Mailbag, incl: Real talk from an oil and gas expert. April 26, 2026

24:35It's gone now. I think that's really hard to justify at a national interest level. I'm not saying you're wrong. This is the one area where almost always retrospectivity I'm against for almost everything. And I even am conceptually here. I'm just not sure whether – there's a materiality question about – You know, we sold Australia to the New Zealanders for 40 cents in 1881. We'd probably like it back, please. And maybe we should take it back because we kind of did a bad deal. And, you know, if you're a stickler, I have this on social media, but if you're a stickler for we did the deal, we've got to live with it, we're fine, but it wasn't really us and it isn't really – I find it's a really difficult one, mate.

25:18I don't know the answer. And, John, I'm sorry to hear you, mate. Oh, no, just quickly on that. What makes it so irritating is when there's a lot of things in business and economics where it's like, gosh, that was hard to see. Who could have seen that? Yeah, yeah. There are other things that are like Blind Freddy could have seen that from a mile away. Or at least imagine a range of scenarios. What the hell were you thinking? Like what the hell were you thinking when you signed these? Obviously that was going to not be a good deal for us. That's what the tragedy is here. So you're right. I'd be more forgiving of this really weird set of circumstances sensors arose and we kind of have to pivot a little bit versus we did something that was so obviously dumb we gave a loaded machine gun m16 to a jimp and wow it turned out that was a mistake yeah yeah do you think you know so jonah then had some technical stuff which i love and this is some of the stuff i think is not the rest of isn't great jonah but this is this is fascinating this is onto technical reasons why it's not smart for offshore mega projects to choke back production once bought online.

26:18Decades ago, most mega projects had a platform built and part of that platform included a drilling derrick. That platform derrick did the drilling so the development of a field could progress in phases and be put online to the trunk line, here, I'm learning some things in here, going onshore to the plant. However, modern day mega projects are different. A lot of smaller satellite fields are bought online using a subsea manifold. Man, you're catching up, I'm learning a lot. For fields that do have platforms, they now save costs by not having a drilling derrick. Both use a floating rig to drill the wells and tie into the trunk line.

26:50The rig costs are now around$2 million per day. So mobilising a rig down and back from Southeast Asia costs$30 to$40 million even before you start drilling. Therefore, most drilling is done in one big phase due to economics. And for each additional brownfield phase, you're adding complexity where the activity may damage the existing facilities, curtailing production whilst repairs are done. Don't forget safety too. Each phase or intervention is a major HSE event to manage, with a lot of ignition points on a rig now in very close proximity to a lot of highly combustible gas, yeah, fair, and a lot of very expensive facilities.

27:25On the downhole side of things, shutting a well back means there is sufficient risk when trying to restart production. Often wells will have water in the well bore, and this can flow back in and damage the formation permanently so that production rate will never attain the same flow as before shutting. I don't think that was interesting, Matt. I don't really have any thoughts. I've not, I've no idea the exercise to have a view on that. I mean, that is the story of business full stop writ large, you know. There were problems, not problems, there were incentives to do things faster, better, cheaper.

28:00That is the story of civilisation, you know, whether framed in an economic way or a business way, that is not. The great example here too, and really I'm trying to put this as an, I don't want to morph this into an environmental discussion, not that you should ignore that stuff, but just there was a lot of talk decades ago about peak oil. That's right. 70s, wasn't it? Yeah, yeah, like 50 years ago, right? And it was like, it's very Malthusian of a view that like, here's how much it is, we're going to run it out. And obviously we're going to run out because it's a finite resource. But it turns out that the predictions were miles off.

28:39What they missed was two things. They missed the reflexivity of markets. So there's what's viable and proven now under a$40 a barrel. Same with gold, actually. I mean, think of all the gold mines that have opened up lately. It's like, oh, actually, it turns out our tailings are worth something. At$5 ,000 US an ounce, we can actually make some money. market reflexivity is in the end. And just what reminded me of that little part there from Jono was just like the technology improves as well. I mean, don't forget the US went from a net importer to a net exporter of energy, right? Because of coal seam fracking, because it's a horrible thing in a whole bunch of different ways.

29:23So again, I'm just trying to make a separate point here without morphing it into something else. And not that I don't think it's important or anything like that, But we should expect this kind of stuff and we should applaud it too because when this is done well, it actually means that we get more and cheaper stuff. Yeah, right. That being said, the flip side is that I will say to Jono's point, he's right that companies have done certain things based on certain expectations and costs and everything else, and they're right to minimise those costs where they can. It's also reasonable for them to set their costs based on the rules that are put in place and it's not unreasonable for us to say you've got to incorporate that into your ROI.

