Irrational pessimism… and optimism. April 11, 2025

25:04Now, this is the... They say Bitcoin's volatile, right? Yeah. My goodness. I haven't checked the Bitcoin price. I'm sure you haven't. Had to throw Bitcoin in, didn't you? So here's the thing, right? So look, I do believe, again, not with sending your points, Ram, to whatever degree the market thought the market was fair value because it must by definition because it's the price which things are being exchanged. So those who are in the market are happy to exchange at that level. Maybe wrong, probably wrong, but whatever it was, have then fallen meaningfully over that period of time, over since the first tariffs were announced.

25:36So I mean, this is going to be a terrible thing, right? And that's not reasonable. Again, I've said the same thing before. And yet, so the high was 6 ,144 points on the 19th of February. The low was literally the day before yesterday, 4 ,982, massive drop, right? 1 ,200 points, what's that, 20 %? and then back up 9 % overnight on the back of that coming off. Now, I thought the 20 % fall was silly. A 20 % reduction to the permanent discounted cash flows of every company on the US S &P all rolled together wasn't overreaction in my opinion. I could be entirely wrong. In my opinion, that's the view.

26:13I also think, and to be really fair, I'm not just someone who complains about falling share prices. Plenty of people in our industry do, by the way. You hear them loud. As you've said, mate, we call gains gains and falls volatility. We excuse ourselves from that stuff. So a 20 % fall, I think, was massively overdone given the long-term realities of the earning power of these companies over time, is my view. Regardless of whether you think that's fair or not, I also think a 9.5 % jump back up is also stupid for exactly the same reasons. It's not like the tariffs are only half as painful as they were previously.

26:43Now, again, to your point, maybe people look at it and went, oh, we overdid it. Okay, well, maybe we call our heads providers. It wasn't that. The market was flat until the announcement. and then shares jumped. So this is a direct response to tariffs. And again, we're still at 10 % on everything else going into the US at the moment. I looked at the numbers. I didn't do the numbers. I'm not that smart or that dedicated. I looked up some numbers. The Yanks in 2024 bought$460 billion worth of product from China. At 125 % tariffs to that, that is the best part of$600 billion worth of additional cost for the US consumer, because it all flows through, to pay and the US market is celebrating.

27:25Again, maybe we end up at the right place. A 10 % fall net on the news of the tariffs may actually be kind of reasonable-ish. So I'm not even saying we didn't end up at the right place, but the daily falls, the last couple of weeks and then the overnight recovery make zero economic sense for anyone trying to actually do the maths on this. It just doesn't work that those changes are meaningful. And yet here we are. And I have to say, to assume the optimism that the West traders are assuming, given there are still going to be 10 % tariffs on everything, plus 25 % on, as far as I know, aluminium and steel, plus 125 % on China, the world's factory.

28:04I just saw some numbers, but I can't find them right now. The average cost, apparently, of creating an iPhone, the raw materials, about 550-odd bucks. The estimate was, this is before the tariff changed, before China's went up and other countries went down, so it will have changed. going to add about$250 in total to the cost of that iPhone when purchased and bought into the USA. I'm not surprised Apple's stock has dropped 30 % from the high, right? Well, here's the other thing, by the way, though. Trump is now promising some US companies exemptions from those tariffs. Yeah, right. Which you kind of think, well, either you want to reshore manufacturing or you don't.

28:37You want to use tariffs for income tax relief or you don't. I was going to mention that. And by the way, if you want to reshore manufacturing, which manufacturer has gone, oh, yesterday I was going to do it But today you've dropped the tariffs and I'm not going to do it anymore. No one's stupid enough to be reshoring without a guarantee of long-term, frankly, tariffs. I made that point last week. Right. Security, safety, transparency, clarity, massive, massive things. I already said to you this morning, one of my companies has announced this, like, actually, we're pausing our expansion in the US until we get some clarity, which, of course, I'm not spending God knows how many millions of dollars when things can change in a heartbeat.

29:14And either they want to bring Apple back on shore, One of the knuckleheads at work for Trump, and I use that term deliberately because it's just... By the way, have you seen the sicker fancy overnight? Yes. Stephen Miller. Ben Lee, kiss the ring. To the point, I'm trying to scroll through crazily now on my Twitter feed, trying to find the tweet, because I swear to God, it was... I'm not going to find it, am I? Here we go, I found it. Stephen Miller, quote, you have been watching the greatest economic master strategy from an American president in history, end quote. that was the tweet I swear to you how do you there's kissing the ring mate and there's just kind of selling your credibility for 30 pieces of silver like that's anyway except except it's not 30 pieces of silver though is it maybe not it's a lot more than that you know it's sort of like everyone's got a price and so I'm not justifying it in any way no no no I know what you're saying but you know there is no aphrodisiac like power or loneliness if you believe the Whitlam's Motley Fool Money for more Subscribe to the free newsletter at fool.com.au forward slash listener.

30:23Maybe I'm just naive, mate. Maybe I've never been close enough to it to be impacted by it. I can't imagine going for what you and I do on this podcast. Can you imagine in two years' time, one of us working for the then Prime Minister of the day, doing something entirely stupid, and us, like, I can't conceive of writing a scene that, I just can't. And obviously it happened. So this guy's happened. And, you know, knock yourself out, Steve Miller. Yeah, but, you know, it's only because we are so incredibly principled and ethical people. But even then, there's an extent, right? I mean, how much do you sell yourself for it?

30:54There is no depth to depravity with a lot of these people. And I really just think it is as simple as that. You can over-intellectualize it, but it's sort of like, I want to be close to power and money. And, you know, I can say a news. Who knows what they're saying behind closed doors? I imagine that there are very different things being said behind closed doors. But in the town square, it's like I will absolutely sing the praises of the emperor because I will be enriched. And my share of power will increase and my wealth will increase and my influence will increase. And we can shake our head at that.

31:30But that's the stark reality. I just can't imagine it. I just can't imagine it. Yeah. Go on. Well, the other thing, you made an interesting point in there as well, which those who support some of these actions will say is that, I forget the number you just said, based on the imports from China. $460 billion in 2024. So the tariff will add about$600 billion worth of additional cost for US consumers. $600 billion in cost, but$600 billion in taxation revenue. Yes. Now, and I don't say that to support that. No, yeah, yeah. That's fair. You're right. Because my point is, and this is a George Soros thing.

