Is the government going back to 2019? September 27, 2024

26:15And I love this, Mike, because it was, I'm going to assume I know the answer. I'm going to assume I know this. So I'm going to say it in absolute terms because I'm 98.4 % sure it's true. There was a story leaked, selectively given to a journalist. And the story goes that an unnamed bureaucrat has been tasked to look at whether or not negative gearing maybe possibly is an issue and maybe possibly could maybe if we thought about it long enough could maybe be changed uh but if it isn't it was never our policy in the first place we never said we actually wanted it and it was a leak to a paper and you can't take that sort of thing seriously in other words the government wants to change negative gearing but doesn't want their name attached to it because frankly i remember 2019 and so they've said we're not going to say it it's not going to be we're going to say it's not a policy we're going to say it's not even our idea but if someone interested you want to look at it i'd be interested to see whether the public like that or not so let's make sure it's reported in the paper can i save them a whole bunch of effort go on the public are not gonna like it right they're not we've well they've tried it right like fun now don't don't get me wrong it'd be good we're gonna be very careful in my language i'm not saying it's not necessarily a bad idea or a good idea i don't want to i don't want to wade into that just yet um oh we're going to but but they know they know what the reaction is going to be because they've run this up the flagpole before and it wasn't like, oh, it was a nuanced debate and, you know, the populace was split 50-50.

27:40Like, no, everyone hated it, you know? When I say everyone, you know, a significant majority of people hated it. And it's like, you're running this up the flagpole this close to the election? Like, it's bold. It is very bold. And so that's kind of, so let's do the politics just for fun because it's fascinating and then we'll get to the actual things that matter, the policies themselves. I find this fascinating so I will say I've said many times actually because I'm on Twitter a bit I've saved this link to this tweet so I can just give it to people when they keep mentioning it the number of times people said oh Bill Shorten tried it in 2019 it didn't work so the Australians don't want policy or we don't like that or we don't like frankincredits we don't like whatever and I've said this is my personal view and I'm no political scientist or pollster my personal view is Shorten had some good policies had some terrible policies including the frankincredit refund thing he was an unpopular leader Chris Bowen came and said, well, if you don't like it, don't vote for us.

28:34Okay, that's what they'll do then, Chris. Morrison was a spectacularly better campaigner. Regardless of what you think about him as a person, as a prime minister, I vividly remember, I don't know if I've said this podcast before, I was in Queensland at the Motley Fool's Gold Coast office. And it was the week before the election. And I didn't predict the outcome of the election, but they had Bill Shorten on before or after Scott Morrison on the Today Show. 7.30 in the morning. And Bill Shorten, God love him, he's just waffled through what he wanted to do. A bit like John Hewson of the birthday cake, right?

29:06Just like, well, let's do it. And they have Scott Morrison. He's like, right, I'm going to do this and this and this and this. And I vividly remember this. I'm going, oh, man. I mean, if Morrison wins this thing, that's going to be why. And that's not just why, but the campaign was just spectacularly better from the LNP than Labor just was. I've given Labor a whack on the inflation thing. I'll give the Libs a bit of credit here. but it was just a better campaign. Now, I think Scott Morrison's government was pretty disappointing, particularly by the end of their term. So I'm not saying he deserved to or should have been or was a good prime minister.

29:36That's for other people to judge. I thought it was a bit disappointing towards the end, particularly. So I'm not convinced that any of these individual policies, well-conceived and well-communicated, are politically impossible. That being said, to your point, I've got to believe the Greens are actually getting some traction on housing. Now, I think the Greens' policies are abominable. But I think people are so despondent and have given up so much hope they'll take anything right now. That's why Donald Trump gets elected in the US where I was like, well, I don't know, but the rest of you guys are knuckleheads, so I'll try this guy just in case it makes it better.

30:09And I just, I think it's fascinating to point out, who would do this? I mean, the poll at the latest is May. So eight months max between now and the election. As you say, you're running up the flagpole. Like, how mad is that? Now, firstly, as I said, they do it by making it arm's length and then, you know, arm's length from there it's like senior treasury official not authorized to speak not not government policy we're not even sure we want to do it yet we're just and if the treasury want to look at it i guess it's up to them albo said in the paper on thursday morning uh oh it wasn't even my idea yeah it's like you couldn't get further away from the idea if you tried yeah but i gotta reckon the greens are having some impact man i've gotta reckon because if you're gonna if you're gonna do this why are you doing it are you doing to win votes well you and i would think ordinarily no but maybe that's the case i mean if you think about the political spectrum You've got the LNP to the right.

30:53You've got a couple of, I'll say now just because I can, further right than that. You've got the Teals now kind of in the middle ground. Labor to the left of that and the Greens to the left of them. And I kind of feel Labor's probably going, well, hang on. We're not going to lose any votes to the right. If we're losing primary votes to the left, our little space there, which was once half the political spectrum, it's getting really small. I think they got less than 40%, maybe less than 35 % of the primary vote last time. I wouldn't be surprised if someone's done the maths and gone, on, well, the tills are on our right, and that's kind of safe-ish ground for us.

31:25The Greens are on our left, and if they get any more primary votes, they're going to pick up Senate seats, maybe a couple of rep seats. And we're in minority government from the left, not from the centre. So I don't know. That's my best guess as to why you would do it at this point. Do you have any thoughts on the politics before we get to the policy? I'm pretty sure that of all the focus grouping – gosh, which is just so – you know. I know. But anyway, that's what they do. All the focus grouping that they've done is just come back loud and clear. People care about two things right now. Well, really one thing.

31:56Cost of living is everything. Yes, it is. It's everything. It's the economy stupid. It's the economy stupid. And within that is housing. So if there's two things and really one thing, I guess, combined that you want to talk about, it's like I'm working harder and harder and not getting anywhere. And the dream of owning a house is just getting further and further and further away. Or if I've got my toe in the water, the hope of ever paying that damn thing off is getting further and further and further away. So it's just sort of like, so partly it's sort of, well, we need to do something. We need to do something.