30:04So I take your point about the$34 million John Allen and not for a second saying it doesn't matter but equally it's like okay well the rules are you have to do it this way so build that in and if it's not worth doing don't do it and if it's worth doing keep doing it but that's kind of the rules of the game. So I say well you don't understand Scott if we stop companies pouring paint into rivers it's going to cost them more to get taken away and that costs$30 million a year to get the paint taken away and disposed of property rather than pouring into the river and you know that's a lot of money so surely we should let companies do it.

30:29Now, I'm being a bit facetious, John. I'm not saying you're saying that at all, right? But my point broadly is there are things that absolutely cost companies money because we say that's the rules of the game. For whatever reason, economic, social, environmental, whatever, there are rules that we put in place. You must put scaffolding on the roof if you're on the third floor putting some tiles there. Well, that'll cost a whole lot of money. Yeah, but it'll stop people dying from falling off roofs. Okay, well, would the business, would the builder like not to pay the money? Yeah, of course. Would it reduce the ROI?

30:57Yes. Would it put a couple of builders occasionally out of work? Yeah, probably. Is that enough to say, well, let's let the people fall off the roofs? Maybe not. So maybe you don't do it. And again, it's a silly example, but it's directionally, just try and make that point. Well, I would actually go as far to say is that there is an economic argument. Like too often with the environmental debate, it's sort of environmentalism and the economy is pitted against each other, we can either be richer or we can have the nice environment, which one do you want? It's like, well, I guess we won't make as much money, but it saves the environment and that's just a good thing in and of itself.

31:36And by the way, I think that. It shouldn't be difficult. But I would say even if that wasn't an argument, the economics, when you look at in an aggregate standpoint, still would argue you do that. The best example, actually, the more I think about it, the best analogy for anything economic is the farm because it's kind of like the basis. The farm is the perfect analogy for everything. And so the farm analogy here with this part of the economy is you've got a patch of land. I've got a patch of land. We've both got 100 acres. They're identical for all intents and purposes. I can flog the hell out of my land and I can have much, much, much higher yields and I'm going to make much, much, much more money.

32:23And in five years' time, I've completely salted the earth for all intents and purposes. You've got the top soil, nothing grows anymore. Massive soil erosion, the salinity issues. You've got enough food for cattle. Yep. Yep. All of this kind of stuff, you know. Now, you have deliberately taken less, quote unquote, of a return, but actually a far, far, far, far greater long-term lifetime return. And as we all know, when we're talking about productive assets, their value is proportional to their lifetime generation. So when we look at things like chopping down forests or extracting olives, what we have to do is not just say, well, obviously, for very narrow interest groups, there are, you know, as you rightly phrased it, yes, we would like to spend less on safety.

33:05We would like to not worry about this. But when you put the economic argument at a wholesale level, it's still, again, friendly, touchy-feely, tree-huggy, whatever stuff to one side. The argument is, no, do it for the economy, right? It's just like, how good is it for the economy if the sea level rises a metre and we wipe out all of it? Generally, as a general rule, waterfront property is the most valuable property. It's like, what does that do to the economy? So I don't know. I don't know why I'm jumping on this. I wrote the price GDP because they rebuilt the houses. Example,$4 ,987 ,000 as to why it's such a stupid metric, particularly when it's focused on.

33:45That's right. But, yeah, I guess I would make that. I really hate that when it comes up in the media. It's like, oh, well, there is this, but on the other hand, and we need to consider both. It was like, no, just consider the economics and you'll still reach the same conclusion. Yeah, I think it's probably fair. Johnny goes on to say, lastly, I already touched on megaproject cost, but exploration costs need to be seen to be believed. The gnarliest one I worked on, I mean, I love to be with Johnny because we have some hell of a story, I reckon, was a high-pressure, high-temperature well where the geologist screwed up the target depth and we had to drill nearly an additional kilometre, turning it into an ultra-high-pressure, high-temperature well.

34:26The bottom hole conditions were 200 degrees Celsius and 12 ,000 pounds per square inch of pressure. To put that into perspective, we had to get the downhole tools full of electronics working at the temperature of your Sunday roast and the pressure being twice that at the depth of the Titanic shipwreck. the cost of this well was 120 million dollars and it was unsuccessful um yeah get it right i totally understand on a side note he says i totally agree that australia needs a sovereign wealth fund for its resources but the current discussion on tax is just laughable for the complete clickbait rage bait facts reporting that that beer pays more than tax beer pays more tax than gas argument completely omits the fact that like i can complain depreciation on a laptop i'm using so can companies claim depreciation on the mega projects.