32:12I think it was him who first said it, or his idea of what he calls market reflexivity, which is it is wrong to take a number and go, this is currently what we import. This is what the tariff would be. Therefore, this is how much we will make. It is true if you go with the assumption that the rate of imports won't change. Yeah. Now, again, year nine economics is all you need for this stuff. You would say that a significantly increased price would probably reduce demand. So the reflexivity in this is that, well, it won't raise that much, will it? Because the amount of stuff being bought is going to fall precipitously, I would imagine.

32:55I would imagine. If you need to fall precipitously, man, it can fall by 10%. I mean, you think about the impact, iPhones, right, to use that example. if iPhones go from I don't know what the Yanks pay from $1 ,000 to$1 ,100 $1 ,200 based on that it doesn't have to fall precipitously but if 15 % fewer people buy iPhones and 20 % fewer people buy cheap spatulas from Walmart and whatever 5 % people buy less of whatever else it is not as individual worse off because either I buy a more expensive iPhone and have$200 less to spend on something else or I don't buy the iPhone and that makes me less comfortable less happy because I wanted the new iPhone and you talk a lot about consumer choice and markets deciding.

33:35In either circumstance, we either buy less stuff or pay more for that stuff. You buy less stuff, that's reduced economic output. You pay more for that stuff, you push up inflation. There is no third door. And probably both, frankly. There are two doors. Some people will say, okay, I'll pay the extra$200 for the iPhone. Other people will say, I won't buy an iPhone at all. So you've got inflation and you've got... Now, I'm not saying recession, I think it's probably likely, but it's not guaranteed. And I'm not... I don't want to... There's too much absolutism in public conversation and discourse, it is probably going to push up prices and it's probably going to reduce economic output.

34:07And that reduction in economic output will probably lead to a recession in most people's views. It may not, but some reduction is almost certain because of the economic you mentioned. Yep, yep, and yep.

34:19I actually do have some sympathy. I've got to be so careful here because, again, there is no room for nuancing context in this world. Andrew said. But there is some sense. I can imagine behind closed doors, part of the calculus is, and I've mentioned this before. It's not my take, by the way. It's doing the rounds, which is things are getting pretty prickly with China. They're absolutely our biggest adversary. If things went from a cold-ish war to a hot war, we're screwed. I mean, they've got more shipbuilding capacity in one of their ports than the entire US does. They could launch, you know, they could just out-manufacture us.

35:02And also a lot of the components used in the US military comes from China. So if you want to look at it through an entirely strategic, militaristic lens, actually, this is a really good move. Well, except that, you're not going to bring everything back onshore. You're only putting a tariff on stuff to discourage it. This is my issue with national security arguments is you have to be entirely self-sufficient or not at all. because there's no point being, oh, we can make ships, but we can't make bullets. Well, okay, we can make bullets. We make bullets, but we can't make food. Okay, I have to make food.

35:33Make food, we can't make clothes. Well, we've got to make the clothes. At some point, unless you literally are perfectly self-sufficient, the second you rely on something that's necessary, that argument to my mind is the house of cards that falls down once you pull out the bottom card. I know, I mean, I'm not advocating for it. Yeah, yeah, yeah. Those who advance that, I heard it on Twitter this morning. People say, oh, well, we can't make our own ships, so therefore, it's like, okay, Let's say we can make our own ships. Can we make our own tanks? No. Can we make our own cars? No. Can we make our own food?

35:59No. Can we make our own computers? No. Can we make our own satellites? No. Can we make our own rockets? No. At some point, it's kind of like, I mean, it is both scary as hell and the simple reality of this, we've got to deal with this shit, right? This stuff. Excuse me. Back in World War II, we could conceivably make enough munitions and arms and vehicles because it was not very complicated. If we are going to say we have to be, if we are an island, we want to be Fortress Australia, and we want to do that, we can choose that. But we've got to onshore every single thing that we import or the ability to do that.

36:32There's enough to keep us afloat. And that's not – it's not so doable. Your point about US military needing Chinese software or Chinese components, it is just we don't have the things that we need to do the stuff. And if we did, it would have said our living standards back 50-odd years. The cost of that would be phenomenally large. You stole my thunder. Sorry, go on. It's exactly where – I started ranting. You go, you go. No, no. Mate, if there's one thing that we are, I think our audience demands is a good rant. So I will never hold you back on a rant. Thank you, sir. Yeah, one wrinkle on that is it doesn't have to be entirely within the borders.

37:08It could be within a strategic alliance. So, you know, maybe - The US who are so friendly right now. Yeah, yeah, yeah. I'm just - No, I know. I'm trying so hard to get the benefit of the doubt. And again, I just really want to underscore here. It's not what I think, but just for the sake of balance. But you're right, right? So it's very difficult. And it's also supply chains are so complex that even if Australia is supplying something to the US that it needs, it may have been that the componentry that we had to make the thing that is the componentry for the other thing came from China. Or if it didn't, it came from Vietnam.

37:41I mean, it's turtles all the way down except to the base turtle, which is probably in China. So it's sort of – I know we're known for our rare earths, but by far they come out of China, right? And there's a lot of examples of things like that. But yeah, the point I was definitely leading up to, and just to underscore this, is even if you feel as though that is an important strategic objective, it is not costless. And in fact, it is an extraordinarily costly endeavor. So let's say they thread the needle and they're successful, and somehow they reconfigure global supply chains and the global economic order, and they somehow reshore manufacturing or friendshore, I think is the term I heard the other day.

38:25They friendshore everything and they achieve their aim, which as you've just pointed out, that's tough to do. But let's say they somehow do it. That is still a world in which your living expenses, already starting from a base of cost of living insanity, is probably going to go up close to an order of magnitude. I would imagine, And like, I don't know, it's going to be very, very difficult. So you could win the battle and lose the war on that front. That's the hard part, right? I mean, I really honestly have those two thoughts made at the same time. To your point, we should absolutely acknowledge that.

