Mailbag: incl. Is cash really king? November 5, 2023

29:28And you think, how many car parks are there in the world? And you do see them being rolled out. Like there's another shopping center near me. I just walk in. It just scans the number plate. The gate opens. it's all just it's much more seamless it's going to direct me to the vacant spots it's just going to it's going to do everything for me that's that's better but more importantly at your point for the customer it's like well what what matters to me is i want to make sure i've got the maximum number of people in here that anyone who is breaking the rules we're going to find and find effectively without having to run around and chase it all up and make you know all that kind of um that that kind of nonsense and it's a very attractive proposition when someone comes up and goes, listen, you've got to replace this stuff because it's breaking down all the time.

30:09You've got people taking the mickey and parking there all day when they're at work in the city and they're just using you as free parking and da-da-da-da-da-da. And it's like, we're just going to make you more money and more efficient. And that's nice when they've got two or three prospects that are out there. But when you've got 80 % of global parking lots still running in the 1960s, that's – and again, it's not the only company that's doing it. There's a lot of them that are out there, right? But it is always, I think, a nice thing when you're in an industry that is going through that transition of modernizing and you've got a good solution with a bit of traction, positive, favorable unit economics, the balance sheet capacity to sort of or at least access the credit that you can continue to grow and expand and take advantage of that opportunity.

30:57Very interesting setup. Some serious money can be made in those areas. But remember too that the market's incredibly impatient and people will often get the story and go, oh, it's fantastic. This is going to happen. And like six months in, it's like share price is down 15%. They're all con men and this all sucks. There's two things. One is it just, it takes years for these things to play out. And secondly, if you really want the full benefit of the gains, you've got to give it years to play out. It's not the 40 % gain you made in two years that's going to make or break you as an investor. It's the investment that's compounded at 15 % per annum for 10 years plus that has put some serious food on the table.

31:40Lobster, specifically, right? That is far better than the nice easy win that you might get lucky on on the market. So you want to find them and you want to stick to them. Beautifully put. Beautifully put. Hey, mate, one from Scott, not this Scott, a different Scott, who says, hi, Scott and Ram. You both mentioned exposure to the NASDAQ 100 in your own and your members' portfolios. To date, we've only ever talked about the BetaShares NDQ ETF, as this has been the only option available. With GlobalX N100 ETF having similar properties for half the fees, would either of you consider this option for new money?

32:20For the long term and for a lifetime of investments, this amount could become substantial. BetaShares and GlobalX are both, quote, not Vanguard, end quote, so I don't see a major manager-related point of difference. thanks again for all you do to support us long-term investors and that's from scott mate have you looked at the new global x n100 nasdaq etf no but i can't fault the reasoning at all i mean if they're half the price you know they've stuck with the same regulations there is some counterparty risk in there but again these these things are held in trust by a custodian so you'd think that there are protections against mismanagement unless there's outright fraud which is you know very unlikely um yeah why wouldn't you go the cheaper one i think i agree um i'll probably i'll probably talk about the the decision and then kind of get to my thoughts um so the first thing i would say and this is where frankly why i like vanguard no it's no both not vanguard and you're right we've i certainly expect a very strong preference for vanguard the reason i like Vanguard, I'll get back to your point, not about Vanguard, but it's illustrative, is that I hope to invest for decades in some of these ETF investments.

33:39And so when I'm effectively betting on Vanguard as a fund manager, I'm making a bet, and it could well be wrong, by the way, because no one knows the future, that my bet is over 40 years, I think Vanguard will probably be the least regret option. Jeff Bezos from Amazon, who own shares, talks about the regret minimization framework, right? So if I think, okay, if I invest in Vanguard and the fees don't end up being lower over 40 years, then I'll be disappointed, but I can't fault my own decision. If I was to invest in a higher fee or a for-profit ETF and in 40 years they were at the lowest fees, I said, well, I probably should have expected that.

34:20So in that context, Vanguard, I'm happy to say, with a very super long-term perspective, I want to throw my chips in there. I raise that because I'm less sure about these two. Now, you don't have to have one or the other, by the way, and you can add appropriately. The hardest part with any of these investments, because the fees, in terms of differentiating at least between two ETFs, are kind of the major component or likely to be the major component, you kind of try, or I've tried to guess, because it is a guess, educated hopefully, which fees are going to be lowest over time. And I say all that because the current fees now may or may not be illustrative of what the fees are like in two years' time, let alone seven, let alone 21, let alone 40 years.

35:04Which, by the way, is not an excuse to choose one or the other. I guess what I'm saying in general is they're both as uncertain as each other. If you said over 40 years, which of these two fund managers is likely to give me the lowest fees? I don't have a strong ability to guess which is most likely. Because I don't know how we would. It's probable that the lowest fees will be offered by the ETF provider with the largest funds under management because they can spread that money around. and so i think i have no dog in the fight with either i own beta shares etf but if if everyone if every single person listening now sold them and bought the other one it would make no difference to the unit price so there's no bias or no self-interest here i think i would probably choose the larger of the two um for two reasons one the larger one if they remain larger i like they have lower fees ongoing or have the opportunity to lower their fees ongoing the other one is what i love about by the way the global x one and maybe some of us should jump dump money in there just to support GlobalX because the fact that it exists, we're putting pressure on beta shares to actually lower its own fees anyway.

36:13So as someone who owns the beta shares NDQ ETF, I haven't added to that ETF in a while, largely for currency, as we've talked about lots before. I'm hopeful that GlobalX's existence means beta shares drop their fees and I benefit from that. But if I was going to bet over 40 years and say, which one of those do I think would have the lowest fees? I don't know. I could split the difference. But I think in that context, I'd start with the one with the largest amount of funds under management because in ETF management, scale matters. And I think the larger one is probably likely to continue to have the largest asset base and therefore, should it choose to, be able to defray those costs across a larger asset base.

36:55Does that make any sense, Ram? Am I talking out of my mouth? What are your thoughts on that approach? Scale wins in the ETF game, 100%. Should do, shouldn't it? Yeah. Yeah, that's why Vanguard is the king, right? Because they invented the category, they got the scale, and they invested those profits into lower prices and therefore remained the best, the most competitive. So, yeah, whether or not they do pass on that is the other question. You would imagine in a free and open and competitive market that that would be the case. But yeah, I mean, yeah. I guess where I hesitate is that right now, right now the question as framed is, well, this one's half the price.

