes. So when you say it's a different experience depending on that, I mean, there'll be, you know, alcohol and tobacco was up 4.4 % year over year. That's going to impact some people a lot more than others. Education is going to impact some people a lot more than others.

7:24So every one of us, everyone listening, you and I, we all have our own CPI. And that's just another thing worth noting. I know the point is to sort of say dismiss it all. I'm not saying that. You've got to have some kind of, I suppose, official figure so we've got a general sense of it. But it is a very subjective thing inherently in how we choose to measure it. And how we choose to measure it has changed over time as well. With a miss of intentions, by the way. No one's being nefarious or is genuinely just a statistician's best guess. But I just say, even their best guess on the average doesn't represent everybody.

8:00The other thing that's been really painful, to your point, mate, is I don't think it's in this number. It's in the quarterly numbers. So this is the monthly CPI, by the way. It's a relatively new measure. I think I've said that before, but just so people know. The quarterly number is still the Bible, the holy grail of inflation. They actually split out discretionary and non-discretionary spending. And this is, we talked about the impact of inflation. I got a little bit of grief from my comments last week, by the way, about the role of interest rates and where it unfortunately hits people and what we can and can't do and what matters, which is fine.

8:30Different views are very welcome. But what is ugly, speaking of that, though, is the inflation on non-discretionary, i.e. the things we can't avoid, is higher and meaningfully higher than the inflation on discretionary items. So you and I can decide not to go on a holiday. We can decide not to buy new clothes. We can decide to not buy a computer or whatever else. the non-discretion stuff food energy fuel the stuff you can't avoid the inflation on that has been higher higher meaningfully higher for a longer time because of that i mean energy and transport right think about yeah gas coal petrol you know these are oil these are unavoidable impulse and they are the probably the largest most persistently um high inflation categories and so that's that's been really hard for a whole lot of people too is cutting back on spending you know just just you can't do as much with those items as you can with others and that's that's really painful um i will say too mate on fuel just quickly too and this is important without getting too far out of the weeds um if you look at the average price of diesel for example just to pick a number because i just happen to hover over that one april 2022 dollar 95 a litre april 2023 dollar 94 a litre in other words the price of diesel is as cheap slightly cheaper but you know as cheapish as it was 12 months ago now i say that at the same time as i tell you hang on didn't we just say that inflation for transport was 9.5 how do you square those the answer by the way isn't unleaded fuel because that's also the same it just i just picked diesel because i can do it on the graph um the answer is actually because over the year up to april 2023 compared to the year to april 2022 which is what they're comparing the price is meaningfully higher so So even though it's flat, and actually the last six months has come down dramatically.

10:12So again, diesel, six months ago,$2.32 a litre, down to$1.94. So down a lot. But versus the previous year, it's still meaningfully higher. Now, the good news there is, unless it spikes back up again, we will over time slowly see that number just come down of its own volition. Because the longer it doesn't move, you drop the cheap months of last year, you pick up the no more expensive months of this year, and that percentage will come down by itself. And again, that's why inflation is also important. You made the point about Kolder's comment, which is exactly right. The annualized number of just the last month suggests that prices are, again, we shouldn't say coming down, and you need to be really careful.

10:48It's a clumsy way to say it. You have to say it this way because it's accurate. Prices are going up much, much less quickly over the last month than they have been over the last year. So we potentially are on the tail end of it. If we are, that also gives the RBA room not to do anything. is that why to your opinion um the aussie dollar like it fell to another low overnight as well he got into the 64s at one stage at one stage we were only mentioning maybe this is a pre-record but in our timeline it was relatively uh recently just just how low that that is that is sort of gone yeah is that a reflection of that view that okay yeah it's much higher than a year ago but month on month it's coming down if as you say often say the biggest little word in the english language that that maintains the same we will we will sort of ride out of this therefore less likely more interest rate rises therefore uh less competitive dollar for a carry trade perspective yeah you would assume so i just actually um i'm i don't do a whole lot of pre-research just for fun mate i actually overlaid uh the iron ore price in u.s dollars and the australian dollar in versus the u.s dollar and the the correlation of that is astonishingly good right uh which is which is partly i'm giving you make sense i'm giving away the why to the answer i was going to give you which is in part the fall is absolutely the market's not expecting a big rate rise from the rba the rba is kind of flagged as much and to the extent they keep doing that then you know this inflation might be enough to scare them as i said there's reasons if they look at don't say headlines up we need to do more fair enough if they say headlines up but excluding fuel it's down fair enough if they say i heard alan cole on the abc the other day say that annualized was pretty low then okay too there is more to your point they can chop this in many ways there is more than enough data to give them a reason to do either if you want to put rates up you say inflation is going up it's still almost seven percent that is extraordinarily big we need to do more that that in itself is enough of a reason to cut rates if you show sort of raise rates if you chose to.