39:03It's not an obviously terrible idea. And also it's why I've never, ever, ever been comfortable with people who say AUKUS is bad or we shouldn't spend on defence or any of that kind of stuff because we should know what the future holds. It's easy right now to say, well, how could it possibly go badly? How could this possibly hurt? A tank or military equipment is the most useless, unproductive thing in the world until there's a dude pointing a gun at your face. It's like insurance. It's exactly what it is, right? So you kind of say, how do you criticize X dollars worth of defense spending? Should it be halved or doubled?

39:31I don't know. What we do know is in World War II, we were stupidly underprepared. The reason, part of the Kokoda Trail story is actually the reservists, effectively a militia battalion was raised from Australians who we had to raise because we had no other way to do it. There was not enough in terms of material, literal armed soldiers, trained soldiers, any of that stuff to fight the war that was on our doorstep. And you kind of go, up until 1939, we were overspending on defense. Once we hit 1939, all of a sudden this massive, how do you say we're not doing enough? So to your point, I actually have a lot of time for the people who say, it's not worth spending on military until it is.

40:09Should we shore up our own ability to make our own stuff? No, until the answer is yes, right? Because it costs us money. My biggest issue is, unfortunately, even the French or stuff you mentioned, the chance to, you mentioned the Chinese warships. Let's say we were, I mean, Trump is trying to destroy as many friendships and alliances as he can. Let's say we are still friends with the US by the time Trump leaves office. And the Chinese simply block the shipping lanes between the US and Australia. Oh, yeah. Who are our friends at that point? I mean, and this is why, on one hand, it's a massive, it's an existential geopolitical bet, which is, do we assume it's going to be okay and enjoy a higher standard of living?

40:45Do we assume it's not going to be okay and turn ourselves into Fortress Australia just to be sure? And where are the costs? Right. Do we lay barbed wire on the beaches in Darwin just in case? Because by the time we realise there's a fattilla steaming for Australia, we'll be here in a week. That's honestly – and again, I don't – we can't know what the answer is. There is no answer because until it happens, it's a waste of money. Like insurance. Like Matilda Middlebury, as you just said, it's exactly what it is. But I will say for all of that, we need to have that conversation as a country and then decide to do it and then accept that, by the way, all of our taxes are going up 10 % tomorrow.

41:21And that doesn't even go close to paying the bill, right? That won't happen. No, but that's what... So if it's not going to happen, then let's stop playing silly bugs and pretending we're going to solve the problem and then accept that we're rolling our dice on, let's just let... You know, let's assume it's not going to happen. Because they are... No, so I think there's a third path. There's a third... Okay, this is what... So the war in Afghanistan, the war on terror is estimated, I heard the figure the other day, some ungodly number, $13 trillion, I think it was of that magnitude. I think that was just the direct cost to the US.

41:50Right, right. They didn't raise taxes for that. Yeah. They printed the money for that, let's be real, right? So it's even worse than what you're saying. I'm not disagreeing with you. No, no, seriously. It's worse. So it's kind of like, oh, no, no, it turns out that we can wage hyper-expensive wars without taxing people. It's like, really? We can do that? Yeah. You know, which is just financialization and funny buggers with monetary mechanics and stuff, which basically just means we end up in a massive stagflationary spiral, which I've been saying for a while. And the events of the last week or so have just made me reinforce that view that we are in for lower growth and higher inflation.

42:32And I'm not talking hyperinflation and I'm not talking depression necessarily. you can draw the lines wherever you want but i just maybe i need you to talk me down from this particular ledge but it's like how even with things even if things do get pulled back the damage the die is cast in so many ways in in terms of the you know the cat is amongst the pigeons here i do not know how we escape from all of this with you know some some degree of slowdown in economic activity and some increase in prices i just i just don't know how that that happens Yeah. You've always got to remember too, here's the other thing I think economists need to understand this memo.

43:11You know, the things that we have today are because of investments we made yesterday, which is really obvious, right? So the computer screen that I am looking at you through right now is already in existence. And there was a very long, complicated, magical, really, coordination of entrepreneurs that brought all of that into existence. Now, with what we said earlier, with all of this uncertainty, no one's investing, right? Like no one is tooling up at this particular point in time, which means there will be less production in the future. Now, maybe things reverse. Everyone gets super confident again and the investments start flowing.

43:48And I think that'll give it enough time that obviously it will happen. But let's say that this uncertainty lasts to a sufficient degree for six months. I mean, down the track, this is a temporal. You've got to think, again, as the doc likes to say, you've got to think four-dimensionally here. Down the track, we will have less stuff in an environment where we will probably be stimulating and, therefore, in other words, just printing some more code. Less stuff, more money. I don't know. That sounds stagflationary to me. Yeah, and honestly, that's where we may well end up. I mean, that's the risk for the US.

44:20That's exactly entirely the risk for the US. Yeah, for the world. Yeah, right. And that's the potential next step. We have to be careful a lot to – go on. No, no, no, no, no. Go on, go on. I'm going to go into a slightly separate point, so finish your thought. The only thing I want to just keep some balance on, and this is just you and I, Ying Yang, right? You're the pessimist, I'm the optimist. We've got to be careful not to say the falls are justified, but the upside isn't, right? There are still despite all, and this is the other thing, but despite all the bad stuff, and that's the history of stock markets, history of economies, frankly, is despite all the bad stuff, our quality of life is phenomenally better over the last decade, five decades, 10 decades, 200 years, effectively since the Industrial Revolution.

45:00And it's just, it's kind of keeping those two things in your head at the same time. I say all the time, you know, the old Winston Churchill stolen and changed quote, democratic capitalism is still the worst if every other one we've tried. And we should absolutely try our absolute darndest to fix those problems. We've got an election coming up on May 3. Please, as I said last week, vote deliberately, vote sensibly, vote thoughtfully. But it's just good. You've got to keep both those things in our minds at the same time. Are there problems? Yes. Should we fix them? Yes. Is that still great? Yes.

45:27would you swap with any other time in history? No. And that's kind of, that's the dichotomy we've got to really kind of hold in our heads. Not about you particularly, I'm just saying people in general as we think about what's happening in the headlines. And that's kind of the broader point, right? Is during COVID, you know, month and four days, the market falls 38%. You know, biggest, fastest bear market in history. In history. One off, this time it's different, all that kind of stuff. Was it crap? Yes. Was the pandemic awful? Yes. We killed a lot of people. It was an atrocious thing to have happen to the population, right?