37:44Yeah, yeah. Now you may have to figure out, well, how long until that equalizes and there's a penalty in selling one and buying another. But for new money, Global X is a big company, New York listed, you know, they're not a bucket shop. I hope not. I don't know them intimately well, but they feel like they're a reasonably, you know, I feel as though that's probably the better choice right now for new money just because, as the listener says, it's half the price. The other thing I'm going to say, mate, just in terms of ETF though, and I don't know enough to know this for sure, so I want to be a little bit careful about how I express this.

38:22I don't, there's a meaningful though not huge difference in the weightings of the different companies in the two ETFs as I'm looking at these now. And I'm also mindful, if I look at the beta shares one, the target index is the, it's a NASDAQ, but I can't describe, I'm worried exactly what it says on the page so I don't mislead anybody. The index is the NASDAQ 100 Notional Net Total Return Index. Yeah, which is kind of the NASDAQ. That's the beta shares product. The Global X1, the index it tracks is the Global X100 us 100 etf tracking the global x us 100 index in other words they've created their own index to track okay okay now that means you're not necessarily tracking the same index or getting the same results and also when you compare them you're not comparing like for like and i'll just i'm not going to do this in full detail on on audio because no one likes doing numbers on audio but the nasdaq 100 etf from beta shares the top position is apple with 11 percent then microsoft with 10 and a half on the global x and these are as exactly the same date the global x top holding is microsoft with 12 rather than the nasdaq 10.4 apple 10.7 compared to 11 which was the highest holding for uh the beta shares one uh and if i go down to for example the 10th largest holding is adobe on the uh beta shares product it doesn't exist at all inside the top 10.

40:00Costco is in there instead of it, for example. Meta exists in the Global X one, doesn't exist in the top 10 on the BetaShares one. Now - You make an excellent point. I was under the assumption they both tracked the NASDAQ. Which I have a, I want to be a little bit careful here, but if you call something, if you give something the code N100, you're kind of implying that. And for all I know, the BetaShares index, sorry, I'll start again. the global x index may be trying to copy the nasdaq index without paying the nasdaq fees to copy its own index i don't really know what's going on here so worth a look worth understanding what's going on worth understanding why it's being done again i'm not even saying that's bad the numbers the weightings aren't materially different uh different enough to be noticeable because apple's number one on one of them and microsoft's number one on the other one so you're gonna go that's interesting slash weird um i'm not saying it should matter i'm not saying it is different other than to make sure our listeners know these are not identical funds tracking identical indices and so to whatever extent uh either index provider changes their index you may well get different results so again i'm i wouldn't i wouldn't necessarily make a different view about that um it is also true that the size of the current size at least anyway there's only 8.8 million dollars in the global x product now not global x as a fund manager this very specific product has 8.8 million dollars in it uh and i'm madly surprised if i could find out what the size of the nasdaq 100 is with beta shares um if the if the provider i got 3.4 billion dollars is the is the beta shares number if the provider was to close the etf you would be forced to liquidate and a capital gains tax event would be crystallized as a result.

41:53So just be mindful of that as well. And that's the other reason I'd go with the larger one. I hope, as I said, beta shares brings their fee down. I'm glad GlobalX is there. If I was going to invest money tomorrow, I would, I'm probably, I'm not conservative as an investor, but I don't tend to make, I'm slow to change my mind. So maybe that's the definition of conservatism or not. um i if i was gonna if you gave me a thousand dollars tomorrow and said put it in a in a tech heavy us-based etf i'd still put it in beta shares that might be silly because i'm costing myself more money in fees um i just think i haven't been convinced to make the shift across yet but i wouldn't begrudge anyone who did that instead yep any other thoughts on that mate no i think we covered it beautiful um interesting question from james this is not a question we cover a lot and another question i necessarily have a huge amount of uh expertise in but i'll ask it because james asked it and and andrew you might have a way to answer his question james is just very simple questions hi scott ram i've got a question for the mailbag is there nuance to gold and silver strategies thank you james

43:11that's a good question why i just really a really simple short very good question yeah there is i mean there's definitely nuance right i i think on one end it's just completely outrageously stupid like you know gold is really just so funny it's we've got a 10 000 year history with it but you know most of what we use it for is just polishing it up and putting it in a vault somewhere jewelry is by far the second largest but that that ornamental there's not really much use for it so you can kind of look at it and by the way this this is always this is always one of my little bitcoin go-tos right people go it's got it's got no intrinsic value or it's like well Or you can't spend it at shops.

44:03Well, sounds a lot like this other thing that we have a$12 trillion market cap value on. But anyway, so that's why it kind of started from a hyper utilitarian kind of viewpoint. It sort of feels like, what? But the more realistic view is that, well, actually a lot of people value it. Rightly or wrongly, they just do, right? And again, there's a huge history in why that is, and it actually makes a great deal of sense when you dive into it. And then it's a question of, well, when you say invest in gold, what? Am I actually buying the physical stuff? Am I buying an ETF? Have I got it held at a custodian somewhere?

44:40I've got to pay for Armaguard and the vault and all of that kind of stuff? Or am I buying a gold miner? And if I'm buying a gold miner, is it a prospector? Is it a producing company? What are their assets? I mean, there is a whole way of getting exposure to gold. And they'll all be very, very, very different. So to answer the question, yes, there's a ton of nuance. There's a huge amount of nuance to it. I would like, I don't generally do it because there's a better form of gold. But if I was to go into gold, I would say, I mean, gold that you can teleport, that's pretty cool. But if I was, I would be, and I know we've got a few members on Strawman who like to do this, where they actually look at the productive assets of a gold mining company and sort of say, yeah, they've got really good gold.

45:28They've got really good cost of production. They're making good margin on this. They've got a few different tenements where they can mine this when the price is high and mine that when the price is low. It's a viable operation and it's trading at a cheap price. You can do extremely well out of that, right? So, I mean, I don't buy fast fashion jewelry either, but I can still see the value in LaVisa. So, it doesn't have to be and shouldn't ever be about you and what you think. It's what reality and the wider world thinks. And I think some people do very, very well at that. Where I have the hesitation is where you have the first level thinking and people go X, therefore Y.