35:13It's only later in life the cash comes rolling into the government. Most of the WA fields will be getting close to this point now due to the massive construction costs. With all I've discussed, would you as a CEO of a multinational invest in Australia if the government started changing the tax rules? The conversation is so poorly understood, says Jono, by the general public and in a world of social media and increasing populism that so often leads to poor political decisions. Fool on, keep up the great work with the podcasts, Jono. I agree, Jono. Great point. I mean, again, you can't, it feels like as soon as you say something positive or negative and one, like, these days you're on a team of some sorts and it's just like, I think what Jono is really, well, the part that's resonating for me is it's complex.

35:55It's nuanced. There's pros, there's cons, you know, and you've got to look at it. I agree with him. It's just, it is frustrating when someone, there's a lot of, some journalists out there I really respect and then they just, they get on this thing about so oh they they sold this much and it's like yeah well a revenue is not profit and b they didn't just rock up out of you know and just start making these sales there was like you know 20 years of investment before that so you you know this and it's always framed as in their dodging tax and they're not paying their fair share it was like it's a policy decision and discussion that we can absolutely have but they're not breaking the law right and in fact when you put that in the in as john i was sort of done if you frame that in the context of a small business like the the guy down the street has bought a pizza oven and depreciates that every year for the next 10 years is that no one gets outraged by that you know i mean by by depreciating he's depreciating something in year five that he spent five years ago this so his cash profit is more than his accounting profit is more than the profit that he's charged tax on like no one yeah yeah Yeah, but because the asset has a life spot.

37:04Why am I, you know, I need, it's just very, very well-established accounting. It's a very common sense, very normal kinds of things. It doesn't mean that we can't get angry at the gas company. Screw the gas company. They've got no sympathy for them, you know, in a lot of different ways. But we pick the wrong boogeyman, I think, a lot of the time. And when there's so much that we could point at and say, that's egregious, that's wrong, By pointing at the thing that's actually not as sinister as you're making out, you're weakening your own argument, right? Like, I don't know. Life's complex. Life's complex.

37:41It is complex. And anytime you pretend it's not, you do yourself a disservice. The only thing I would say, Jono, and you'll disagree, and that's completely cool, mate, is you're right about the PRRT. The problem is I don't – I think the structure is fundamentally wrong. What you describe is taxation when it comes to company profit taxation, and Rams just cover that beautifully. When the royalty from a barrel of oil is dependent on how much money the company makes, I think we're getting it wrong as a country because we're not incentivizing the company's – sorry, I said that again. We're not maximizing the return we're going to get from the assets because if the company makes a little bit of money, they pay a little bit of tax.

38:24And so we've let them extract oil and get a little bit of tax because they haven't made any money, which is, on one hand, fair and inverted commas for the company, but the Australian taxpayers just shoveled out barrels and barrels of oil for no benefit, right? So if you happen to be a very inefficient, poor operator, we're copying from your ineptitude. It's like, no, it should just be. This is what it is. This is what it costs. For every barrel, that's what it costs. Now, if you do your sums well and you're a super efficient, productive operation. And, you know, we might look back and go, gosh, we probably could have charged more.

38:57Actually, they're getting a better margin than they anticipate. And well done to them. Like, incentives matter. But if not, it's like, why are we, the Australian population, suffering from, you know, an oil and gas executive team that doesn't know how to run a business? So, John, let's imagine, and this is an extreme example, right, but it's worth it because it illustrates that we can work back from it. Let's imagine a company, let's imagine the Northwest Shelf Project, right? in a different universe. Let's say it runs for 30 years and over that period of time makes no money. And let's say we let them extract the full amount of oil under the ground on the Northwest Shelf under the sea and it gets extracted, sold to the market, market uses it, market runs the world on Australian oil and gas and the Australian tax pack has nothing for it because Northwest Shelf project made no money.

39:44We've just given up an enormous, I don't even know the volume, you would know John off the top of your head I'm sure, an enormous national resource for nothing out of it just because the company didn't make any money. Wouldn't we have been able to keep it in the ground? Yeah, of course. So shouldn't we make sure that if we are going to take it out of the ground, the Australian taxpayer is compensated for giving up a literally irreplaceable on any human timescale asset? Of course we should. Your example of the family farm, I love Ram. I've used it myself on social media quite a bit recently. I've talked about the sovereign wealth fund is the equivalent of selling off the family silverware to fund an ease up.