45:57And yet, and yet, we come out the other side, bigger or better off. Not to say those people who died are not worth thinking about or that somehow we discard them or whitewash them out of history. We don't do any of that stuff. It's just worth remembering all at the same time that it wasn't the end of progress. It wasn't the end of history. We have people saying the GFC was the end of capitalism. I mean, you know, and again, you're not saying that at all. I'm just saying for everyone else who's listening to the headlines, don't get too excited about the rise on the market on Friday. Don't get too pessimistic about the fall of the market the previous three weeks.

46:27the comment on what it means and how frankly silly I think traders are for doing all this rubbish given that we have still those circumstances we're confronting but is Willis going to sell more baked beans in five years time? You betcha. You know, is Willis going to sell more well, what are they saying about that? AI headsets or something by then? Yeah, absolutely. You know, so just it's try and keep those things all in your head at the same time. The policy brain on one hand is we really got to fix some stuff. We got some problems. The investing lens and the other investing brain is and despite that I'm going to invest because I think it's going to make money.

46:57I think the future is going to be bright. Despite all the stuff, the future is going to be pretty good. Now, change tangent. Yes. Oh, there's so many different directions. No, no, no, I won't. The only point I was going to make was, I think for a lot of people, probably even a small majority of people, things are worse post-pandemic. So in other words, yeah, markets and various economic metrics bounce back. But I think a lot of people would disagree with you that they're better over the last five years. And I often talked about the K-shaped recovery, the bifurcation, you know, it's sort of like plenty of people doing real jobs without a lot of assets.

47:37So I think they're just materially worse off. So I know it's a small point, but your point is probably a broader one. There's a decade rather than five years, but in any case, I agree with you. Yes, yes. But also, by the way, I think in 10 years, I'm going to look back, we're better off than we are now. I hope so, yeah. Look, I think so, in fact. You had not to. But well, I agree, but I don't think we should take it for granted. I think if that is to be the case, it will be that way because we make good decisions now that push us in that direction. To just think it will be better because it is better is maybe just an extrapolation of certainly decades.

48:15decades that's that's my point i think i think i think i know you're more pessimistic than me i we human endeavor human ingenuity human development human drive those things don't go away ai is here ai is gonna gonna make things better faster more productive the the the arc of history i don't love extrapolation either nor do you but i think the to imagine we hit peak or any of those things capitalism ingenuity development potential all that kind of stuff i think is i think is it would be an unlikely if you bet in any given five-year period i think it's unlikely that things are worse five years they have been the last five years you're absolutely right mate you're many percent right to call it out i think over any any meaningful period things tend to get better because humans tend to find better ways of doing stuff i suspect that's the most likely outcome bit like markets right they go up two years out of three doesn't mean they go up every year but on balance you're probably right to bet on improvement just because that's kind of what people do i don't we have a net we have yet to hit that point where we've maxed out that stuff I think to start with, okay, we'll look back and say 2024 was it.

49:12It got worse after that, never got better. I think that'd be a rough bit. It might be. You're welcome to disagree, but I think that's my take. No, honestly, I don't. I'm being a little bit pedantic here, but it's the only – I don't agree with you – don't disagree with you at all. I think the only point of possible debate or contention would be timeframe. Yeah, sure. So, I mean, there are in recent – when I say recent history in the last several decades, there have been 10 years – Well, they lost decades, they get called. So plenty of - But I mean, they're going to make growth really, has it? And a decade can be a long time, you know - Is that true, though, other than the stock market?

49:44I would suggest real incomes having - So Great Depression, I haven't known the numbers. I'm sure that's probable. Since then, has there been a decade where real living standards have decreased? I'd be surprised. Well, you know, that is a fascinating question because this is why GDP is one of the many reasons why it's such a stupid, useless metric. Because we are taking something we measured in 1970 and we're comparing it with a measurement of 2025. Do you know how many iPhones were sold in 1973? Yeah, that's fair. So it's like we have – That's also my point though. We've got iPhones now. Like that's – Yeah, yeah.

50:18The world in your pocket. And it's like – I don't know. And that goes both ways, right? So you can't compare it. You're right. On the flip side, you also can't say – Well, you went from a telephone in the hall on literally the phone table, it was called as it was in my house, with a couple of yellow pages and a couple of white pages underneath on the shelf to the iPhone. It's like, oh, yeah, it's about the same. It's like, well, kind of, but man, I've run an X thing in the car and ABS and iPhones and this Zoom. We're doing this on Riverside. It's a Zoom-like thing. Go on. So the example I read the other day was in Vietnam, the GDP per capita now is equivalent to what it was in the US in 1904 or something like that.

50:59Yeah. Yeah. Now, where would you rather be? Would you rather live in modern day Vietnam or would you rather live in 1906 New York? Yeah. Now in 1906 New York, there was no penicillin and you had a candlelight to keep you, you know, to be able to like stay up at night. If you could afford the candles and if you weren't street sweeping or no social welfare and. Right. And here you are in modern day Vietnam with a smartphone and air conditioning and penicillin, right? So, and yet, this is why GDP is just terrible. I go on all day about how I hate GDP. So, you're right. But it's also when we have these, not you and I, but when people have these discussions, it's a really good point to bring up that like on a materialistic sense, we are better.

51:45But it's not as if there's like one dynamic or one factor pushing thing. It's a multifactorial, you know, multi-dimensional kind of beast that we have here. So two things can be true at once. We can have an erosion of the structure and shape of the capitalistic apparatus in, you know, not in a good way. One that doesn't allow for as much capital formation and growth and all of those kinds of good things while still getting better things because, and this is the other thing that's so hard for our monkey brains to wrap around the rate of technological process has been so vast that it that it can incredible you you can get that in an environment which is the which in which the capitalistic apparatus is deteriorating it's just it's just that their inventions have been so mind-blowing that it's kind of like well even despite that i'm better off again in this one one particular dimension so it's it's complicated i guess i'm not i'm not Let's, cause gosh, I just looked at the clock.