46:03And I just think, are you buying gold because you've got some pure macro bet? Is that what it is? And I'd caution you to make broad macro bets because they're phenomenally difficult. But you can even be right on what you think is going to happen at a sort of global macroeconomic level and how gold reacts in that context might not be as you expect. In fact, there's been a lot of gold bugs out there that have been dumbfounded by some of the price movements in there, given what has happened in the world and given how the world may have reacted to that at a different point in time. So it's not for me, but I don't fault anyone who's getting into it for the right reasons, having a very clear understanding of the commodity itself and the way it's produced and the economics that are involved.

46:49Yeah, that's a lovely summary, mate.

46:55It starts even one step before that, which is kind of implied by your thing. It's like, what are you looking for? So a lot of people will buy gold specifically to hedge against something, which is its own strategy, independent of just expecting things to go up, which is if the market goes down, gold won't go down as much as their hope. On the other hand, if the market goes up, gold tends to not go up as much, which is the point of hedging. So it even starts with the role, the strategy starts with the role of gold silver in a portfolio. What are you buying it for? Are you buying it for capital growth?

47:24through buying it for hedging minimizing downside for example and that it kind of spreads out from there um you've done a nice job about talking about the commodity versus the producers which is which is really important um the problem with any of these commodities is it relies on a relatively unknown future price and ironically the two hardest in my opinion and and i don't claim absolute expertise in this area so take it with a grain of salt the two hardest commodities to do this for are gold and oil because they don't operate as free markets in the way that other commodities do copper is used in electrical equipment and you know yes some people stockpile sometimes uh yes occasionally there's shortages or surpluses but generally speaking it's mined and used that's pretty straightforward gold because as you say mate is thrown in vaults it's worn on fingers.

48:19It's hoarded from time to time. There's a lot of sentiment that goes into the price of gold and the demand for gold. A lot of people, because it is used as a hedge or as an alternative for investing in shares, there's a heap of market behavior that's rolled into this. So no one's buying copper because they expect the market to fall. They're buying copper because they want to put it in a washing machine or a battery. Now, again, a few people might be hoarding copper for that reason, but generally speaking, it's not the case. So the market tends to work on a relatively cleared supply and demand.

48:47Now, that's hard enough, right? working out future supply and demand. And because pricing is always on the margins, even the price of copper flings around a lot. Price of gold even more so. What will the stock market do? How many people will buy or sell their gold based on that? How many people will buy a gold based on what they think the stock market will do? And then the Keynesian beauty contest we've talked about before kind of goes on and on and on. I'm betting that Ram thinks that you think that I think that he thinks that I think something else. And if that feels weird, it absolutely is.

49:14And that's exactly, whenever you bring sentiment or speculation or market, is exactly what's going on. You're not saying this is what I think it's worth. You're saying this is what I think someone else will think it's worth. And that person will think it's worth something because of what someone else might think it might be worth. And then you layer all these assumptions together. It makes it a really, really tough thing to really talk about in kind of, you know, base supply and demand details. So the challenge with that is that if they walk out, what's the future price of gold going to be? And I think all you can do is shrug.

49:43You might have an educated guess, smarter people than me, more informed people than me might have a more educated guess, but it's just bloody hard to do. Same with any commodity, but particularly gold because it's not used up in the same way. Oil is the same for different reasons because the OPEC cartel controls supply and therefore can manipulate price. And so again, there's no free market where you get to say the interaction of supply and demand means X. You say the interaction of supply and demand plus the thumb on the scale from OPEC deciding how much they want to sell it at what price says x uh and that's got its own geopolitical issues and it goes around around from there so gold strategies are really really hard um the other thing by the way is if everyone's already thinking the same the price is already the same if you by the time you say i'm going to buy gold because i think this will happen if everyone else has already thought that the price already reflects that thing that's going to happen so i'm going to just say a bit more slowly if i think that uh in the future they'll be short of toilet paper then i'm going to go and buy some toilet paper but if everyone else is already thinking the same then the shelves are already bare and i miss my chance to buy the toilet paper right obviously going back to the 2020 great toilet paper crisis uh that we all remember full and well um so i've got to think that thing when no one else is thinking that thing if i want to get in first and get all the toilet paper before everyone else does so it's kind of again you're talking about layers upon layer upon layer of assumption and guesswork and timing here um you know by we know we know that you know interest rates are already 4.1 % if you're a cash rate, 6 %-ish if you're borrowing money from the bank right now.

51:18Whatever you think might happen with interest rates, the rate's already there. And so it was only the person who said at 0.1, hey, I think this will happen in this timeframe and I'm going to bet on that, that gets ahead of the game. But you've got to do it before everyone else does. Now, everyone else is trying to do it before everyone else does too. And again, I'm back to that idea of, I think it's going to happen. So Ram thinks it's going to happen. and you think it's going to happen. So which one of us gets there first? And if you're all the way early, I think in five years time, this is going to happen.

51:46You spend five years making no money because no one else thinks it's going to happen yet. So timing really matters and timing is bloody difficult. So again, I'm only repeating what Rams is, just trying to give it a different spin. But there's lots of nuance, lots of potential opportunities, lots of potential pitfalls as well. I don't invest in gold and silver. I don't imagine any time I'm going to. The one time I almost did, if I was going to invest in this industry, I would be buying miners when the commodity price was low and the share price was low. Just straight out because if you think about the range of outcomes, gold's never going to be worth exactly zero.

52:25It's probably going to be worth a million dollars. But the closer it is to zero, the better the chance it'll be worth more in future because these things tend to be reflecting the cost of production. And there's a whole lot of, we can talk about that maybe another time, but basically if it costs, I'm going to pick some numbers here, $1 ,300 announced to get out of the ground, then when the price is below that, no one's going to get it out of the ground because why would you bother? Now, when the price is down around that level, we say, okay, well, in theory, if people still want gold, they probably will.