12:50If you want to hold rates, you say inflation is coming down. It's going to keep coming down. The economy is slowing. Retail sales are slowing. Let's not kill the goose like the golden egg. The trend is working for us. So we're okay. We can just lock it in and let it do its thing over the next little while. So that's that. But the reason I wanted to pick up behind all, mate, is there is a very significant, and this is the thing with any asset. We talk a lot about price following value and what sentiment does. The value in air quotes of the Australian versus the US dollar is impossible to accurately or fundamentally justify and value.

13:28There is no model that says, of course, the Australian dollar must be 65 US cents right now because X. What we end up saying is, and again, we've talked before and since, and we'll talk again, depending on where we are on the timeline, about markets and sentiment and all that sort of stuff, but also the trend we talk about regularly rather than the absolutes the dollar the australian dollar tends to be considered by the rest of the world as a so-called commodity currency it is a to some degree again we've talked about this i think in a future episode but anyway um it is very much a you know when the rest of the world says hey we think iron ore is going to go up they buy australian dollars as a proxy for iron ore because we're an iron exporting country and conversely when it goes down so i i just pull it up just for the sake of it and the correlation I hadn't ever done this before.

14:12I should have probably. The correlation is astonishing. So I would suggest to you, mate, that the iron ore price is now as low as it's been in US dollars since November 2022. Before that, it was September 2022. And I've got to expand my chart out further to get back to the same price. It hasn't been consistently this low in the last 10 years. So only one, two, three, four times the last 10 years has the iron ore price in us dollars been i'm telling i'm telling a complete lie i'm sorry matt um that's this train i'll look at the wrong line there i should have done my research um it's so it's still true but it was that low back in uh june 2020 so we're kind of you know if you look at that last two three years we've kind of gone up miles it got to 220 a ton at one point now it's at about 100 bucks a ton um it hasn't it was that low again those numbers i told you before were right.

15:08So November, June of 2022, and then June 2020, and then back to kind of April 2019. And it was this high again in March 2017. I won't keep boring you with the numbers. Essentially, it seems to be there is some correlation. I won't say causation. I won't say direct cause and effect. But there is some correlation between that. My speculation, mate, would be the market is assuming the RBA won't raise rates and the US is continuing to raise rates. So it widens that gap. Also, because we're a commodity currency, the iron ore price is falling. It does seem to be tracking with that in some sort of correlated way, which isn't surprising based on what we think we've said before about these things.

15:47So that'd be my best guess, Matt. But I'm no currency expert. I'm just a bit boring. I think that's probably likely to be part of it. Yeah. Wheels within wheels, isn't it? I mean, that's not great news in and of itself. I mean, iron ore is our biggest export, right? So that absolutely hits the balance of trade and all the rest of it. Good point. I think when I think of currencies, I really bring it back to first principles because it can get very complicated and unnecessarily so. I think a high level, it's really like anything that's traded. It's supply and demand. Correct, correct. Why do you want, I mean, stop thinking in our little bubble for a second.

16:27Why does anyone in the, by the way, Australia is 0.3 % of the global population. Yes. You take every Australian. Equity markets. Yeah, yeah. Yes. We are the 12th largest economy, 1.5 trillion in GDP. We punch above our weight. But in terms of these little gift certificates that we call Australian dollars, and I say that in a very deliberate way because it's kind of like a gift certificate that you can only spend in-store Australia. Yeah, that's right. An Australian dollar note, you give to 99.7 % of people in the world, they're going to go, oh, I can't spend this anywhere and I have to go get it changed and I have to pay a bunch of fees on it.

17:04So where I'm going with this is that why do exchange rates move around? Well, the dollar will go up when people demand more Australian dollars. Outsiders will demand more Australian dollars. And they will demand or people want to convert what they've got in other currencies back to Australian dollars. And they will want to do that because they want to spend the money here or invest the money here. I mean, otherwise, what's the blooming point? And when I say invest, it might just be to take advantage of interest rate differentials and all of this kind of thing. Now, there's no real predictive power in any of that, but I think it gets past a lot of the nonsense that you rightly say.