52:53I feel as though, I feel as though we're only just getting into the introduction still. Can we talk about the bond market? I reckon this is why, why, this is why Trump blinked in my humble view. So if you want to take, let's devil's advocate here. Let's take the 4D chess strategy at face value. Right. So the idea being, we're going to do all of this. it's going to be sort of partly for the reasons we explained for geopolitical strategic sort of initiatives. But the other angle that people are pushing is he's trying to do this to force the Fed's hand to force yields down because the US is having to refinance something ungodly amount of debt this year.

53:34So it's like, we'll get, we'll get rates down. We'll force the Fed down, refinance. It'll save us tens of hundreds of billions of dollars in, in money. And, and then, then we can get back on once once again once we've refinanced the mortgage back to the casino right we can get on with with all this kind of stuff what and we saw that right so as as just google us 10-year treasuries and so you sort of see them bobbing along and then they they sort of fall down and then in the last as we speak 24 36 hours the bond yield spiked now someone made the point to me the other day that's like hey gold isn't behaving like gold is meant to behave which is funny right Because like, well, how is it meant to behave?

54:16Or the other one is bonds aren't behaving the way they're meant to behave. I'll just unpack it a little bit here in the sense that when economic orthodoxy would suggest to you that when things are really scary like they are right now and investors are really uncertain, you dump your quote unquote risk assets and you buy safe haven assets. And the safe haven asset du jour in our economic world, you know, I disagree strongly with this, is government bonds, which is government I use, which is government trust me, bros. And yet people are selling their bonds. And I mean, they have to be because that's why the yields are going up, right?

54:56And it's like, that is interesting. It's like, whoa, whoa, this isn't in the playbook. No, no, we wanted yields to go down. And it was sort of like, talk tough, talk tough, talk tough. oh my gosh bond yields are spiking again we've gone from like three point something to almost five which i know it doesn't sound like a lot but these are big on bond markets these are very very very big moves and i think that's just like he's gone okay we we need we need to sort of rethink all of this um what do you think of that what's what's your view on that i can i i can i say one more thing just to frame it up just why is it important because you would say you would say that it's just like the market's doing what the market does people don't want to buy it they and imagine if you're a potential buyer of bonds here it's like okay the safe haven aspect which i can barely say with a straight face but the safe haven aspect might lure you in but in a world we've just like you and i aren't the only ones with this hot take that inflation is going to get worse here.

55:59It's like, wait a second, inflation is going to probably run pretty hot in a tariffed world. In fact, it's probably going to run hotter than even what we first surmised. I want a bigger interest rate to compensate me for that. Of course. There's also this thing called the US basis trade, which is all these hedge fund shenanigans get in with sort of shorting futures on bonds and buying the bonds themselves. It's so marginal that it only works on incredibly ungodly amounts of leverage, like 100 to one leave it up sort of strategy, which is unwinding a little bit as well. But you might still sort of say, yeah, okay, that's what the market does.

56:30However, in the system that we've got, it's sort of like, wait a second, this is not what we want. Here's my take, which is no surprise. It is leading 100 % to Fed intervention, which is, we can't tolerate those higher rates. For the good of the system, we're going to, can't even say the word, support the market, which is just another way of saying, we're just going to buy this with funny money. And that's my call. I'm going to put it on the record, public podcast. I think that this was not what they expected to happen. And why would you? By the way, the biggest buyer of debt is China. Now, your trade, the only reason that China is buying so many bonds is because they've got so many US dollars.

57:14They've got so many US dollars because the US buys so much of their stuff. US buyers, when they buy stuff from China, they pay in US dollars. The Chinese go, thank you very much. I've got a bunch of greenbacks now. Well, we don't actually import that much from you. So I guess we'll just buy US treasuries and assets. This was the big thing in the 80s is everyone was worried that the Japanese were going to take over the world because they had such a godly and massive trade deficit. They had a wash with greenbacks. They were buying up every bit of asset in the US that they could because they could, because they had so much money.

57:45So just to game theory this out a little bit more, it's like, Like, so now we're not, we're never really with that friendly. Now we're really not friendly. So I don't know if I want to recycle all of my hard, you know, I've sold all this stuff to you. I don't know if I want to give it back to you and in fact fund the war machine where the cannons are pointed very firmly. I mean, it doesn't make a lot of sense. Also, you weaponize the dollar when Russia tried to do stuff and you like, you just basically rug pulled them or all the treasuries that they were holding. So I, you know what? I might not buy them anymore.

58:14So there's that dimension to it as well. And so, and the authorities go, whoa, we kind of, the treasury markets aren't clearing. And they're certainly not clearing at a rate that we're happy with because we can't roll over this debt. So we're going to buy the bonds instead. And I feel as though that is a, nothing stops this train to sort of quote Lynn Alden here. I think that the big, big 4 ,000 foot, 40 ,000 foot view area on all of this is that things didn't go to plan. Surprise, surprise. And, or maybe this is the plan. And maybe, you know, the Fed will have its hand forced, which means that we are going to repeat some of the shenanigans that we did in COVID and in the GFC and in the tech crash.

58:56What do you think of that? There's a lot in there, mate. There is a lot in there. Just help me understand for a second. I think I actually looked up the 10-year treasury. I very rarely do because I don't care that much. But I looked up yesterday and I thought the level's about what it was before it started falling. Yeah, it is. Okay, okay. So it hasn't gone to historically high levels, at least in terms of recent history. No. Which doesn't evaluate your point. I just want to make sure I hadn't got some old data somehow. It is deceptive. I fell for that initially because people will post charts.

59:28Oh, it's skyrocketing. Yeah, yeah, yeah. But, you know, from the bottom to now, and again, you look at the y-axis and it looks like, wow, vertical, but it's like going from 4.2 to 4.8 or whatever it is. I have to go from 4.8 to 4.2 in the first place. Just the very quick response to that would be, was it's more about not comparing the baseline in the pre-tariff. Before we knew this was going to happen, the baseline is where we were 48 hours ago, which was a world of much higher inflation and much higher tariffs. And for it to reverse in that more narrow context is the more noteworthy point. But you're right to sort of point out the broader picture.