52:51People will get it out of the ground only when it's worth more than this. But if I buy it at this price, when everyone's assuming it's only this price, then I get more upside. If it costs$1 ,300 to get out of the ground and I'm buying it for$4 ,000, then there's a lot built into the price. And I could go and open a new gold mine, dig it out and sell it for less than that. That should bring the price back down so again just to kind of counter-cyclically looking at supply and demand is how i'd think about if i wanted to play a gold game yeah i mean it's so it's such a fascinating fascinating area it really is i mean it kind of it has value just because we just trust that there's only so much of it it's the scarcest good and you know it's sort of um it's demonstrated itself as the hardest money over thousands of years so it's sort of when roman emperors start clipping coins and you know boulevards start getting printed it's sort of like well i just want to i want some i need something that's globally accepted and other people will see it as value but that you can't make more of that its value proposition is its scarcity and its verifiability and its acceptance that's that's its value prop and is that stupid no i think it's actually really smart um you know it it is something that serves an incredible purpose for for for the vast bulk of of our history um we've decided in the last 100 years that we don't need it anymore and most specifically in the last 50 years where we've really gone off the gold standard and uh we're still seeing what that experiment leads to but but yeah you're i mean you make the right point i mean what's it going to be worth in the future i don't know it's really It's really tough.

54:27Now it's got a rival too. It's the first time in ever. So that's interesting. Let's not go there though. I won't. Other than to say that we are intending to do a very quick catch up on what all things Bitcoin at some point are. Soon. It won't be a long chat, but maybe next week. We'll see if we've got some time. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

54:55let's go to a question from russell who says hi scott and ram i've been investing now for a few years i'm a little bit older than you guys so you don't have to hate me but i do enjoy running a sunday morning so you may again hate me i appreciate that russell and we do and we don't and we do we have basically paid off our house well done and have started dollar cost averaging into etfs and an lic over the past few years and using money in my mortgage offset account for investing You see in brackets, great idea with interest rate increases, dot, dot, dot. Yeah, sorry, mate. I originally liked the idea of the FIRE movement, financially independent retire early, but I understand that I'm nearly 50.

55:33I'm now just looking to build wealth. My question refers to dividend reinvestment plans. I have all of mine ticked to reinvest at the moment and try to work out whether this was a good idea. I have so many small buy transactions now, which are getting hard to keep track of. I'm getting approximately four to six grand in dividends a year and think that it now may be better taking the cash and investing it into the ETFs or shares I want as a single additional transaction per year. Could you gents discuss the pros and cons of this? Also, if you sell a portion of the shares, do the registries send your record of all your buyers so you don't have to do the calculations yourself?

56:13Can you pick which shares and therefore cost base you would like to sell or do I need to get out the dreaded spreadsheet? Ask Russell. Fool on. And that's from Russell. All right, let's start with the first thing. Yeah, lots of shares, lots of individual dividend reinvestment plan purchases. He's saying he thinks it might have been better to just take the cash rather than deal with the paperwork. What do you think? Look, I think it's never going to be the biggest tragedy in the world if you just by default reinvest all the dividends and you don't need it it sort of aids in the compounding and just it's it's easy i mean it's not easier tax time but it's easier from from managing a portfolio perspective and there's a lot of great examples where that's that's proven to be a very successful strategy i don't do it though i think i think yes it is a nightmare when you're trying to work out cost bases and the rest of it you can use things like share site that'll that'll make that a bit easier for you but um as someone who is a stock picker i prefer to take the cash and then put it into what i consider to be the best opportunity at that point in time it might not always be that company it might be a great company i'm continuing to hold and still love it just it's not as good a value as this thing over here and this dividend represents some fresh capital that i can maybe pull for some from from some other dividends or add some of my savings to and then buy and just have a cleaner transaction history and I've got more control over where it goes.

57:39So if you back yourself as a half decent stock picker, I think it's the way to go to do it manually. But as I say, look, honestly, if someone was to say, no, no, no, I think this is the better way to go. It's just easier for me. And I'm never going to argue strongly against that. It's not going to be the biggest blunder in the world other than the company you're reinvesting dividends in is on its way to zero which case it's kind of sucks holding that anyway so i don't know what do you think um it's hard uh i in order okay uh i don't use drps for the reason you've said ram which is i want to um separate out my investing and i want to invest in the best things rather than equal bits of everything i've said many times before though uh i'm very very very very happy with anyone who says I just want to do it automatically because it's easier for me.

58:33And if that keeps you investing and reinvesting the dividends, then great. We've said lots of times you don't have to be absolutely at the pinnacle of anything. If you own a decent portfolio of shares, you're investing in all of them over time, you'll probably do very, very well. So I don't do it. That's not my preference for anyone else, but I also wouldn't be particularly energized about it if they said, look, I just want to make it easy for myself and simple and all that kind of stuff. That said, as you're rightly finding now, Russell, the paperwork can be a pain. And when you sell them, yeah, it can be particularly painful.

59:05If you don't sell, if you're going to hold them for the long term or you only sell once at some end point, then you wrap all those parcels up together. It's easier because you've got to get a little month's space. But yeah, you do need to keep track of each individual transaction. So be mindful of that. As you, I'm sure, know, Russell, but for the benefit of our listeners, you still have to pay tax on that. So reinvesting dividends means you don't get the cash, but you still have a tax bill, a cash tax bill to pay in the year because it's incoming that year. So if you do that, just make sure you've got enough cash on the side.

59:35The registries won't keep the record of it. Sorry, mate. You're going to have to do all that yourself. You can see the ins and outs when they happen, and you can kind of use the registry records, I think, to cobble together prices, but it's a bit painful after the fact. So yeah, keep yourself a spreadsheet, make your life a whole lot easier. You can pick which shares and therefore cost-based you would like to sell. And I just pulled up, just to make sure I did this properly, pull up the ATO fact sheet, and they say, quote, there are three common ordering methods for parcel allocation, which is what they call it, when calculating capital gains tax on shares one, first in, first out, in other words, the first ones you buy, the first ones you sell, last in, first out, which is the last shares you bought are sold first, or highest in, first out, which can be also referred to as highest cost first out, the most expensive shares bought are sold first regardless of timing.

1:00:29They say, quote, a different method of parcel selection may be applied for each parcel of shares sold. Most people use FIFO because it's easiest to keep track of. However, you can choose any of these three methods, end quote. Yes, so that's that's about a little to you, mate, if you want. Again, I don't hate DRPs. I've done them before. I don't do them now. I think I'd probably lean towards your suggestion of bundling the money up and buying your best ideas, which is kind of what Ram talked about as well. The only thing I would say is that assumes you're adding more money regularly. If you're only reinvesting dividends, you're buying one transaction every six months with the dividends come in, that's probably not great for diversification either.