32:31So when you look at any of the policies - Well, we seem to be doing something, one of the two. Sorry. Thank you. Thank you. You know, it's like we'll build however many houses in the next five years, which is going to land so woefully short, right? Or we'll do this, you know, just, or we'll get onto this in a moment too. We'll go after the Coles and Woolies. You know, we just, we need to, this is what we have to go to the election with is a at least seemingly credible plan to address these very, very clear pain points that most people are feeling. Yeah. And I think that's what's driving it. I hope we sufficiently bashed the LNP when they were in government.

33:10We've certainly done plenty on their housing for soup and other stuff in opposition. So, you know, I'm an equal opportunity, brickbat and bouquet kind of guy. We're criticising the government more because that's kind of their own power making the decisions these days. Every time Treasurer Chalmers gets up and says, we're doing everything we can to address the cost of living for Australians. I just want one juror to say, Treasurer, just give us a list. Just three things. What do you actually, I mean, everything you can, sure, I hear you, but what's the, as Jed Bartlett might say in the West Wing, what are the next 10 words?

33:41And what are the next 10 after that? You tell me those, I'll drop out of the race right now. and it's kind of exactly that it's like so everything you can which of those everything you can's are you doing and what effect are those actually having you can have some taxpayer money on energy bills and you can add some rent assistance and that's useful the latter in particular the former is an absolute ridiculous debacle because jenny gets money as much as the poor bastard doing his you know on the bones of his backside um which was a ridiculous policy it was pure politics to make sure that no one missed out and so everyone was happy and everyone voted for him but to actually address the underlying issues with inflation like there was there was zero literally zero being done well no it's worse it's it's worse than that i will i'll take zero at this point i'll take zero you're making it worse i mean just let's step back a second here and i made this point again a week or two ago but it just bears repeating it's just like everyone think well the government should pay us some money so where does that come from it comes It's from us.

34:41They tax us. They don't tax us enough because they're in a deficit. So they borrow the rest. There's a whole bunch of that chewed up in admin and the rest of it. And then they give it back to us. Now, there is some redistribution in that. But as you've just pointed out, it's not always a fair redistribution or much of a redistribution. And it's just like, so the end result is we're just pumping more liquidity into the system. You know, it doesn't automatically follow from that, that that is going to result in more people making more stuff and delivering more services. So it's just like that's the irony of ironies here is that in attempting to address this, you are just making it worse.

35:22You're distorting the economic transmission mechanism. You're increasing the supply of money relative to that of goods and services. What else is going to happen? What else is going to? And it's so pernicious because there's a lag effect, right? And it's not a one-for-one. And it's operating in an environment where there's 50 other gazillion factors also playing on it. So it's easy to kind of do the shell game with that kind of stuff. And it can set – like first level thinking-wise, it sounds great. Wait, the government's going to help me pay my electricity bill? Brilliant. Bringing down the cost of living.

35:57Where's that money come from? Don't worry about it. I don't have to pay for it directly or immediately. So it's good, you know, and it's, it is, it is madness is what I would say. It is, it is pure madness. And, and unfortunately, I don't know what I, if I was a dictator, I know exactly what I would do, but if I were operated in the political reality that we do, I don't know what I would also would do because it is going to take, it is a Herculean task to, to. educate the entirety of the country in a clear fashion as to what the problem is. And this is, as everyone listening knows, is a very nuanced, multifactorial, diabolically tricky problem.

36:43So first we're going to have to school you all up in some pretty advanced economics. And then we're going to have to convince you that you need to suffer for a little bit, short term, for the long-term benefit. And then we're going to have to get you to all buy into this. All right, here's$3 billion for electricity then. Yeah, which is why I am so cynical when it comes to the government fixing it. I can't believe that they're that silly that they don't recognize the problem. They've done the political calculus and it's just like, well, I would rather just stay in power for a little bit longer and my successes down the track can deal with this problem, not me.

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37:31hey let's let's then go to negative gearing mate let's go to the policy itself because that's frankly i mean the policy is hard to get past just because it's so bloody annoying but um the government's again some faceless bureaucrat has somehow managed to find a way to leak something to a newspaper blah blah blah let's assume the government's actually looking at changing negative gearing um i have a view i'll share my view first then you can share yours um i would given the choice stop but grandfather negative gearing for residential property only and it kind of goes like this i don't god speaking of bloody trying to get people on board when i've done this on twitter people say oh it's just more tax for the government less tax deductions for me so they're screwing me even further and it's kind of like just firstly pull your head in secondly um that might actually be the outcome and if it was well actually hey it might just slightly close the massive federal budget deficit and debt we've got.

38:25But it's not about that at all. And it's just that self-referencing thing that drives me a bit crazy. So why would I do it? Because if you think about a potential landlord who might buy an investment property, they will say, right, I'm going to buy it for a price that approximates the rent I'm going to get, plus any tax benefits, plus whatever I can afford to put in out of my own pocket if I I fall short and I'll use that as my total monthly outgoings to work out how much I should pay for this property. So if I'm getting 500 bucks a week in rent, I get 100 bucks a week in negative gearing benefit, I can pay a couple of hundred bucks myself.

39:01Okay, cool. That's what I can afford to borrow based on that repayment. It's kind of how it works. If you take the tax bit out of that, either I'm going to put my hand in my pocket for more money or I'm going to get more rent and rents might go up. So I don't want to gloss over that. but I can't afford to pay the same price as I might have for that house because I'm not getting the same incomings. So net-net, I'm going to have to find some more cash or pay less. And so that should, all things being equal, have some downward pressure on house prices. Now, I'm not saying it's going to crash or crater.