40:19Yeah, you had fun. and what do you got to show for it? Nothing. Where's the family silver? Oh, it's gone. So now we're actually worse than we were. We've got nothing to show for it and we've got no silverware. Yeah, that's right. So think about this in the context. Take the silverware as the oil and gas under the ground. Okay? Every time you sell a fork or a knife from that silverware set and you say to the retailer, can you go and sell this for me? If you don't make any money, that's okay. If you make a profit, can I have some of it, please? Who's going to do that? Imagine you're in your car yard and you sell as many cards as you want, card salesman.

40:53If you don't make any profit selling them, that's okay. But if you do, I'd like some of it, please. I mean, it's a mad structure, right? And so at a company tax level, Johnny, you're right. They should absolutely not pay tax on profits unless they're making a profit. You're 100 % right. And they should carry losses forward as we all do. But should they be able to, and the other example I use a lot is the wheat and the flour mill. The flour mill says to the wheat farmer, oh, sorry, I can't pay you for the week this year because I couldn't sell the bread at a profit. I mean, which week from us? Yeah, no, that's a fine.

41:25No worries. That's okay. That's the deal we've got. Who would now? Your point, Jono, some government, some stupid government's made the deal. I don't know who wrote the legislation. I don't really care. But approximately either of their houses. The person who wrote the legislation is now on the board of an oil and gas company. That's where I... Probably. I don't even need to research that because the odds are so staggeringly in my favour that that's... Yep. Why are we even laughing? like it's just you gotta cry but sorry so yeah so like so you know so i understand jonah from the company's perspective i get it of course they want those things all the things you mentioned are very reasonable things for a company to want the question for the taxpayer or the question for the government on behalf of none of the taxpayer the average citizen right it is literally the common space wealth of the average australian resident slash citizen there are 28 million of us and we've got x tons of gold x tons of iron ore x barrels of oil under the ground it belongs to all of us.

42:18And the job of our representative is to make sure we get maximum value if we're going to extract it, we get maximum value for it, and we still retain, i.e. sovereign wealth fund, as you agree with, the maximum amount of that value we can maintain. Because why would you do anything other than that? Why would you sell oil for less than you could get for it if you waited? You wouldn't. Why would you let someone have a better deal and you're getting your assets? You own the assets. They want your assets. You answer, Jono, honestly mate here's the if i was setting resources and royalties and rents the the the the only right spot is the only right level is the point at which the marginal project becomes unprofitable that's the only that's the only point it should be set at i don't care if companies don't make money i don't care if they don't drill the oil i don't care in a particular field or mine the ore in a particular in a particular location leave that until the price is high and they'll come do it then which is great because then we wait and get something for it that's we win massively at that point right our job is not to have as many oil companies right now or drill as much oil right now our job is to take the finite resource i've got the family silverware set i'm only going to sell a fork when someone gives me a great price for it if they don't give me a great price i'll leave it and i'll leave it in the cupboard and when someone says you know they want to give you three dollars no thank you five dollars i think you're ten bucks yes you can do the deal i'll wait till someone gives you ten bucks for the for the for the fork and i'll sell it off by the way I'll invest that money for the farm's future so that the grandkids have got something to show for it.

43:43But I'm not going to sell it just because someone said, well, we should sell all the silverware and whatever the retailer says it's worth, we'll sell it for. And whatever they get for it, we'll take a share. It makes absolutely no sense, mate. As a resident and a fellow resident of Australia or the States when it comes to the minerals, it makes absolutely no sense for us to sell at too cheap a price. It makes every sense for a state or a miner, yep, don't drill. You're right. It doesn't make sense to drill at this price. Don't do it. Why not? Because we can't make any money out of it. Even when you think you can make some money out of it, come and talk to us because you know it's here.

44:15And knock yourself out. Once we can get whatever the right rate is, let's chat. Until then, know that it's here. Know that it's for sale. And whenever you want to give me$10 for the fork, come and talk to me. Three bucks for the fork, I'm not interested. Or no profit because I just said I'd sell the fork and this fork's here and someone wants to buy the fork. So I guess I've got to let the retailer sell the fork. I know I'm torturing the analogy. To me, Jono, and I'm not in the industry, mate. I'm sure I'm ignorant of a whole lot of stuff. and I actually really take your point about slowing down and stopping maybe we have to rethink that part of it honestly um but but and yes the business cases matter but I would allow an oil driller to say I won't drill the 15th well because I can't make money but the first 14 Australia gets much more money out of than if we'd let them drill the 15th well and the royalties for all of the wells at a low enough price the 15th well made sense that that would be that would be crazy if you own the resources yourself you wouldn't do it John you would not do that deal you'd say no just do the 14.