1:01:11So maybe just have a think about that a little bit. I wouldn't wrap up my entire portfolio dividends and budget one company every six months. If you're adding other money and buying other companies fine. Otherwise, just be mindful of diversification on the way through. Yep, nice. Mate, one from Lachlan who says, Hi, Scott and Ram. First, I just want to say thank you for providing us listeners with such expert knowledge while you both inadvertently go off on a tangent and chew our ears off. This question relates more to economics through positive interest rates and inflation. Given the cash rate at the time of typing is 4.1 % and the current inflation rate is at 7 % for quarter two, my question is, how important are positive real interest rates in combating inflation?

1:01:57Further, how difficult would it be to obtain positive real rates? And if applicable, does it change people's propensity to hold cash in the bank, such as a term deposit, rather than investing in equities? Love to hear your thoughts. Thanks, guys. And Fool on. That's a big meaty question, mate. Mate, what are you doing lobbying that into the mix one hour past exactly oh my gosh that is such a huge question it's big isn't it oh i didn't even know where to start yeah um i suspect you don't want real positive rates if you're trying to combat um uh inflation and work your way out of a very highly leveraged situation you want the debt that you've got and uh governments have quite a bit of it um as i said before the u.s is 124 debt equity it's it's the highest it's ever been there it's you know interest is their third largest expense and only getting bigger a bit of a potential for a doom loop unless they they really course correct but generally what you want to do the least painful option particularly if you're wealthy is just to inflate inflate it away and you need negative real rates to sort of do that.

1:03:14So that's my conspiratorial answer. I think that's what you want. If you had real positive rates, that is going to make that scenario a lot trickier to navigate. I don't think you can afford to. I mean, here's a really basic question that is very hard to answer and it applies to whether you're talking about shares or lending money at cash converters or whatever it happens. Where does the interest come from? Now, you kind of say, oh, it comes from the government. That's not an answer. Well, where do they get the money from? Someone's borrowed money and they've promised you an interest rate on that.

1:03:57So they obviously feel as though they can take your money, use it to make more money, make it worth their while, and still cover the costs that you've put on them for lending them money in the first place. Where's that coming from? That is a very deep question. And I speak at the sovereign level. And I suspect when you look at it, unless you're the kind of person that thinks one plus one equals three, there is a point that unless there is genuine and real wealth creation, that is we're just getting more and more stuff to my point on Friday with the less amount of effort, work, then that interest is not going to be real in any great sense.

1:04:39It's just I've just got more seashells in my patch. And that correlates with the reality that productivity growth is the only thing that improves real living standards. A hundred percent it does. It literally is the only thing. I mean, well, population can at a national level, but at a per-person level, it's all productivity. And I would go down a level, you're right, but I would say, well, productivity is just technology. Yes. Whether that technology is a pointier stick or a laser engraver. I mean, it can be better work methods. It's probably intellectual property slash technology in that great group of stuff, but you're absolutely right.

1:05:14You can only optimize around a burger production so much in terms of where one person stands when they're flipping the burger. You're right. But it's technology. I'm a lumberjacking company. That's a word. Look it up. And you are too. I use an axe and you use a chainsaw. Who's going to be more productive? Who's going to be able to offer the cheaper product? Technology is everything. I don't know. Tech is sort of like a thing these days. And we just all equate that with computers and electronics. But no, technology as properly framed is everything towards our standard of living. Can I just a quick hint?

1:05:49That is such an important point, right? We think about technology as being computer hardware and software. And it kind of is these days in the most dominant sense. The wheel is technology and axe itself is technology. Fire is technology. Right, exactly. Yeah, it's those things that are – and there's probably an all-encompassing term of definition, but it's that idea of things that are used to improve productivity. that almost it's almost the reverse way right you you describe technology as as a function of or a contributor productivity rather than vice versa it's yeah it's it's the catch-all of how did you how did you manage not to have to break that tree down twig by twig with your hands well i i used a thing yeah and the thing is technology regardless of how sophisticated otherwise it feels oh it's you you have no i think when you see you look around and peel back the layers of of of what's in front of you here, when you look at the prosperity of nations and the wealth of nations, it is because we have a really good capital stock.

1:06:50Capital just gets used in replacement of the term money. Money is a type of capital. But I mean, capital is something that you can use to make something else. It's a non-consumable item in and of itself, like an axe. I can't consume an axe, but I can use it to make firewood. but but but when you have a very diverse well-maintained capital stock in an economy it means that you can make a lot of stuff without much effort yeah you're really you're really rich that's that's that's that's true wealth and again if we all lived on a tiny little island and you guys over there have some some rocks and some pointy sticks okay you can maybe put some leaves together and have a bit of shelter that but i've got i don't know a combine harvester I've got a cement truck.

1:07:35I've got, you know, I've got kilns. I've got blacksmithing. I'm just, I'm richer. I'm 100, but whatever money you want to use or whatever, like that is true wealth and comfort. And that is where I think all gets lost in all of this. So just to come back to the original point here with real interest rates, the reason why it makes money, I'm sorry, it makes sense to borrow money at a cost is because I can use that money to enhance my capital base, my productivity, and I can get more for less. I've created real value. And so now I can now go out there, win market share, make profit, make it worth my while and pay you back and make it worth your while.

1:08:22It works beautifully. It doesn't work when I've invested that in some monkey token that did nothing. Now I've still got to pay you back, right? and if I'm the kind of entity that can create my own money, well, I will pay you back because I'll just print it out of thin air and pay you back as all the crypto cowboys did and as many governments around the world tend to do. And in that scenario, again, just to really dumb it down here, you look back and it's like, actually, we've taken all this money. People got paid there for a time. We had all this activity, but we didn't enrich ourselves in any way, shape or form.