39:30In fact, most analysis says somewhere between 1 % and 5%. It's most likely it's going to be 8%. Oh, my God. Heaven for a friend. The world is ending. The sky is falling. 5%. But I guess my point is I'm not saying we should do it so that prices crash. I know what you're saying about, you know, my house would fall by the same amount. Everyone's would because properties would go down. So, you know, I would be slightly poorer as a result, but it's not really a big deal. Not because I'm richer than God, just because I'm not going to sell my house. So it doesn't matter what it's worth on paper. Just very quickly, it makes zero difference to you, even if you do sell your house, right?

40:03Because you're going to have to buy. Whether the market's up or down, you're buying and selling in the same market, right? I mean, I could be renting or moving overseas or something, but yes. Different for investment properties, whereas, you know, you get to pocket it. But for your primary residence, it makes no difference. That's right. So I will die on this hill, by the way. And I have this argument a lot. You're like, you do not have any extra money, right? You do understand that. Correct, correct. You have extra collateral, okay? But you do not have extra money. Okay, sorry. Some people say, hang on, going from having equity to having negative equity.

40:34That's going to feel more painful. It's not going to be painful. It's going to feel painful. And that's the same for most people, right? The feeling and perception is reality. So I feel like I've been screwed over. It's a wealth effect. Right, exactly. Yeah, yeah. But, so look, so my point is though, I'm not saying this will solve the housing problem because price aren't going to fall that far. But anything we can do to remove or to alleviate pressure on upward, upper pressure on house prices is good. And if we create downward pressure, it makes it more affordable, that's good too. So that's straight out.

41:02That's simply why I would do it. I don't think we need to, we should be using tax to make shelter more expensive for people who otherwise would be able to buy a house. It makes, it's, speaking of, you know, Robby Peter to pay Paul, you were talking before about, you know, my taxes go back to my energy rebate. In this case, you know, we're paying tax or collecting less tax so that landlords can have higher-priced properties and bid other people out of the market. So the people at the upper end of the socioeconomic spectrum. There is no rational policy reason for negative gearing to exist on shelter.

41:35Now, I've had some – people love clean, elegant solutions, right? So someone says, well, if I've got to pay tax on the profit, I should be able to claim a deduction on the loss. And kind of conceptually, it makes sense. I mean, the balance of that makes perfect sense. So I get why you'd like the elegance of that solution. Bottom line, I was like, OK, but wouldn't you like me with the principal place of residence? My home is capital gains tax free. No one argues that I should have to pay capital gains tax on my house because it's more elegant. But if I take away a tax deduction, oh, hang on, I feel a bit offended by that.

42:04It's not elegant enough. I get it's not elegant. I get that it's messy. and I get that it would still look negative you would still play every other asset in my view commercial property real estate shares tiddlywinks whatever you want to borrow money for and get an income from it's not that I don't like the idea of that it's not like I want the government to collect more tax I don't that's making a difference to me from that perspective I don't mind if they do but uh simply saying hey let's not make shelter as expensive as it otherwise might be is a social good and that that to me should be enough so that's what I would do am I on the right path the wrong path, what would you do differently, Ram?

42:37Yeah, I mean, I would do it too. I mean, I think there is something to be said for not shifting the goalposts. If you've sort of set up a framework and then people make big, big decisions, you know. I would grandfather it. Sorry if I didn't say that. Yeah, so yeah, so I would grandfather it too. Again, I think perfect is the enemy of the good here. Everyone's got their pet solution and none of it, there's no silver bullet that's out there so it's really a combination of everything that that people talk about and and that's that that is i think that's there's a there's a sensible uh discussion to be had on on on negative gearing i i really do uh come on you're kind of sensible conversation you're you're that's that's uncharacteristically um uh what's the right word uh you weren't you weren't as clear as you might but what would you actually do come on you're treasurer now What do you do with negative gear and keep it, make it bigger, make it worse, change the criteria?

43:34What would you do? I think I would – you know what? I hesitate because my opinion has sort of shifted and I don't know if I have a firm conclusion about it anymore. I mean, I think it is overly generous. I think, but I also think that it's sort of, it speaks to the magnitude of the problem when, as you say, something that really on a spreadsheet should have a rather marginal difference. The share market will move 5 % in a three month period. Yeah, exactly. In the best of, like it's nothing. It's absolutely nothing, you know, but people jumping up and down and pulling their hair out as if this is the end of the world.

44:21Yeah. to me shows you how finely balanced everything is. We have painted ourselves into such a corner that even discussing the possibility of removing something that at best would have a 5 % difference is like the world ending. That's right. And I would ask investors, again, just forget about all of the, you know, philosophical, ideological sort of preferences that you may have. if the entire thesis of your investment breaks with this one thing changing, you've got a bad investment already before that. We talk about it a lot with shares. I certainly do as well. I can't read the future. None of us can.

45:06So I've got this spread of different outcomes, and some of those outcomes are going to be negative for every share I buy, any investment that I buy. But I want something where the skew is positive. I want a really nice positive asymmetry. is like heads I win, tails I don't lose too much. That's to me, you sort of like one of the core fundamental investing principles. And if you can sort of, you basically want to play the game, whether it's property shares or whatever with loaded dice, that's what you want to do. Otherwise it really is just a dartboard and a thumb suck. And that's not investing, that's sort of gambling here.

45:38And it strikes me that these setups and scenarios are just so finely balanced that it's sort of like, you're telling me that the status quo is going to see you double your capital value every seven years and yet you check which is you know which is the the sort of the uh your people you people throw that out all the time you know property doubles every seven years like does it i don't think it does but anyway but that's that's that's the attitude so we're going from that to the whole market's going to crash if we do this and like that that to me even if that was true it suggests that there are far far far bigger structural issues there in in other words that's that's you you're essentially saying you're hanging your entire investment strategy on this one policy setting because without it it makes no sense that's right with it with it it's easy riches yeah and and i think if people stopped and thought about it for a second and thought you know that it wouldn't make sense now there'll be there'll be it's different if you sort of say i had this calculus based on all the various things that you sort of outline and i'm obviously better off as a property investor with with negative gearing now for changes i get a slightly lower return than i otherwise wanted but if i've again i'm not really hammering the point here but if i was going in thinking i'm going to get 10 compound whatever and now with this change i'm going to get 8.5%.