17:40These false precision model – every model is wrong. Some models are useful. Yeah, that's right. That's the way I like to sort of think about it. But they're all generally wrong. And the fact that I can't plug in interest rates, inflation, commodity prices and get this is the intrinsic value to use a share term for the Australian dollar. Correct, correct. But generally speaking, if we're making lots of great stuff, if we've got a lot of great stuff to offer, you'll want the gift certificates to come to our shop, right? And get all our stuff. Exactly. And that's what it is. The other thing that's when I say wheels within wheels before as well.

18:18So iron ore prices come down, not good. Aussie dollars also come down. Well, not necessarily that bad. That's going to take a bit of the edge off for iron ore exporters. Correct. Because iron ore is priced in US dollars. Correct, correct. We're just confusing everyone. I'm confusing myself as I talk because you realize how tenacious it all is. Yeah. It's important, mate. Go on. Go on. No, no. I mean, that's just the only point I wanted to make. This is always a story I find when we talk, or whenever I think about economics, is, ooh, this, oh, that means that. But on the other hand, it means this.

18:55Yeah, but that means that. That's true. But on the other hand, it means this. And where do you end up? It's hard, hey? Yeah, yeah. Yes, I think that's right. One last point I just want to make. You talked about the fact that we're confusing ourselves and an online all goes down, but the dollar goes down and the dollars we get doesn't necessarily change, all that kind of stuff. I want to make the point, most of our listeners will know this i think we've i'm sure we must have said it before but there were humans like higher things and bigger things and we like to beat other things when we do things so too many things in that sentence but work with me here uh a higher dollar must be good right because it means we buy more u.s dollars so that's well that's great so therefore when it's up we're happy when it's down we're sad and it's kind of like yeah you need to really think carefully about that because most of us think selfishly of i want to go to the u.s it's up the u.s train dollars down i've got to yeah it's cost me more to go there i get i absolutely get that but plus all the stuff i like to buy that are made overseas right yeah exactly so if you're buying imported cars imported tvs computers whatever else it's absolutely true what i wanted to say though is the flip side of that is important which is when the dollar is down our exports are much cheaper for other nations to purchase and so if you're a farmer if you're a miner if you're whatever else uh and you're exporting around the world you want a lower dollar i was kidding jack jack you was a little you need a lower dollar you need me on that wall um yeah but you i mean yeah it's good for us so you know in terms of and by the way economically if and when things start to slow down locally a lower dollar is spectacularly good because it means the rest of the world is going to buy more of our stuff than they would have otherwise which helps prop up australian you know output when we're not buying it here at home so in a perfect world you take a 40 cent dollar in the middle of a recession because it'll really prime the economy and really get things moving now you couldn't go overseas and you're probably just stuck at home but that's you know there's a real economic benefit to that in terms of sheer amount of things produced and therefore jobs created or maintained all that kind of stuff so yeah when we talk about the dollar just it's always worth remembering higher isn't better lower isn't better by the way than necessarily depends who you are what you're doing but there is a very real and by the way lower dollar imports inflation because it makes those things we buy more expensive so you still buy one computer but now cost 10 more okay well let's just put the price of computers up the abs tell me not because the manufacturer or supplier put their prices up yeah they sold the thing in the same number of yen we just had to pay more australian dollars to buy the to buy the japanese made computer or the you know you want for the chinese computer or whatever um and everything else by the way around the world everything from europe or asia or anything anywhere else um so yeah just it's just worth just worth making that point that's the genius of floating the dog so good right let the market decide markets are really good but we are we are signaling all of our intentions, just through our own action.

21:43I need to go here and buy some US dollars. I want to import this. And we're all just doing stuff for our own vested interest. But in aggregate, markets find equilibrium points. And they change over time as information and sentiment changes and all the rest of it. So, you know, it's not... But it is that lovely shock absorber for the economy. And the fact that the Aussie dollar is low is signaling something. And that will have feedback loops which help correct these kinds of things. And on we go. It's a really, really, really good idea to take something out of a centrally controlled environment in which, again, it's not about intent or anything like that or capability.