1:00:06Yeah, and the reason I actually pointed out, I suppose it comes out, it comes out to how much motivation you're willing to ascribe to Trump's actions and what motivations those are. Yeah. Because I don't think you are wrong that a president might try to do that to solve the problem. If that was a problem that they took seriously, I have seen zero evidence ever. I don't think I've ever heard Donald Trump talk about bond yields or the rolling over debt or repayment of the debt or anything else. I also don't necessarily believe that Trump is some altruistic,

1:00:40generous president who's prepared to lie about the impact on the american people so that you can pay back debt of a country uh and somehow improve the long-term standing of of you know if this was a i'm not gonna mention it because it'd be one part of the other and someone will be if you're a politician you know what here's the thing people this is tough here's the problem we've got we can't repay it we've got to either get a print some money and inflate the whole thing away which goes you pay more or we've got to do something on trade deficits or something else so here's what we're doing i might give that some credence economically mathematically you're not wrong and so i think but but i just have i think about again i i perspective is funny and perception is funny there are people out there who think donald trump is the best thing since sliced bread and the and the most the smartest person god's ever put breath into and i guess that's come from some reasonably they believe objective view and so my view i think is reasonably objective but i could be as wrong as them is i see no seriousness i see no policy interest i see no national interest even when he says america first the way he's doing it has no national interest outcomes other than maybe some very very very clive palmer-esque um you know sounding good year two economic year two maths rather than you're not economics so you don't need a bloody high school degree we've talked about a million times so i see no i see no credible way to link the the tariffs the policy as announced with that outcome and maybe if the tariffs are in place for the wrong reason and maybe that is the outcome maybe things aren't doing up better by complete circumstance and coincidence rather than because trump actually meant it and i could be horribly judging him badly here and there's people listening if they're still listening thank you by the way if you're if you're a hardcore trumper and you've listened to an hour of us bag him thank you for being open-minded enough to keep listening um because i just i i don't i don't it's hard to say i was gonna say i don't just like trump i do just like trump i think he's i think he's intellectually morally unfit to be president i don't think he has enough policy interest or dedication to the role that that that's absolutely my view not because i'm anti-republican i'm not pro-democrat um i quite like mitt romney i wish mitt romney was president rather than rather than Donald Trump right now.

1:02:34In fact, I'd rather Romney than... Anyone. Well, yeah, but also Romney than Biden, right? I think there are people who are out there, and it's not because I'm pro-Republican or anti-Republican or pro-Democrat or anti-Democrat. I don't have to stand back it. No, it's fine. I totally get your point. I don't think anyone's listening here going, wait a second, he's pushing a barrow here. You've sandbagged it. You'd be surprised. Last night, I live tweeted the Treasurer's thing, which we're not going to get to, and I was accused at the same time of doing a protection racket for Angus Taylor and at the same time for being so pro-Labor, I should join the ABC.

1:03:03Literally within about three minutes of each other they were the two tweets back at me. It's like, cool guys. So you're right, our listeners are better than that but I just, as you said about the military stuff, sometimes we need to feel like we need to contextualise this stuff. Particularly if there's a transcript at some point someone pulls out in 2048 and says, but you said back in 2025. I was like, you're all right. Anyway, yes, you're right. So I hear you, mate. I think that's a reasonable explanation from smart people who are trying to justify what Trump is doing. I don't think it explains his motivations in the slides personally.

1:03:32I think that's true. No, I don't either. So I'm more interested in the what happens and not the why. So you're right. You might get lucky, you're right. Apologies if I gave that impression. I'm not saying it. I think that they think that they are trying to engineer a certain outcome. But my point is, is that the outcome that they assumed would happen didn't happen. Bond yields didn't fall. They rose, right? And it's not even like we can tease that apart all day long, But it's more just for whatever reason, they did. They just did. That's right. And the fact – and again, we – the media has done us an incredible disservice in terms of educating the populace here because we imagine that central banks set interest rates.

1:04:17Like, that's what we think. And I'm not trying to be controversial. I'm not trying to advocate for the downfall of the system here or today anyway. So bond markets set interest rates, period. They do. Because at the end of the day, when you say, I want to borrow, you're a government, any government, and you want to borrow money, here's some bonds, who's going to buy them? And the free market will buy them, and they will buy them if they feel as though it's a good property. Like any person is like, well, what's the offer? Hey, Scott, I've got something to sell you. I want to borrow some money. Oh, yeah, cool.

1:04:49How much do you want? Want this much? Yeah, well, I'll do it for you at 4 % because I feel like you're – that's just business. That's just trade. That's just normal things. Central banks, when they set interest rates, they're just only setting the interbank rate which banks lend amongst each other. I don't want to get too much into the – And to some degree it impacts things like home loan rates, but the bond market acts independently of that. It does, but they're all referenced back to that. The only where it gets interesting is when the market doesn't behave in the way the authorities would hope that they would behave.

1:05:25Yes. And I don't even want to get into the theory of it. Yeah, yeah. Whether that's right or wrong, they just don't. Because they look at it and they go, I don't like high interest rates. You know, it's like, well, do you like free markets? Okay, but okay, you don't like it. Fine. Well, you don't like it. Yeah. They will intervene. And that is really, it was a long-winded, badly articulated point. My point is intervention is coming, whether you think it's a good thing or a bad thing, because it either has to because you then you just simply cannot spend on the credit card for this long, racking up this much amount of debt before the bank goes, you know, I'm just not going to increase your limit anymore, Scott.

1:06:04Like, mate, you're a trillion,$100 trillion in debt. Like, no. Or, okay, but I'm going to lend it to you at more money. And then if you go, well, no, you're going to have to lend it to me at a lower rate, unless you point a gun at my head, the only alternative is for someone else to come in and act as, quote, unquote, buyer of last resort. And that's why I think this is, I hope, I'm really trying not to sort of frame this in any ideological kind of way rather than just an inevitable mathematical way. And not in saying this system should be different or anything. It's just like, here's the system.