47:05Yes, it is worse, but it doesn't take it from a good investment to a bad investment. It's just a slightly less good investment. It's still a very attractive one. I think that's right, but I think it's even simpler than that because no one's forced to make that investment. If you grandfather it, then there's no impact on those people who otherwise have that property. And maybe their resale value goes down at some future point because you take a bit of heat out of the market. So yeah, maybe, you know, but you're not taking away the tax deduction. And as soon as it's announced, no one has to buy an investment property.

47:41You buy the property based on the potential investment returns. And you're right, if it is eight and a half rather than 10, it's kind of irrelevant, right? Because you didn't get the 10 in the past. As long as you're one of those ones who's grandfather. If I decide tomorrow to buy an investment property and the government says, yeah, you can. But look, yesterday we changed negative gearing. I say, oh, okay. Well, I won't do it then. Or here's the other thing. I'll pay a lower price. That's what I was going to say. The 10 % return becomes 8.5. There's no reason it can't be 10. You just pay a lower starting price.

48:08The returns are calculated on the combination of the starting price and the end. Well, no, I'm not telling you this. But the calculation is the start price and the end price. So the 10 % return is only if I buy a higher start price and lower end price than otherwise would get, then my return falls. If I buy well and then sell at a reasonable price, I don't even just buy reasonably. There's no reason property can't return 10 % a year if it starts low enough and ends high enough. Same with shares, same with everything else. or they're both going to turn 5 % a year if you buy too high, as we know with shares.

48:34You pay too much, your returns are going to be lower than if you paid less. That's just the maths of it. So even there, and you're not wrong. I take your point absolutely. I just think as a policy decision, given no one's going to be smashed by, this is going to change your investment thesis, if you already own, you get the tax deduction. If you don't, you don't get it. So either buy or don't, whatever price you want. Yeah, but that will not be the messaging from the various lobby groups. So it's like when the mining tax came through. So any sort of level-headed look at that was sort of like it actually doesn't impact me directly too much at all.

49:08In fact, you would argue as a society, we're probably far better off and maybe ultimately end up paying some less tax and it's a good thing kind of thing. But that assumes that everyone's going to make a rational level-headed decision. And we know that they won't. There's too much vested interest involved in this. So all of that is true. But that will not be the – so for the person who's just struggling to get by, Right. I'm working my 60 hours a week. So is my partner. We're scrambling from, you know, ferrying the kids everywhere. We're just trying to keep our heads above water. And I'm going to see an advertising campaign or the various talking heads just tell me that, oh, this is going to destroy you and your world creation dreams.

49:47You know, it's like, and it's easy for people like us to say, well, you just got to think about it. Understand it. You know, no, no, it's very hard to wrap your head around all of this stuff. All I know is it sounds scary and it sounds unfair. and why did I get that? And I'm going to pay more tax if I don't get the tax deduction. So the government's taking more of my money. Yeah. You know, so it's, yeah. So it's, I think unfortunately for all of these reasons, we're not going to see any meaningful reform on this. Unfortunately, which means the can gets kicked down the road, you know, which means the problem gets worse.

50:23Can I throw some cold water on another thing that comes up often in this debate? It's the holier than thou view of the, some, case into it, property investors who will say, yes, but I'm doing, I'm actually, I'm actually doing good for the world. I'm doing God's work. Yeah. Because I'm providing shelter to someone. Can I just say that is the dumbest, like, I don't begrudge you for making an investment and trying to get a return. I do it all the time. Right. I think any rational economic actor with some spare savings would want to, you know, in a sensibly risk-adjusted way, maximize their return.

50:59Of course. Like, what is wrong with that? But I don't pretend that I'm solving the housing crisis and putting a roof over someone's head or, you know, with any of this stuff. If you don't buy it, the house still exists, right? And we can have a debate about – by the way, this is one thing I would say. I think I would be much more generous when it came to new builds. Okay. You know, because that does change things. That does add to the supply. That does help a lot. When it comes to existing homes, it doesn't make any difference. And as you said, all else being equal, some of these changes go through, the price comes back a little bit and it makes it more affordable if someone actually wants to buy it rather than rent it.

51:35And you ask 1 ,000 people in Australia, would you prefer to buy a rent? And you'll get 1 ,000 people saying, I prefer to buy. Like 100 % of people will say that. Some people like the flexibility of renting if they're moving in a state or they're young or they're showing a house. I mean, there are places where renting makes sense, but it should be a lifestyle choice, not an economic determined kind of necessity, right? Yeah. I don't think it is. I haven't gone through that experience very directly. I spoke to someone I knew the other day and they're selling their property to invest. And I'm like, let me tell you a story.

52:09Are you sure? If you were moving somewhere in a state for work, you wouldn't want to have to sell your house and buy another house and sell that and come back again. Yeah, that's true. got back or if you're if you're a 21 year old uni student you don't want to be forced to live with mom and dad or buy a house yeah i'm not i'm not i'm not absolutely you're dead right about landlords are not doing a public service they're just making the point that there are a cohort of people for whom renting is actually a better solution than owning for a period of time based on where they are in life and you know some people said to me oh we should have no no investment property no investors then it's like well no rental no no yeah as long as you're choosing it yes without being coerced by economic circumstances then knock yourself out you've said yourself you'd rather rent for 20 years if you could because you if you had stability of tenancy and a good landlord so yeah it's probably it's probably a bit of a penance point but i just want to make the point i think it's there is a role for it it shouldn't be the only choice available to people because of house prices yeah yeah i mean yeah so that's a whole other yes that is true but well i was being hyperbolic in the sense that you know generally speaking i think most people would would prefer to own and i agree and anyone who's rented knows i don't need me to explain why that might be the case because who loves being treated like a second-class citizen and dealing with real estate agents.