22:32Well, I guess it is about capability because it is just so unrealistic to expect that no matter who the group of experts are, that they can anticipate every single individual agent's intentions and sentiment and price that in at the aggregate level to let the market do it. It's a really, really, really powerful thing. And I think that's why virtually all countries do it these days. I agree. I think, by the way, we talk about the value of having a reserve currency, and it's absolutely great for a whole lot of reasons. Let's talk about 2 ,500 currencies. But one benefit we have over the Yanks is when the oil price moves, for example, they have no ability to devalue their, or not to devalue, I shouldn't make it sound like it's a command decision.

23:16Their currency can't devalue in terms of the relative price of oil, the relative price of iron. Those are already pricing US dollars. They only get the commodity movements. We get the commodity movements and the currency movements. that go against this as well but to your point you know the americans on one on one hand don't have a floating currency against for example a commodity because it's priced in their own currency yeah one of the great things about having i'm again you know i'd rather i'd probably rather have the reserve currency than not all things being equal for the reasons oh yeah we've talked about oh yeah but but economically we are much much much better off having a commodity to donate someone else's currency and having our currency be able to move against it as as that buffer again it can go the other way it can be more expensive so it doesn't just work in one direction but it's a really nice little attribute to have oh it is i mean just i can't i can't let that one go what you said that is there is there is huge advantage in in being the reserve currency not for the reasons that you you say are true you don't you don't get that sort of um that currency uh impact but the people who you um buy the oil off you're paying them in your own money Yes.

24:23Yeah. Here you go, Saudis. Have some US dollars. Oh, okay. What can we do with these? Well, they're gift certificates for America. Oh, I guess we'll buy American stuff, right? I guess we'll invest that money back into America. That's the advantage of being the reserve currency. Plus, the other great advantage is as well, it's just like, oh, we don't have enough money. It's okay. Press the printer button. Here you go. You don't have that devaluation against the reserve currency or against the commodity because you own the reserve currency. So, yeah, exactly. Yeah, exactly. I want to move on to speaking of inflation and reserve banks and other things.

24:57Phil Lowe was out this week and he spoke to a Senate Estimates Committee. I wanted to just highlight two things he said because I thought they were really fascinating. The first one is he said, and this is what I really, people give central bank governors plural a really hard time. And I think that's both understandable and really unfair because there are some reasonable conventions around public servants and what they do and don't say publicly versus what they do and don't say to ministers that i think are reasonable to expect an rba governor the bluest of blue suits to just kind of um observe right you observe the convention because it's just it's not the done thing not to and and on some level conventions are made to be broken on the other hand conventions are what kind of underpins our parliamentary system to some degree there's most of the most of the stuff happens in parliament's unwritten rules right so it's kind of you know i really don't buy into the philo should just blow up the treasurer or the government and say they should do this now he's not an independent commentator he's an employee of the federal government his job is to do monetary policy and not wait into everything everything else just because he wants to we'd ask the education secretary what they think about the health crisis um so yeah there's there's something there i think to that but but more can i just add very that is that is true that is but i also say that there is um it would be nice if there was a convention that such people would speak truth to power.

26:20Yes, and we don't know what they do, by the way, because we don't know what's done behind closed doors. They may very well do that. They should do that and they should be allowed to. I think you're right. The public service has been politicised dramatically over the last... I don't include Governor Law in this, but for what it's worth, just to be really, really clear. But the department secretaries tend to be political fellow travellers more often than not, if not direct operatives. And there is something to that. That's why we see some of them leave when a new government turns up, either voluntarily or otherwise.

26:46um mate so low said two things he said so i'll get your thoughts on these the first thing is he actually told the truth about inflation in the last federal budget you know we said at the time if you if you have a stimulatory budget it must add upward pressure to inflation by definition it doesn't mean that's bad doesn't mean the the programs you're spending money on are worthwhile that's a very different question but there are two simple realities one does it have you know does it cause upward pressure on prices and or are the programs worthwhile and the answer can be yes to both no to both or yes to one or the other and to his credit phil low said yep the budget was probably a bit expansionary but we'd already included in our forecasts like cool and and that was that's the that's the thing that jim chalmers should have been saying for the last month but for reasons political and otherwise chose to pretend that if he yelled loud enough that it wasn't inflationary enough people might agree with it that might go away as a topic i just think i think there's you know there's there's some really nice honesty from phil low there maybe because he's coming into his term maybe not i think it wasn't outlandish he didn't go outside any any realms of of of um of convention as i said but just saying that i think yeah he just he said what other people have been saying and it was kind of nice to have someone in power actually acknowledge that without pretending that you know as the lmp did they're going to destroy the economy by having a stimulatory budget or as the government did that there was no inflation at all don't worry about it doesn't really exist it was it was obviously both of them were ridiculous and we've lost the nuance of yeah probably slightly inflationary but worth it because we're looking after this group or that group okay cool that that's an okay outcome that's an okay choice to mate the other thing he said mate i'll get your thought on both was about inflation this was really interesting he said the rba could have and arguably would have gone further i'm not quoting him paraphrasing him could have or would have gone further on inflation and frankly got higher and harder on rates but they wanted to and again this is almost a quote preserve the gains in the labor market in other words unemployment's at a 45 year low thanks in no small part to massive government stimulus and record low rates.