1:06:38Yeah, that's right. Here's the reality. Here is the inevitable outcome of that reality, which is intervention. It's not only the amount of money you've borrowed, actually. It's actually the interest you can afford to repay based on the level of income. Which is already bigger than defense. Right. In the US, this case. And that's my point, right? So imagine – it's not so much the bank says you can't have more limit on your credit card per se. it's, well, hang on, you're already spending 20, then 25 to 30 % of your income paying back the interest. And that's going up over time because you're not actually paying back, you're taking on more debt over time.

1:07:05I'm not going to call you because the debt is too large. I'm going to call you because your ability to repay becomes – and I know it's the same thing, but just to keep people that context of, in the US budget sense, why can't they keep increasing the debt? They can, but at some point they can't repay the debt and it takes more and more of the national income. And that's the problem. That's where you've got into control. And again, so I'm really careful not to steer into the ideology of it all. It is just when I look at the current scenario and the unintended, I think, gosh, you'd want to imagine it's unintended consequence of these bond yields spiking.

1:07:36I mean, again, people will be listening to this. It's all pretty wonky. It's just like, what does it mean for me? And here's what I think it means for you. And again, I'm navel casing. Macro forecasts are there to make psychics look credible, right? Weathermen do, that's right. I know. But for whatever it's worth, what does it mean for you, dear listener? It means higher prices for all the stuff that you pay. It means lower value for your time and effort for when you work. And it will mean a reckoning of two. It's going to be when an immovable object meets an unstoppable force, which is we don't want interest rates to be too high because the debt burden simply will not allow it.

1:08:21At the same time, we want interest rates to be high because inflation is high and we need to fight the inflation. and there is an impossible square to circle or circle to square. I forget. I'm too far along. To, yeah, that analogy I've joked. I've memed myself into a corner there. Let's square the circle, shall we? Let's square the circle, thank you. All right. Do you see what I'm saying on that? You say you, dear listener. I'm not as sure the impact on Australia as much as the impact on America, though, given the relative debts. Well, just given the relative debts. I mean, the impact on the US almost can't possibly find its way out of this one.

1:08:55I think Australia can. Now, maybe it won't, and maybe the impacts happen or maybe they happen down the track. But I just think that maybe, well, we have to assume a lot in terms of what politicians and central banks might do between now and kingdom come to work out what is inevitable and what's not. But I think the Americans are far closer to the cliff than we are. We may be walking together with them in the same direction. So that's what's about the fire process. But they're our major ally and the largest economic superpower. And again, we will not be isolated from all of that. We will get some of that, yes.

1:09:29And while we look at things like debt to GDP and all this kind of stuff, we always look at that through the lens of, well, how is debt moving? Yes. It's like, well, the GDP can move a lot too. Yeah, that's true. Right? And so all of a sudden those ratios can change, not because the debt is necessary, but you listen to the debate. Is anyone talking? You heard the budget. Like, okay, okay. You're the US and you're just like a basket case of financial responsibility. It's like, people, I might be better, but I'm not much better. And I'm on the same path. That's what I'm saying. We're walking towards the cliff.

1:10:04We are a decent number of sets behind. Yeah. Debt to GDP, we are miles behind. But to your point, if we simply keep walking the same way, we will have blowback. And I didn't mean to suggest we had no impact. Well, I guess the impact on the US will come from the US Fed's response to, So if, again, there is – The RBA will move in lockstep with them by that because they always do. But in terms of the inflation and money, we won't need to do those same things. We have more options at this point than the Yanks do. And we have more time to respond to that. Oh, yes, yes. I agree with that. No, no, I definitely will agree with that.

1:10:35So I just want to point it as a fait accompli. If the US has inflation, the trade will suffer some inflation as well because these things will kind of become global. If the US economy has a downturn, we will have a downturn of some degree. Maybe it's not a recession. maybe it's a reduction in growth, maybe it's a short-term recession. We are a couple of ripples out on the pond. But I just want to make the point that what the US Fed – I want to make the point that your interpretation of what the US Fed may or may not do isn't necessarily what the RBA will need to do in terms of that money printing slash debt buying unless we don't do anything about it.

1:11:07We have longer to respond to it. That's the one benefit. We also have a slight benefit in the exchange rates too, which makes life a little bit easier because we have that – it's almost an automatic stabilizer buffer. and as much as I want, I think I would still choose the reserve currency if I was able to, but I'm not sure by as much as other people think because having a floating currency that allows it to absorb some of those shocks is a huge benefit over the reserve currency, which is like, well, we're the big kids. Yeah, but if you get hurt, you can't kind of, there's no kind of immediate buffers or stabilizers that help you.

1:11:35We might be the smaller kid. Yes, we kind of get hit. If someone throws a punch, we probably get hit, but we can soften that blow in a way that the US can't. Yes, that is true. I mean, it's a question of degrees, But the point will still, I think, stand. It's very hard to envisage a world where the RBA diametrically opposes or moves in a different opposite direction to the Fed. I mean, it could, I suppose, but I think it'll be. And it's also a question of what markets are doing. It has to sun go recently, but not much. Yeah, you're right. Yeah, I mean, it does. But let's say things get more, I was going to say real, they get more real.

1:12:08And then, you know, because the government has a pretty big deficit, they go, okay, we're going to issue some bonds. And again, it doesn't, it's like the initial conversation we had with people dumping stock, not because of any objective rational calculus, but just because I just don't want this anymore. And people with money, the actual money that exists today will be like, yeah, Australia is better, but I'm really not in the mood to take this risk right now. That's also true. And I mean, the RBA did it in COVID. We've still got the term lending facility in place. You know, we've still got all kinds of things that happen.

1:12:42So anyway, so I think the RBA will – I think – I'll come back a step. I think it's not – I wouldn't say – I would never say count on this. This is definitely going to happen. But I would say as an everyday Australian, I do think it is a reasonable chance of higher prices and all those things that I said, lower growth and the rest of it. And the tragedy of it is – As a side effect or as a rippling out from what happens in the States. Yes, yes. And I think the greater tragedy of it as well, and I want to do a rant on this one. We don't have time today, but in terms of, I think everyone's angry at capitalism because no one understands what capitalism is.