53:21So yeah, no, it's, I don't know. I don't know where to go from here, mate. No, it's all good, mate. Let's put that to one side. I do, at some point, there's a big policy conversation around property. You and I have talked a little bit about it. I think capital gains tax needs to be looked at. I think the APRA lending buffer needs to be looked at. I think supply and demand in the component parts needs to be looked at. There's a role for public housing as well. So lots of things necessary to fix the property market. As you say, maybe none of them get done because it's all too hard. I like to believe that's not the case, but that's the difference between you and I.

53:51You're happy to believe maybe in reality, I like to pretend there's some sort of utopian future where people actually do get better. And because we've done it in the past, maybe there's a chance, but maybe I'm just being silly about it. I tend to think that these problems over a long enough timeframe solve themselves. It's just that the solving of those problems usually involves incredible amounts of pain for a lot of people. Or revolution, right? Yeah. I mean, just a big student of history. I think history is something that I've just really gotten into in later life. Yeah. Not just for the intellectual, because it's just fascinating, you know, whether it's the Romans or something that happened 50 years ago, but it just, it's such a valuable, it offers so many valuable insights for those that want to look forward.

54:37As investors, we want to look forward. and and i think we naturally extrapolate our direct experience our recent history exactly forgetting that we're in one tiny part of this giant sine curve that you know might have you know very very fractal like in nature and you think that hey wait a second it turns out that this general set of circumstances has happened a lot of times before in other parts of the world and other points in time and that's it. Maybe there's a lesson that there may be. What happened when this is your, well, 99 % of the time this happened. So now, does that mean that the 1 % can't happen?

55:16No. Does it mean that you're extraordinarily bold and courageous to sort of bet on that 1 % outcome? You know, I just think, I think it's very, very, very telling. And that lens, I think, will tell you that it'll solve itself at some point. it's just that if we can we can either we can try and guide things to a more reasonable outcome and alan cole i'm with him on this one he's just like the best outcome here is sideways for a long time that is the best outcome right and and that's going to annoy a lot of people because those who want to buy go well no i want it to go down and those who own it no i want it to keep going up so it's kind of like the solution that makes the most people unhappy is probably the right solution if you're a bit of a dictator that's what you would do right that's That's what you would do, right?

56:01You would try and engineer that kind of way. Yeah, but it's not going to happen. So the market will correct itself under its own weight at some point, whenever that is. Mate, let's switch gears and talk about supermarkets. Willis and Coles have been, I'm not sure what the official terminology because they're not really - Cheeky. Cheeky is the - Say it? They've been cheeky. Oh, cheeky. No, I mean, I'm not sure. The ACCC has said they've done the wrong thing and it's taken them to court. I'm not sure that makes them accused or makes them charged with something. I'm not sure that's really about the official kind of, whatever the role is.

56:38Basically, the ACCC is saying that Woolies and Coles, in its view, allegedly probably a few times in this sentence, have been claiming - My favourite word, by the way. Have been claiming discounts that weren't real. That they had a price, they put the price up and discounted it back and said, look, you're saving 25 % or 20 % or 10%, whatever it is, from the newly higher price, when in some cases the discounted price was still higher than where it was before the price went up in the first place. Rory Sutherland, speaking of, would have something to say about all of this. He would. A couple of hundred examples of Woolies, a couple of hundred of Coles, both 200 and something according to the ACCC's data.

57:17I'm really torn on this one, mate. So a couple of things I will throw in first to set it up and then I'll give some thoughts. The maximum fine here, which has actually been increased during the period of alleged wrongdoing. So I imagine the old fine would apply to some of the period and the higher fine of the other part of the period. The highest fine is$50 million, which is a lot of money for me. Not a lot of money for you, mate, because straw man's worth a billion. But, you know, for normal people, it's worth a lot of money. I'll take your word for it. Exactly. That's your standard tip these days, isn't it?

57:49No, that's just walking around money. For losing coals, it's a flea on an elephant. It's just so immaterial as a penalty. Cost of doing business. McCorry Bank were fined this week for letting their customers, allegedly, I think it might be proven, either way, trade in the energy market improperly. They were fined. Guess what? What? Colour me so surprised. A major bank doing the wrong thing? They didn't do it themselves. Just be really, really clear. They didn't have the appropriate oversight. And not that it is that different, but it's really clear. Oh, okay. That's totally different. Okay, sure.

58:24Sure. It's important that we're clear if we're going to throw... So people are going to jail then or copying some pretty major fines, I imagine. So Macquarie Bank gets fined, sit down for this one,$4.99 million. So less than the drinks budget for their, not even their Christmas party. A tenth of their highest paid trader. It's wage for a year. Anyway, back to all the Coles. I can find that in the bottom drawer. That'll be in the, like, you know, in the ashtray of the country. somewhere exactly yeah uh i saw one of the tick tables upstairs i'll pay half of it um so willy's and coles taking again to take into the court uh basically to say hey you guys did the wrong thing here and so 50 million dollars is the biggest fine the government is talking about i've gave the government heaps this is a good one the government's talking about increasing the fines for this sort of behavior to up to 10 of annual sales okay if you think you think willy's profits five percent of sales so effectively for for a low margin reach and maybe it shouldn't be percentage of sales, honestly, because margins differ.