28:44And for all of the unintended consequences of inflation that we're now dealing with, what he said was when that happened, the RBA said, well, we should fix that, but we don't want to throw a whole lot of people out of work. So we'll fix it less slowly than we otherwise might if our only aim was to fix inflation. I just thought that was a really fascinating disclosure. Again, was it surprising? No. Could we have intuited it? We could have maybe assumed or guessed or extrapolated it. but I thought those two things, those two bits of truth and honesty were really refreshing firstly, but also fascinating in terms of the working of the RBI and how they're thinking.

29:21Yes. Yes and? I find it was such a circus. It was such a circus. You know, the little gotchas from various politicians for trying to score points and sound good. And I just wish there was a more serious conversation. Yeah, look, I respect that. I mean, there was also some other comments in there that were probably a little bit tone deaf. I think he was suggesting regarding housing that people just move in with flatmates and stay with mum and dad. That was interesting. Like, you know. Yeah. By the way, he's - That's the solution. That's the best we've come up with. We've got this massive housing problem, but hey, it won't be a problem if like we just to put two families in every home like come on can i say though did you again this is i blame the media did you actually hear the comments he made directly uh no i'll be fair then i know i read i read there i read a few select comments and he's and this this is the problem honestly the problem with picking great central bankers and expecting to be great communicators is a really big challenge and lowe is not bad what he's what he absolutely he actually absolutely said effectively what he what the point was i'm kind of trying to describe the point rather than try and repeat what he said because that's what he actually did say the solution would be more people moving together what he what he actually was saying in that context was price mechanisms do their thing and when housing gets more expensive we find other ways to solve it like people moving with each other and that's you know it's a bit like we could before you know the inflation is the solution to inflation to some degree it's it's the solution to the own problem because we we take different actions as a result and his point was at some point given those prices people will find different ways to do it and that will impact prices because there'll be less demand for rentals or house purchases if and when people move in with each other so he's talking about the the impacts of supply and demand he said it horribly badly because exactly he didn't exactly say something like people should or will or it would be good if i can't remember exact phrase but it was basically it was interpreted as low saying and if you read the direct transcript only that quote that's exactly what he said he said you know people should move in with their flame mates or whatever the problem was he actually you know he said those specific words but in the broader context if i if i'm more i'll give the media a bit of a wacky if a more reasonable non-clickbaity non-headlining media had actually reported exactly what he said he was effectively saying that that high prices mean more people will move in together and that will help bring prices down because there'll be less demand for freestanding homes that's part of that that's part of the economic supply demand trade-off right yeah i still call bs um if if if you and i are forced to become flatmates because and you know that'd be an odd odd couple kind of moment right there what is that noise that's the odd couple thing people look it up yeah that's right um uh our demand doesn't go away it's it's like you know in fact after six months of living together our demand probably increases above to where it was exactly so it kind of it takes immediate maybe pressure off because okay we've just signed a six 12 month lease whatever so i guess we're out of the market for the moment but that demand does not go away right it is and it is the most fundamental of demands that all of us want a safe secure nice place to live it's not going away that demand so it was sort of like to what extent it is a solution it's a very marginal solution at best and about number 483rd on the list of smart better things that could be done if you really wanted to address the damn problem but yeah so look about i look i yeah what do i think about all of that i where i come back on it is let's say, we won't even use specific people as examples, but just you could have two really ethical, really smart, really capable, experienced, independent, go through the shopping list of ideal characteristics for a central bank governor and give them the exact same situation and data.