1:08:56And the only way that I am still getting whole on the debt and this interest is because it's been created. It's not been generated through increasing wealth of the society. Does that make sense? I'm kind of a bit all over the place there. But that's why I think we are in trouble now is because we've had way too low interest rates for too long, a whole bunch of bad malinvestment in dumb things that never generated any lasting value for society. and now we've in order to sort of try and avoid any reckoning we've just bailed out and printed money to you know to like drunken sailors and we're at a situation where we kind of really need negative real rates that is the rates are getting relative to inflation to kind of square the whole equation again because there is no there is no real interest to be generated here because there's been no real value that's been created here at an aggregate level i think that's right i think um without wanting to drag this on for the sake of getting too deeper too much for the big question well there is future value can still be created from here so i wouldn't i wouldn't stop at this point and say therefore x i think and not you're not saying this but i just would add that future value is important right so if i borrow money to buy a house over 30 years uh i'm to some degree deferring some consumption or pulling forward some consumption.

1:10:25I'm choosing to have a shelter now and the thing I could have bought in five years' time, I now can't buy because I'm going to be paying back the house. So there's kind of that. And back to the inflation thing, if I buy a house at 21, I'm expecting that my income will hopefully rise steadily over that period of time. And so there is some element of me arbitraging my future earnings or we don't directly speculate on it, but assuming that at some point I earn a bit more so I can put more of that. So it's not as much a burden at that point. And that's kind of the national, that's the personal example or analogy to the national inflation story.

1:10:59As you borrow some money now, and hopefully if inflation goes up in a few years' time, the tax base is higher. And so you're collecting more money than you thought you would, and that's going to pay down the debt, or at least to make the debt smaller as a proportion of your total income. Either of those two things can be true separately, depending on whether you pay the debt down or just carry it forward. So those things are true. And that's where, to your point, mate, and to Lachlan's point when he asked the question, that idea of negative interest rates means that the economy is growing faster than the debt pile that is growing, and therefore you effectively inflate away the debt.

1:11:30It never goes away, but the burden of the debt as a proportion of your income or your wealth falls over time. And that's the benefit for national governments of that. Now, I will also say - You can still be poorer off in that situation, though. Right. And what I was going to say was we need to be careful with that because we too often separate the us and the them. People say the government should do this or I'm not giving the government more money. What that means is that the government runs up more debts. We are still Australia and Australians and we will cop the consequences, not necessarily line for line, dollar for dollar.

1:12:06We don't have to. Andrew's not going to get a bill for his share of the national debt, but the economic circumstances of the country will impact all of us. And so when we kind of pretend that the government can spend a deficit because it's them and not us, then we kind of disconnect that. We really shouldn't because when - We have a cost. Right. And when they, being the government, get to inflate away that debt, it does so by making us poorer in living standards, even if not in absolute dollar terms, in living standard terms, because we have to bear the cost of that inflation. So we're paying 7 % more for everything right now.

1:12:43And that helps the government debt come down. But unless we're getting pay rises to match, we are poorer individually. And that goes both ways. During the last 30 years, we all got richer individually because the government took on more debt. I mean, that worked both ways, right? The government spent more than it earned and it magicked that money into existence either by borrowing it or printing it and got to pretend for a few years there that we were all getting richer because look at all the good things we've got. Didn't cost any more. Look at that. Magic money, magic assets. Until you realize that that came with a debt that needs to be either repaid or the interest bill covered.

1:13:14And that was the exact equivalent of the reverse happening. We don't complain about when we're getting richer when the government's taking on debt because, hey, look how good we are when we have to then inflate that away or choose to inflate that away if that is indeed what happens. And it may not. Inflation might come down more quickly and we might end up with positive rates again. But in any case, that circumstance does go both ways and we shouldn't just look at the downsides and say, here's where we are now, but rather we got the benefit, knowingly or not, for probably a good few decades of that wind up.

1:13:43We'll have to pay the bill if it winds down. Well, that's just what we were so dumb as a country. And we, I mean, debt is just bringing forward consumption, as you rightly say. I can wait and save and do it when I can buy it outright, or I can just bring it all forward. That's fine when you're creating genuine value. When all you're doing is just inflating the housing stock, think about the proportion. I can't give you a number on this, but think of the proportion of Australians out there slogging their guts out, working 40, 50 hours every week. just to service a mortgage, just to service a debt.

1:14:13That money could otherwise be used to create new businesses, to spend into the economy. No, it's just going to pay back debt. And it is a huge amount of our productivity and effort and sweat is in that. And that's fine because we decided that we went into that deal. I want the house now and I will trade you that a lifetime of work and repayment for that. Okay, cool. That's what you wanted to do. But what value was created here? Do you remember when we were kids, if you were a millionaire, you were rich, like a millionaire. What the hell? The average house in Sydney is$1.4 million. An average crap hole, two-bedroom, whatever.

1:14:54It's not a lot of money anymore. So you can feel this notional sort of sense of wealth and, oh, I've got a million dollars. Well, it ain't what it used to be here, right? And it's just like that's where this measure of wealth can be wrong. And I would much rather think about why I've got my parents' generation where it was only one adult that worked and they could buy a house at four times their income. And, you know, my dad was, oh, but I was only on$30 ,000 a year when I first was. Yeah, but you're an idiot, Dad, frankly. You're confusing. You're using some arbitrary measure here. Think about the person, fast forward to today, the 30-year-old who can buy a house at four times their income that can have the option of one parent staying at home and raising their kids.

1:15:44It's not an option. It's impossible to do. So, yeah, my pay is much bigger in notional terms than what it was a generation ago. And, yeah, in a lot of ways, I've got all these cool gadgets that my parents didn't have. But are we wealthier? Like, I don't know. if that's necessarily an easy question to answer. And I feel as though that is, again, I know it's my favourite hobby horse, but I think it's just a period of extreme luck in terms of the world needing all of the commodities that we have. And us being the geniuses, and rather than sort of doing anything smart and sensible with it, just decided to inflate our housing stock to insane levels, such that now half the workforce is breaking their back every day just to service this thing.