59:24So it kind of means that it's a bigger deal for low margin businesses and high margin businesses. So maybe it should be profit rather than revenue. In any case, it certainly means that the low margin guy has got to pay a lot more attention, right? Because that'd be two years of the entire profit of Woolies or Coles if they'll find the maximum amount. So that's a really good move. Whether it's exactly the right basis or proportion is a question, but breaking the law actually consequential would be nice. So that's important. Yep. yep that is that is a that is a maverick idea that you've got right there yeah so here's my thing about the woolies and coals thing so full disclosure i used to work for woolies i also used to work for grocery suppliers before i came to the fool i worked for heinz and diajo who do grog and 20th century fox and some other local importer of some uh overseas products and i've dealt i've been on both sides of the the proverbial table right for these these conversations and the two there's two problems that i've got with this kind of not even with the prosecution just with the structure of the thing i my understanding is and i know lawyer that the law requires a reasonable amount of time between putting the price up and then discounting it and when you kind of make it vague like reasonable then it's going to be this weird conversation that the court case will probably hinge again i'm no lawyer so let me be really clear the court case will probably hinge on how the court defines what reasonable is yeah and you kind of think at some point guys if if it matters that much that reasonable is is judged then define the bloody number you know and it's not the current government or the past government i don't know how long this legislation has been in place but when you say reasonable and then ask people to make a judgment i find that really mad from both perspectives it's not fair on the supermarkets and it's not fair on the regulator or us who you know is that reasonable i think it is you don't think it is well who's right i don't know let's i don't know let's spend dollars in court ungodly amounts of money arguing this right right yeah so there's that the other one is the structure and i i shared this on twitter and again people had had a go at me depending on what their personal views were um again because i've worked with them before so here's the thing right let's say you make tim tams and they cost four bucks a packet i don't know what they cost but let's have the four bucks back the price of cocoa has doubled over the last 12 months right labor's gone up fuel's gone up plastic's gone up it's okay so it's all gone up and you're gonna will you say look here's the thing guys um our prices have gone up our costs have gone up excuse me our costs have gone up we need to put the price up Woolies goes well I don't really want you to well I have to there's an argument there Woolies calls hate taking price increases trust me I know um but eventually they'll look if you can prove it like okay fair enough you know you can pass on that cost increase fair enough so the price Tim Tams goes from four bucks to five bucks and then every supermarket supplier runs promotions all the time they give the retailers money to drop the price and put their product in the catalog right so your team has got it for four to five bucks sales have fallen off a cliff because you know the price is the price has gone up so you're like well i've got to get some sales back what do i do i know i'll promote the product i'll discount the product i'll throw some of that promotional money into that pot i'll give all these 50 cents a pack so they can they can drop the price to 550 to 450 okay that's all i'm gonna do that great will just take the money drop the price on promotions in the catalog and all of a sudden the accc turns up says you guys did the the wrong thing now i'm not saying will these did the right thing or the wrong thing i don't know the circumstance i don't know the details i don't know the supplier funding but having been on the inside the only alternative that alternative to that would be to keep the price of tim tams higher for longer which yes avoids quote misleading advertising and maybe that's enough but it actually means we're all paying more for tim tams as you think about the public good here the net public good of what's the issue do we feel like you know some people want to get back at the big bad guy that i'm going to get back at the man and yell at woolies for for discounting the product and you know there's everyone wants a photo of the price sticker saying it's this discount and i don't think that's necessarily wrong it's probably cheeky to use your phrase because it's not as dodgy as the words i would have otherwise used um to do so but it's it's it's really not clear cut and again maybe the circumstance of the case will be different maybe i'll happily take back my words if they've done the wrong thing i've said before they should have the book thrown at them if they've done the wrong thing it's clearly the wrong thing not interpretation of the word reasonable or anything else then yeah for sure go at them yeah but it's kind of like if if artists come and say here's some money to discount my product can you do that please and willie says no i'd rather not thank you you keep your money i'll charge my customers more for tim tams imagine that one imagine the headline where woolworth charges more for tim tams despite customer supplier offering to discount them it's it's not exactly a no-lose situation no one needs to feel sorry for willies they're perfectly fine and their shelters are perfectly fine i just do find the you mentioned first order second order thinking before mate i find that really difficult this this is not as clear cut as people like to pretend where it's uh well he's just screwing his coals are screwing it's which of course the government's more than happy for you to believe because they want to run the line that too much responsible for inflation no one else yeah i don't know mate i find it i find it really difficult to try and get my head around as a clear view an obvious view of where wrongdoing was the rule should be changed but if it's six weeks between the price increase and a promotion for six weeks you're paying more for tim ten there is there is something there which might feel better in theory but in practice maybe end up worse off i don't know what do you think yeah i mean it's it's very hard i agree with you 100 that if you're not happy with the outcomes and it a big part of that is because things are so um so much ambiguity you know then just make it clear cut you know that don't don't leave it so open to interpretations i won't repeat the point It's just, it's a very obvious one.

1:04:46And there's a whole debate as to what, what, you know, that should be or whatever. Yeah. I think where it's a little bit galling, I suppose, and I don't even know if this is necessarily wrong, but this goes back to how we started the podcast here. This is social engineering, not in a Machiavellian necessarily kind of way, but it is like behavioral we're being hacked in terms of our behavioral psychology. Totally. We have been conditioned that when you see that sticker that says down, down, down, or what's the one from Woolies? Everyday lowest prices. Yeah, yeah, yeah. You know, well, basically outside of the supermarkets, whenever you see the word sale, that you're getting a bargain.

1:05:30And this is actually, speaking of Rory, this is one of the points he makes a lot as well. It's actually not the absolute price that matters. Humans are not rational, right? Newsflash. we are not rational so what matters to us is not necessarily the the quantum of the price it's whether we feel we're getting a good deal totally and they've done a million experiments on this i would rather pay more but feel like i got a good deal than pay less and feel as though i was being ripped off and so and so they know this and then we talked about before this has been in the arena there's been a massive experiment running for decades and and and the the big retailers have made a science out of this and they do it because it works right it's like oh we need to shift more of this we've got a bit of an inventory build up here put a pop on a sale whether it's all the stuff going on in the background or not it doesn't matter and we're all time poor we're all lazy you know and none of us have the capacity to do these detailed economic calculations on the fly.