33:17And they could come up with two, I'm sure it won't be miles apart, but two different interpretations. each month there'd be likely chance that there'd be some deviation in the in the actual differences so again how do you know how do you know what's the right move he's sort of saying well this is my best guess and we've all talked about it and we think this is good and uh you know they ask him why why is this happening and blah blah blah and but it it is it is a i i can't get past the idea of it being highly sort of subjective even if it's the subjectivity of someone who's pretty pretty capable i come back again to to the the exchange rate and and letting the market sort of its thing i i i know it's not going to happen but i i just i feel as though we make such a fundamental error in in in trying to set these things because it is it is too it is too impossible a task to set and it becomes such a circus and a distraction and no one talks about the the everyone talks about inflation no one talks about the fiscal impacts to that which are which are pretty damn significant, right?

34:17Yeah. Let's not go there again, but I had to add it because it was right there. You did. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

34:33Mate, let's move on to a couple of corporate announcements during this week. West Farmers was out. A couple of key things from West Farmers. um yeah and again let's that kind of you know rob scott the ceo put the uh put the flag up and we'll put his head above the parapet and said hey have a go firstly he said the honeymoon is well and truly over probably no surprise ever talking about the economy he talked about the fact that again we've just talked about the fact that massive stimulus and low rates those things rates have gone to reverse and stimulus has gone away um the economic honeymoon is over the harder times ahead now he also then said as you'd expect but we're fine we're going to deal with it because we've got products and services that customers like and we'll be fine no i don't think he's necessarily wrong bunnings and kmart and target up you know are that part of the market so uh to some extent if you're looking for a cheaper option they're the place you probably end up but the honeymoon is over pretty dramatic the other thing he said mate was if he called for a wage increase of no more than five percent now again let's let's be cynical but and probably honest you he would say that he's an employer um he's got to deliver a profit and if he thinks his costs are going up faster than his sales then that hurts his margins and his his shells are unhappy so maybe he believes it maybe he has to feel like he has to say it because he's expected so that that's absolutely possibly true what i did think was fascinating mate and this might be just purely uh convenient and give me your thoughts on that but also give me your thoughts on maybe if he's not being let's assume for one second he might be being legitimate he kind of talked to me he said look if we give around a five percent pay increase we limit the opportunity to give our better performance our more productive staff a bigger increase now on one hand companies got all the profit it makes to distribute however it wants and it can double the cost you know pay for all of its staff and make less money or no money if it chose to so clear it's you know those things there is no arbitrary limit between how much you can give everybody else but i did think there was something to that idea we talk about productivity in australia and kind of the the absence of that over the last 20 years and frankly the way we get economic growth is only through real economic grows only through productivity you get some through population growth but that just you know spreads a larger pie across a large number of people and we end up the same genuine economic growth comes from productivity improvements and i just thought that was an interesting idea if only again let's assume you as well we can assume anything i'm going to suggest that rob scott may have been slightly um biased uh when he talked about that for his own personal and corporate reasons but i did think it was interesting in the context of raising standards of living it still is that productivity gap that's missing now whether or not you want to pay more to really productive people or really high performance or something else there is something to that i thought rather than you know thinking about why and where we find ways to reward productive output wages capital right across the board yeah oh man this is another deep deep rabbit hole isn't it yeah um yeah i actually i'm a little bit stuck on on where to go with I think the reason I say that is because there are the, if we live in theory land in a perfect world, then there are some really good arguments to be made, but it's much messier out there in reality.

37:49How do you, I mean, how many employees does he have? 20 ,000? I don't know. Yeah, probably more, I think, but yeah. Yeah. How are you effectively gauging true productivity and contribution to the overall enterprise, measuring that and fairly distributing all of that? I would suggest that most of it will go to upper tiers. Not the checkout people. Yeah, I don't know, mate. I'm really struggling with this one. You keep going. Oh, I don't mean to do that. I was trying to avoid saying anything horribly controversial. I have you call me something, call me names and get listeners on side. um i mean oh i will say this i'll say this right like again i keep coming back to to markets because i'm a markets guy yeah yeah there is there is a transaction here that again like everything is at its fundamental level one of based on supply and demand there's so many people who want to work in the warehouses at west farmers who want to help uh who do the checkouts at bunnings etc etc uh and they have so many stores that they need to fill you know so there's a supply out there and there is a demand and things will tend to sort of reach an equilibrium over time on average just because i don't have enough people i need to attract more people i'll need to pay more actually i can get as many people as i want i don't really have to pay that much i can lower my prices so that's sort of like the pure yeah the pure the purest answer but the reality is is that well it's much easier for certain people to bargain and negotiate than others correct right and this is where you get into sort of minimum wage laws and stuff and we can see the differences in that place contrasting places like the us and australia for example minimum wage has gone down massively in real terms over the last few decades massively i can't remember the exact number but it's it's shocking um and and you you this is why you can see why i sort of wrestled with a clear answer here.