1:16:29And I don't – we are in a situation now where it's sort of like, yeah, interest rates are going up, but inflation is going up a lot higher. And guess what? That's what happens when you create a bunch of money and don't actually build any new capital stock with it, productive capital stock. It's inevitable. I mostly agree with you. I'm going to play the other side of it just for the fun of it just to kind of give our listeners a bit of extra context and we can agree and disagree and then go do something else because this podcast has gone off way too long already. um the own the one thing i would say is that humans find ways of spending money on the things that we value most and those things go to somebody else and so i think there's there's some value in thinking about where if we if we collectively like the the bargain we made ourselves which is we will value houses overall because that's what we think is most important and we'll do that and and the ongoing slow moving auction that is the housing market will will generate that return and i say that because the average is not a real return just my quick interjection there what's the return it's the greater full theory is the return no i mean return as in uh as in the the benefit we get the the living standard benefit we got a house we got a you know we're happy with it's utility to use the economist term happiness satisfaction whatever those things are i say that because we're no we're very very slightly less wealthy than the average american the average australian is slightly less wealthy than the average american their housing is much much cheaper than ours and so you say well hang on square that circle for me they spend more on other things and we could in one version of the world say well at least we own a house that we can live in they've they've frittered that away on uh you know food and clothing and whatever else they've spent their money on cars and whatever.

1:18:22And suckers, they've got expensive cars, but the big yank tanks, they're going to break and rust out. And so at least I've got a house that's not going to deteriorate in value. I'm not making that argument necessarily, mate. I guess I'm just saying that whatever we spend our money on, whether it's housing or cars or holidays or whatever, we give to somebody else to perform the service or provide us with the good. And so if I buy a house from you and you say, sucky, you paid me$4 million for a rundown, ran infested you know bolt hole in Sydney um I got your money but then you go and spend that money somewhere else and then you know if I bought a car from you would have spent that money somewhere else if I'd if I'd gone on a holiday and you you provided the the accommodation you would have spent that money somewhere else there is an element of of the circularity of of any economy the economy the global economy frankly but you know locally or nationally for our purposes um that that you know the the value we put in these things and the way we choose to allocate that capital if you save it it never gets spent so there's no utility in that other than a bit of satisfaction knowing you're not going to go broke and when you spend it whether you buy a house or a car or a holiday or some clothes or some whatever's uh really expensive french champagne um the the money still goes through somewhere and i i think i'm not as convinced that i'm not as convinced the argument of you know housing is a worse choice than many other things that could have been done with that money in terms of life choice and that utility or satisfaction that we get from the things we spend on.

1:19:49If we think a house is worth$1.4 million, then it is. And I did that instead of buying a second car or a new car or something else. And if I'm constantly making that choice or the reverse choice, which the Americans make, which is I'm going to spend $500 ,000 on a house, not 1.4, but I'm going to buy the new Camaro and I'm going to buy the whatever, I'm going to do this, I'm going to do that. At a total living standard level measured other than in you know pieces of seashells to use your example before uh it's not a dead loss because the money goes somewhere it's not like we we say i bought the house and i buried the money in the backyard it goes to the person i think you do no i think you have i think you have buried it in the backyard almost literally and the difference is is that with so i bought my house this is why this is why so much of this wealth and like the australian average wealth is is it's like looking at a REIT who says that, look, all the property on our balance sheet is worth X.

1:20:44Is it? Is it really? Okay. Well, let's say this. I bought a house for whatever I bought it for, and now I'm selling it for$2 million. And I've just sold it. $2 million. Great. Oh crap. I'm homeless. I guess I'll buy a house. So it's not real wealth, right? The only way for me to access that money is to borrow against it or to scale down, is to go from my three-bedroom house to a two-bedroom unit. And then if I want to access it, I've got to go to a one-bedroom unit, to a caravan, to a tent, to a cardboard box. So it's sort of like it's not real wealth if the money that I use is not surplus to my needs.

1:21:25If I can sell you my house at$2 million and get equivalent utility elsewhere for$1 million, then that value has genuinely been created. But we haven't done that. So it's sort of like the only ones who win out of this property race are those who have leveraged up in an incredible high way so the actual return on their equity has been sufficient enough to do it. And they are just playing the greater fool theory game while ever it plays out, and it's been playing out for a long time. So good luck to them. But at some point, you know, like we've got to ask ourselves what real value has been created.

1:22:03I'm buying a young person now and I'm entering into the housing market. I'm going to spend at least a million dollars in Sydney for something very ordinary. And I'm going to be probably working the next 30, 40 years just to pay the damn thing off. No value has been created, even for the person who sold it, who has to now live somewhere else. Do you get where I'm getting at? I do, but I guess I'm making the point that if I'd spent half that money on the house and the other half the money on something else, these things are only measures of utility represented by by seashells is all is the only point i'm making we're gonna i'm gonna earn a certain amount of money between now and my day i die and i'm gonna spend the vast majority of it in some way or other yep and americans spend theirs differently to australia the way australians spend out but australians don't have it so we have no choice but to spend it on housing because generally people like to have a roof over their head so what yeah okay maybe i spent it somewhere else but you're great i spent it on a holiday i spent it on some toys for my kids.

1:22:58I spent, I spent it on something else. Whereas like now it's like, nah, you got no choice. You and your partner, you're both working, you're both up to the eyeballs and there's nothing else left over. This is why all the retailers are cratering on the ASX. Harvey Norman came out the other day. I mean, they're always like, no one's buying anything. And it's like, and then the banks are saying, oh, but, but, but arrears are fine. No one's defaulting on their loans. Yeah. No joke, because that's the last thing that's going to go. And we, We are, as an entire economy, committed to doing nothing other than working our guts out just to pay the debt back.

1:23:33We're not doing anything else with that. Yeah, the money might have gone somewhere else and everything else being equal, but it's probably better that it was somewhere else, right? Rather than all in just the one pot. That's what I'm not sure about. We've made the decision. So culturally, communally, we've made that decision. There was nothing forced on us. I mean, recently, it's actually population growth, frankly, but let's go back before, you know, pre-COVID. There was the average American, the average Australian said, I'm going to spend my money this way. And yet to some degree, you're right that we had no other choice but do it because that's what the prices are.

1:24:06But the prices aren't there because some government or Politburo or lizard people said, this little island down here, we're going to make everyone pay double for housing because we're just bastards. We made those choices. We literally said, I will outbid you. And you said, you will outbid me. And I said, I will outbid you. and the price became the net result of what we all decided to do. And it's not fair for individual people who are saying, well, shit, this is the only choice I've got. But I guess the money is going to be spent in some way, shape, or form. We have decided that's how we've collectively placed our priority chips.