1:06:32I'm walking, I've got two kids in tow that are screaming at me. I've got my trolley here. I'm trying to figure out what to get. I look at all of the range of different chocolates and that one has sale on it. I'm just picking it up. I'm not even looking at it. And I'm certainly not going back through my internal spreadsheet to see how is that tracked over the last six months. So they're just doing what they do because it works. Now, is that wrong? That's a more difficult, that is a more difficult question. Because we also get a better price, right? If there are no specials tomorrow, then we have a win.

1:07:02Ha ha, see, they're not going to screw me anymore. I'm going to pay more for stuff so they don't get me to buy stuff. It's like, hang on. I'm not sure that works. This is what I mean about the first order, second order. It's like, at some level, if there are no promotions anymore, we're all paying more for groceries. I guarantee you we're all paying more for groceries. Yeah. So it's kind of like, well, what do you want then? And this is where it gets really difficult. Yep. I mean, I'll come back to another point made earlier too. The cynical point of the focus groups have said, we're sick of this cost of living.

1:07:31Someone do something. Phone calls have been made. Emails have been sent. Do something. Do something. Oh, it's a really hard problem to solve. I don't care. Just do something. It looks like you're doing something here. And it's also the psychology. I don't think I blame anyone for this because, well, we probably should be more aware of ourselves and aware of our – that's on us, right? So I think you can blame, oh, blame's a hard word. We all should be responsible for thinking more deeply about stuff rather than assuming that our first impulse is right and we should do a better job at school of teaching kids psychology and sociology because it's just we're letting them down if we don't.

1:08:07But it's also that idea of where do I feel the pain of inflation? At the supermarket and at the pump. All right, well, obviously the petrol companies are screwing us and the supermarkets are screwing us then because prices are going up. It's like, well, no, that's not really. Yeah, but the price has gone up. Yeah, but look, so there's suppliers and there's wholesalers and there's raw materials and there's international issues and there's exchange rates and I don't care. Just can someone yell at Woolworths, please, until they put the price back down? And that's, you know, so again, it's that same idea of partly we're being taken advantage of.

1:08:36The other part is we're not thinking about these things. So who's to blame for inflation? Well, food's up 20 % over the last four years. Bloody coals. Well, I paid more at the petrol pump. It's obviously the bloke behind the counter when their margin's, you know, one or 2 % of the petrol price. I'm going to blame that guy i'm going to blame the worst and if they just stop doing the bad things to me because obviously bad people how they know they're bad people because prices are up but it might be no i don't hear it just just just i'm going to blame the wherever i pay the bill that's the one who's responsible and that's you know that's it's understandable at one level but it's deeply deeply bad for policy because you end up with the government has spent years yelling at the supermarkets if they can give us the supermarkets to default they don't have to do anything yeah if they don't do anything we don't solve the problem we feel better because we've got it we've got a we've got a you know a scalp you know the worst ceo goes ha ha bastard good riddance that's why now my inflation's fixed isn't it yeah no no hang on did we get rid of the woolly ceo yeah well let's get rid of the next one then it's like you know but beings will continue until morale approves improves it's like it's not it's not kind of how this works no it really isn't and i mean we touched on this recently as well is that one of the knee-jerk reactions politically is price caps.

1:09:47I know Kamala's touting that in the US. I know. It just blows my mind. It blows my mind. And it's just so counter – it just makes things worse. Yeah. I mean, just follow through the thinking there. If you set a price that's not economic for me to produce it or others to produce it, they won't produce it. There'll be less supply. What does that mean to pricing? I mean, they're going to push it out. It's either just not going to be around anymore and whatever remaining supplies are there, prices are going to naturally sort of go through the roof. Or just eventually, I mean, and if these caps are actually enforceable to any degree, then it's just sort of like we just don't have it anymore.

1:10:24Yeah. And this is like, okay, well, well done, Einstein. You just fixed that problem. I was paying too much for biscuits. Great, well, we're going to do this. Oh, there's no biscuits anymore. You're welcome. No more inflation. it just doesn't it just it ignores look there's a lot of debate to be had in in terms of economic theory yeah but there are some areas which are stitched up like supply and demand's a thing it's a lock right at this point you know that's right you can take this to the bank right is is is almost as good as a law a gravitational you know law of physics or something like that it's it's a it's a incontrovertible truth of the universe that we we sort of live in gravity Supply and demand and politicians lying.

1:11:08You can pretty much take those ones to the bank. Very quick tangent, actually. There is all kinds of economics outside of what we would consider economics. Like, you know, in the animal kingdom, there are economies of sorts as well. You know, there's so much supply and demand in terms of what creatures need. They're little mini economies. They're not mediated by monetary units or anything like that. But it's just like these - Yeah, that's what we make. Economics isn't maths and it's not money. Yeah. it's human interaction or in your case animal interaction it's it's the the the decisions that we make based on but the circumstance we find ourselves in the resources that are available the pressures on those resources and on other things it's just it just describes life it is a physical it is a physically bounded system it doesn't it doesn't matter what your theory says there is an underlying reality to to to to all of this kind of stuff and you know it's just we we ignore that at our peril.

1:12:06So one of the size of supply and demand is a pretty big deal when it comes to economics. Another thing, if you want to try and study is scarcity, right? Like scarcity is pretty much without scarcity, there is no economics. You don't need economics in a world where infinite supply of anything that you ever want ever, right? So there is unlimited human wants and there is a finite supply of cars, houses, Tim Tams, like anything, anything in the world, there is a limited supply of and therefore you have an economy right so it's it's another thing that must sort of a reality that must be acknowledged and recognized and does that mean that wow there's not enough ferraris for everyone in the world yeah it does does it mean that there's you know there's not enough uh whatever you know yes it does and it's just like that's not very fair no maybe not but here we are right like so we can deny that and i think it's like i feel i think so the price of ferrari is a hundred bucks but no one then makes any more ferraris so there's no ferraris to have there's no point setting up right exactly yeah you got it so you must always ferraris in which case you pay 100 bucks at the dealer or 300 000 to the bloke behind the pub yeah that's not solving the problem either yep yep i i really think at the end of the day you you you just have to rely on the imperfect decision subjective decision of each and every one of us and we'll buy what we want to buy you know like whether we consider that tim packet too expensive or too not we'll make our own personal calculus and sometimes that'll oftentimes that'll be irrational and oftentimes that'll be against our own self-interest but we'll still do it and we'll reveal our preferences that way right and it's just sort of like as long as to me it always comes back to the solution for high prices is high prices and a free and open market where people can where where competition is encouraged and you you do not have a stifling of said competition you will always find someone out there for their own self-interest will find a way to deliver you a cheaper packet of tim tams or equivalent because they want to make money right and they'll be able to do that by offering a superior product or at a sip or a superior price or some combination of the two and you just range or convenience or something yep yep that's where that's where that's where government economic policy really should begin and end there is just like don't you don't you're not in the business of providing groceries you can't be you shouldn't be.