1:13:21They're angry. They're right to be angry. They, and they're right to be angry at the system. The system is defined as not. I wouldn't call it capitalism at what we've got. There's this great article. Let me give a shout out to a guy called, two guys, Alan Farrington and Sasha Myers, who wrote an article after COVID called, This Is Not Capitalism. Okay. These are ex-finance guys, still finance guys, actually. And they talk about what capitalism really means and how this is not capitalism. And it's such a good article. I've read it a few times. Honestly, disclaimer there, Bitcoiners, but it's not a Bitcoin article.

1:13:57But it's really deep. I'm really excited, thank you. Yeah, you won't read it now, so I shouldn't have said that. But it's a fascinating article. My point being and why I reference that is that it would be one thing with all of this stuff going on if the structure of our economy was more robust and resilient. But in the good times which we are now leaving, we did not enhance our capital stock. We did not put in place mechanisms to allow the thriving of the capitalistic endeavor. What we did do is we built a bunch of totems. We happen to live in these totems and we call them houses. But that is – so you talk about the – we talk about the strategic militaristic sort of angle of all of this kind of stuff.

1:14:47We have done nothing. We have not taken our good fortune and invested it into good productive capacity a little bit at the edges. We've taken it all and we've put it all in housing. and like beyond the beyond the investing lens of that the the strategic misstep in that is is not really going to become apparent until the if these things continue on their trajectories and then we turn around and go right we got to roll up the sleeves and do some stuff and go okay who's got some uh some industrial capacity uh not us we shipped it all to china okay okay cool cool uh who's got some spec oh no it's all tied up in this apartment block like we don't have anything We don't have anything of productive value.

1:15:30Not much. And it's just like, that's a reckoning that's going to be interesting. Especially when it's debt funded. Debt funded in a world where interest rates may not be able to go down without an incredible intervention, which is going to have all kinds of second and third order events. My TLDR in all of this is it's really hard to be positive at this point in time. See, I completely disagree. And that's why I want to separate out. You're always positive. Well, but. I'm always negative. Well, it's always been the right thing, right? Over centuries, it's been the right thing to believe that humanity improves its situation.

1:16:00I think that's, you know, I will separate the short term from the long term. I am far less optimistic about the next 12 months. But I also don't think if you're making bets, if you're investing, you're hopefully investing for all the 12 months. If you're making bets for all of that, and it may well be true and it may be even the worst of that. There's never been a time in history where it wasn't a good idea to invest or a good idea to believe that the future was going to be better. And that's why I'm optimistic because I think we can get a little bit too caught up in the, you know, I've used the example before when I learned to ride a motorbike years ago.

1:16:28They said, don't look where you are, look at where you're going. And it's a nice analogy because it actually works, right? When you're riding a bike, like I started, I'd never ridden a motorbike before. So I go to the Lotus course. And I'm always looking down the road in front of me, looking where the wheel's going to go. It's like, dude, stop it. Just look where you're going to go. But the stuff in front of me is like, no, look at where you're riding to. Eyes on the horizon. It's a beautiful analogy because it happens to be, well, at least in the motorbike sense, it's 100 % perfect. And it's amazing when you look at it, you're like, oh my God.

1:16:54Your instincts take over. you kind of balance the bike properly you know how to get there your body we've walked for years we've run for years our bodies are really good at going there's an obstacle three feet in front when i get there i'll step over it but i've got to look ahead to see where i'm going so i see the next obstacle ahead of me yeah um that that's why i know you're right i'm always optimistic you're always a pessimist i get all that i just think that i don't want to subsume the long-term upside with and again the vanguard 30-year chart blah blah drink everybody it's better than kogan um you know i just i that's why i'm that's why i'm optimistic despite what might happen that that's It's like the optimistic even though the short-term future might suck.

1:17:28Actually, I agree with that. I think where we differ is one of timeframes. So I think you're right. I mean, the 30-year chart is an excellent reference point here because it goes up. But, I mean, these long-term charts are deceptive in our temporal reference frame, if I can use that, because while it might be good, there are lots of periods where 10 years sucked. you know and and like it so i'm not saying you're right to be long-term optimistic and you're wrong to to not that you are but or i am either for the record advocate going through a bomb shelter and like stocked baked beans i'm not saying that i know you're not but but i but i am saying i my my personal again macro forecaster there to make psychics look respectable my my personal outlook is I think 12 months.

1:18:22I don't see things getting better in 12 months. Maybe, and again, who knows how it plays out. I think we could have a decade of moving forward, but maybe at 5 % real terms per annum, not 10%. And to your point, the answer is I'm like, all right, well, what do you do? I guess I invest. And for the record, I'm fully invested right now, right? So you've got to try and thread this needle appropriately here. Just coming back to my earlier point, it's just, oh, it's 4-5, and you're not saying this. It's 4-5 % I should buy, be optimistic, this too shall pass. There's a lot of truth in all of that, but at the same time, I still think over a medium-term horizon, I don't, because these issues are so structural that it's not, the can has been kicked down the road on some of these things for so long that a reckoning, if there is a, it's either a prolonging of this, which is going to be a very difficult headwind to sail into, or there's going to be some kind of reckoning, which is going to be a very painful and hopefully not too long lasting kind of thing.

1:19:27But it might, it might just undermine that idea that not you're saying this particularly, but that, you know, still buy, because in a couple of years, this will all blow over. Maybe it won't. COVID was extraordinarily unusual as a bear market, extraordinarily unusual. And it might not be the best. You're not using this, Cthos. But it might not be the best reference here. It could be more akin to the 70s where we just had the market went nowhere for 10 years. Yeah. And we get into market timing and all sorts of fun stuff. I reckon we're probably done, mate. We're an hour and 20 in. We've successfully almost covered the first bullet point in our agenda.

1:20:07There's so much more to say about that. I feel, yes, let's end it. But it's like, I feel as though we could spend 10 hours on any one of the points that we discussed. We absolutely could. But we won't because we - Fortunately, we do it every week. Exactly. And we have for every week. We've done more than 10 hours. Let's be really frank. We will call here though. Thank you for listening. Thanks for spending time with us. If you've got any questions, comments, feedback, if you've got any criticisms, no, I'm kidding. Follow us on all the socials. Ram is at Sage underscore Simeon or at Strawman Invest on Twitter exclusively.

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