1:24:40There's no policy. There's no whatever. It's just that's how we've got to this point. Yeah, it's game theory. It's game theory. Everything's game theory, right? I did it. It's not in the US, except they're just making different choices. They've all gone, yeah, I'll pay that much. How much for that much? No, none of us are paying that. And so it just never got that high. In an alternative world, in exactly the same circumstances, American property is worth double, Australian property is worth half just because that's the way things netted out.

1:25:06So much to say.

1:25:11Yeah. I get your point that we've all just made these decisions, just for our own individual circumstances, but the cultural phenomenon at play in Australia is like, this is how you get... If you're financially sensible, you buy a house and you invest in property and you make wealth. Why would you think that? Because it's worked wonderfully well for the last generation. That's why you think that. And you've got every expert under the sun and every policy under the sun incentivizing and encouraging you to do that. Great. No one's planned it, but that's how it's kind of gone. but where we find ourselves is completely now beholden to careful what you wish for right so we're all still living in the same kind of houses more or less right they're a bit bigger on average and yeah okay maybe there's a media room or a jacuzzi out the back as well but but you know we are we are now in a society where it's that and a little bit of a pittance left over for anything else that you might want to do.

1:26:09Yeah. I completely agree. And that's what I find frustrating is that because there is a parallel world out there with better planning and policy and incentives, et cetera, where we're buying houses for four, five, six, seven times income. Sure. Everyone wants to. But I've also got the flexibility where maybe if I want to raise the kids, I can do it. I have to pay a childcare worker. I can buy it. 100%. Maybe I can have my house and have a boat because I really enjoy fishing. But we don't have that choice now. It's just like we're both working. We're breaking our guts out. We're going to have a mortgage until we're 78 and never going to see the kids.

1:26:46Someone else is going to raise them and there's nothing left over for anything else. Oh, and if I get sick or lose my job, I am screwed and I'm a forced seller in this market because I just can't make ends meet. It's an incredibly fragile scenario we've built for ourselves. and that's why I get a bit exasperated with it all because it is what it is and the chips have landed the way they have. But then the amount of shoulder shrugging goes, oh, it's always like that. I'm just going to extrapolate that forever. Well, gosh, I just don't think mathematically you can extrapolate it forever. And where are your new ticket on that one?

1:27:19I'm not taking any of what I've just said to be and therefore it will continue forever. There is absolutely, I'm a million percent with you on the - No, but 90 % of quote unquote experts say that. Right, exactly. Right? Yes, 100%. Which is like, really? You know? Yeah. He's talking about gold before and like how it's all subjective. It's the same with houses to an extent, right? Like it's sort of, there is a collective madness in it. Oh, God, yeah. Can you imagine, as much as what I've just said, it was largely devil's advocate. I've said on Twitter a while ago, and actually had a conversation with a couple of economists and property people.

1:27:53And, you know, it almost feels a bit socialist. I got called Marxist, by the way, during the week, which is easy for me. um but it feels a bit socialist to say but you know imagine a scenario where we all live exactly where we live but the cost of that housing was half what it is now i consider us to be much wealthier well that's the thing oh no i wouldn't i wouldn't say wealthier like nominally we've got less money because my house is worth half as much but i would say we are wealthier yes in terms of as i've defined it previous in the previously in this podcast yeah much yeah yeah yeah we as you say we could i mean we i've said before too we you know had women join the workforce belatedly and and you know still not equal pay but we pretty much just co-opted that into house prices rather than actually saying so we did guess what women want to work and can work and that's really great now we can both work part-time or i can take the time off and the wife can raise the kids or vice versa or you know whatever we spend we can both work and spend more on leisure activities or my honest one if you think about this here's the here's the really crazy thing right imagine what we have today so we got all the things we got today everything we got today except housing was worth half the price including rent if so yeah everything's proportional we could all be literally working in half we could all work 20 hours a week sign me up that's the society i want to i know i know like for all of the things we could have it nothing's more valuable than time it's like so hang on if we just all agreed i'm not assessing this at all because people jump up and down if we all agreed that housing and rent everything else was just gonna be half the price from now on just boom down it goes yep so now i only have to work three days a week yeah and you have to work three days a week yeah and we why would i work more than that well i could pay more for my house but that would be stupid so i'm just gonna work two days three days a week yeah good idea let's all do that there is as you said there's a collective matters collective delusion in the whole thing which is very late in the podcast to be philosophically talking about this sort of stuff but it's not untrue anyway this is this is way off on look the original question here was versus interest rates versus inflation but these are the consequences of that it's just it's a lovely example and all roads lead back to Australian property because it is the black hole for capital in the country.

1:29:54But that is the natural consequence of unproductive investment. And that's what housing has been unproductive. Yes, you can live in it. Yes, it's great, but it's not generating the kinds of yields that can be real and decent in any extended way for any period of time. It It just can't be, right? Because it's not – what's the utility? Well, I get to live there. Okay. The same utility, whether it's three times higher. I had a chat to a friend the other day. He was talking about how well his house has gone up in value. I was like, great, go spend it. And he looked at me like, what do you mean? Well, you've got all this money.

1:30:32Go and spend it. I can. You're a hard man. How can I do it? Like, oh, well, you know, offset. Well, that's a loan. I'm not trying to be a difficult person, maybe a little bit. A little bit. It's made up. It is totally made up money. You want to go live in a caravan park, absolutely, you've made some real money there. But if you want to sustain your lifestyle and sustain the kind of house that you have, you've made nothing. Nothing. Challenge me on that. Like I don't – you've got more seashells. there's a bigger number in your bank account or on on your personal balance sheet that's what you've got a bigger number yeah your actual wealth hasn't changed at all that's probably you've got it you know what what do you do what do you do for you uh it makes you feel better that's the wealth effect there right that's that's probably where there's some benefit to it but yeah anyway i don't know i've been longest podcast ever oh yeah what are we up to We've done an hour and a half, give or take.

1:31:37I warned you. It was two past one and you dropped that question. You didn't have to spend 28 minutes talking about it. If you could have been a quick seven or eight minute answer, we could have been done. No, that is still the short answer. I could go on. But to save me and to save our dear listeners, because I'm a friend of the listener, we will call it there. That was a fun podcast. For the three people who are still listening, you've obviously fallen asleep. So when you wake up, thank you for listening. Until next Friday, fool on. Cheers.