1:14:24Queensland's going to provide petrol. Steve Miles has announced 12 petrol stations in Queensland to fix in brackets the petrol problem. I said before history, right? Open bloody history books Stephen. It doesn't work ever. Oh wait, you point to me an example where that works. I know where it works, Andrew. Okay. Oh, Qatar? Does it work? Yes, I go votes from it. That was the point. But you said it was. No, It worked. I got elected. It works. See, I told you. Yep, yep, yep, yep. Sorry. So I don't know. It's another circus. It's another circus. It'll distract the masses. Right. You said free and open markets.

1:15:04Do you literally mean free and open markets? Unfettered. Yeah, I think you want - No regulations. No, don't you try and corner me. Well - No, I'll do it deliberately because I know that's not what you mean. So that's why I wanted to - That's why I wanted to throw it out. When we say free and open markets, only because of what the listener hears and what you mean, just because I know you, we've had this chat before. Different things, right? So I wanted to, and I'm not saying you should have a view, by the way. My recollection is you have a view, which is not, you know, have at it, unfettered capitalism.

1:15:37I'm turning away. You guys, whatever happens, happens over there. I'm going outside for half an hour. You guys sort it out. You're not saying that. You're saying. Look, on one end of the spectrum, you've got sort of Cuba and Russia and China, and China's actually very capitalistic in a whole bunch of different ways, right? Yeah, it is. Exactly, yeah. And then you've got the complete open laissez-faire capitalism. Anything kind of goes, right? Right. And it's like, I think too, it's why I wish we could reset the language here a bit. There's too many of these terms are loaded. So you say free markets and it just triggers people.

1:16:06Yeah. And it triggers them because - By the way, some people do think free market actually means free market. That's also why it's, it's not just triggering it genuinely. Libertarians will say, yes, absolutely. No laws. Yeah, right. That's free market to them. So it's not, I mean, they're being misused, but they're also so open to interpretation that you kind of have to put some descriptors there just to be specific about what you mean by free markets, for example. Yeah, absolutely. It's just, again, it's nuanced. The real difficult debates lie on where you set the slider along that spectrum, you know.

1:16:41But I think directionally, I want to be at that end of the spectrum or towards that end of the spectrum where I don't have a centrally command economy type thing just because I actually resonate a lot with the philosophy, but it just doesn't work. It just doesn't work. And that's why I hate these, as I said, elegant but wrong kind of answers. Like if it was just like this, that'd be fine. Yeah. But that wouldn't work. Well, I don't care because I like the idea. It's like, well, no, the outcomes actually matter. The policy only matters because they deliver outcomes that are worth having or vice versa.

1:17:20So, yeah, I know you didn't mean that. I just want to make that specific point, which dragged that out a little bit, not to corner you, just to give you the chance to actually what it means is, you know. Yes. Unless you need to be there for socially positive reasons, get the hell out of the way. Yeah. So, I'm a big believer in antitrust or antitrust or antitrust. I think that's a big role of government. In a way, it's the best one for me. Yeah, sure. Think about, like, you know, if you say markets, well, what's, you know, other than money, labor's probably the most logical open market. So it's, okay, well, free market for labor.

1:17:49No rules, no work standards, no minimum wages, no 40-hour weeks. Just do whatever you want. As long as you and the employer agree, they can do whatever they want to you. You either want the job or don't. You don't. Minimum wages, for me, probably the cleanest example of where market intervention for socially positive outcomes is warranted, in my view. Yeah. Yeah, well, again, look, we can have a really interesting conversation on that. I won't at this point. But it's in that ballpark of where you want to sort of focus the thing. There's adults somewhere having a proper sophisticated conversation about this stuff.

1:18:24And there's someone over there saying, we should, no one, the government should give us money and stop the nasty men from charging us too much for this and that. And it's just sort of like that's the disparaging part of all of this. It's not that I have a particular view and your nuanced view is slightly different, but we're sort of circling around a pretty central rational set of ideas. We're over in the sandpit in fairyland talking about things that are just not that they just might work, might not. They've got no hope of working. They can't like logically they can't work. Exactly. Yeah, that's right.

1:19:01And that's what I find so tiring about it all. I'd much rather you and I spend all our time on the podcast having nuanced debates about which area you want to be. Not like it's 2024 and we're still talking about controls. Really? I know. It is just, and, and, you know, bloody Biden's put tariffs on Chinese EVs and Trump wants to put tariffs on everything else. And it's just, we've been there. We know how this works out. It's just, and yeah, it's frustrating. It's frustrating. Yeah. We'll let it be prosecuting the whole thing if I go down that path. mate I think we've probably bashed our listeners enough hopefully some useful stuff in there lots going on a little bit of investing a little bit of politics a lot of policy but hopefully a useful conversation will you join me on Sunday mate and we'll do a mailbag yes absolutely I'm very very glad if you want to have a new question answered info at fool.com.au is the way to do it enjoy the first half of your weekend or as Andrew likes to say your Thursday morning and until then Fool on cheers The Motley Fool and people appearing in this program may have positions in the companies mentioned.

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