39:46So I'll hand it back to you. It's hard because at one end of this conversation, you end up with no minimum wage, let the market decide. You talk about markets being good at those things and they generally are, except when they're not. And they're generally not when there is an imbalance of power or information or something else that means markets don't work properly. And that's exactly the wrong thing. Which, by the way, very quickly, unions were, you know, in their earliest inception, a solution to exactly that problem. we need to collect we don't know the bloke on the production line you know stamping out widgets day after day has zero bargaining power but a thousand of them have a lot of bargaining power correct correct um but then a cartel in employment sorry business is also illegal so there are there are there are times when we believe groupings of things are useful and when groupings of things are unuseful that are anti-competitive arguably a union is anti-competitive because it it stops an employer being able to negotiate individually now don't get me wrong i'm not anti-union i'm actually pro-union so before you throw things or if you are anti-union you think i'm pro-union probably so some different people will throw things put it that way um i think these are important they have shown themselves to be necessarily important and it's true that for all of the benefits we enjoy as workers today and andrew is a dirty you know employer communist pinko whatever you are but uh the rest of us uh are trying to you know just just get get one over the man i'm working for the man i'm just trying to get what my you know reasonable share of things no uh look i think you know unions got us eight eight hour days and six days then five day weeks and other things sick leave paid leave maternity leave all that kind of stuff so it's it is now the question is though was that a market failure or is the market now do we choose to say well we don't want we don't want the market to work because the market worked perfectly some would say but there is no thing as market failure because markets give you the outcome the markets give you there is no there it's not possible market failure that's just what markets gave you and the markets will solve it if you leave it long enough now i don't subscribe to that theory i'm going a long way this is all for long run mate to answer your question because my point is if you said you know at one end just pay the most productive workers what they're worth what the employer thinks they're worth what they get away with and frankly this is the other thing but as consumers we don't say i'm going to go and pay that guy double the asking price because it doesn't seem like a reasonable margin i'm going to give him some more money because he's a small businessman who's struggling or whatever we say i'm going to get three quotes from a trader i'll take the cheapest one or you know a combination of two is the best quality so when we say employers shouldn't do that there is a there's a massive double standard now societally i think it's reasonable but it we have to be honest and say the principle doesn't always carry right through unless we want it to right i want to pay less they should pay more it's like that doesn't that seems pretty selfish um so but i do think what what here's where i here's what i struggle with matt let me let me say up front again let me for the second week in a row annoy some people when you say to the boss i need a pay rise because my costs are going up my prices are going up your boss is entirely entitled whether he says it or she says it or not to say that's a shame but that doesn't impact the value you provide for me right now that sounds harsh and it is harsh and i mean it to be harsh because i'm i want to make a point my boss doesn't shouldn't give me five percent just because my this year and two percent two years ago just because inflation is higher this year there's no obligation other than on a minimum wage basis for an employer to make up the my higher cost of living that's not how employment works right there is the the minimum wage absolutely that's what the whole um the original harvester case was the famous harvester law case that set the minimum wage was at the time you know a man with i think it was a wife and two kids or something it was like you know how much would it cost to maintain that family that was the entire base of the entire minimum wage system but i'm talking about someone not a minimum wage i go to the boss say boss i want more money because my costs are going up he's like well that's fine but whatever whatever value have you created for me this year well nothing but i want more money so hang on why should i subsidize inflation for you if i'm going to lose as a result there is no direct line for that there is no in my view moral responsibility for an employer to do that just because my costs are going up he's not you know he doesn't he doesn't employ in a cost bar plus world he employs in a you're here to do a job you're here to create some value if you don't create more value why should i pay you more i think that's a very worthwhile conversation i go even further i go even further it's just like i just any cost right take the human element out of it i want to minimize my input costs as you should and and the other side of the equation is well i want to maximize the price i can charge for an hour of my time you know that's that and again that's that's that's the yeah that's the trade now this is but so again off a long run where it gets challenging is and this is i'm not a neoliberal guy and i don't believe in the absolute line of this one but the theory conceptually and directionally is true which is the more expensive i am the more likely my boss is to replace me with a machine or send my job overseas just by definition i work for a company I won't name them because it was a million years ago now, but they had a factory producing food, a particular food product.