45:06I'll come back to the 15th when it can make money for you. And if it never does that, it's okay, it's in the ground forever and I get to keep it and pass it on to my kids and grandkids. And at some point, if they get a good price, they can sell it. That's the only way you would run the family farm to Rams and Allergy. Oh, it's so obvious. And in fact, the business making the go, no-go decision, they have to figure out all of these things. And like, you've got to remember that this is all a process of experimentation. Those that intuit things well and execute well get rewarded and they should they've made us richer they've they've increased production of something that we clearly want otherwise they wouldn't be selling it you know absolutely put some rules around it so can you please not like kill all the fish while you do that because there is a fishing you know industry as well and there's a whole bunch of other things but it's just like these are these are really really common sense kinds of things And you'll find that in such a framework that actually the incentive leans towards efficiency and responsibility and capability in terms of long-term planning and that.

46:13Because they're the ones who survive and the others don't. They go out of business. Good. See you later. Don't let the door hit you on the way out. Boo-hoo. I don't care. Yep. You know? And like, it's just like. It's the only responsible way to do it. It's the only responsible. I mean, you've got to always ask yourself, if not that, then how? And the only other alternative is a group of people, probably men in their 60s, who will make a decision between the 12 of them. I mean, it's a nonsense. It's absolute nonsense. I don't know why it's even a controversial thing to kind of say, right? So the whole debate is silly.

46:49The whole debate is really, really, really dumb. And we are giving it away. And I agree. Literally, yeah, yeah. We were talking off air about some of the recent Senate hearings. They had a guy from Punter's Politics and the Australian Institute actually make some really good points. But, I mean, they do gloss over some certain things here that even though I have great affinity for the general message, it is like you are simplifying it to a point, which again, I don't think it hurts you. And this is, I mean, John, I said it as well, right? It's just, it's sort of like the conversations are so shallow as to just, you know, like I don't think either side is happy and we all become poorer as a result, unless you happen to be a resources minister who's going to walk into a beautiful, I wish I was joking.

47:44I was like, I mean, someone's done the work on it. I forget what it might've been Michael West or one of those guys, but it's just like, it's like, it's a thing. It's like, oh, I can find a few examples of it. It's like, nah, pretty much you're guaranteed. You are guaranteed. And I don't know how any of us look ourselves in the mirror and go, yeah, this is a good system. No conflict of interest here. By the way, mate, speaking of unpopular, I would pay our policies a whole lot more. And I would ban them from taking corporate roles after politics in the ministry of their responsibility. Yeah, hell yeah.

48:18And frankly, I'd further, Prime Minister and the Treasurer, can be on the speaking circuit forever but never hold a corporate role and other ministers can only hold corporate roles in industries in which they weren't ministers for during that time. It shouldn't be that difficult. I was going to say, don't take the job. It was like, oh, that's outrageous. Someone was good. 28 million of us. Pay the police more. You're not that gifted that we can't find someone else who'll do it and find this still a very reasonable deal. I'd better pay more and I'd give them a good pension. I'd make it worth their while.

48:49Here's the deal, guys. You get paid more but you can't take the job after politics. That's the deal. And as you say, either do or don't do the job, I don't care. But that's the reality of the circumstance. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

49:07One from Jake. G'day, gents. Long-time listener and second-time questioner. You'll like this one too, mate. Well, this one's funny, but you'll like the bit after it. I'm writing to you currently on holiday in Thailand. Beer in hand. and listening to the pod on my speaker in the pool, waiting for someone to ask, what is I have on? Only so I can spruik your wares. I, I'm not sure if I believe you, Jake. I love it. I hope it's true. I'm sure it is. You wouldn't tell us a lie. Mate, turn it down. We're trying to, we're on holidays. What the hell? Who are those two? Play some music, dude. What the absolute hell?

49:44You're in Thailand. Put some Doofdorf music and grab some bintang. Off you go. Was that Bali? I can never remember. he says you may recall I'm trying to think of a Thai beer Tiger right? Tiger is it? must be is it Tiger? yeah we do seriously mate I drink two years old I don't do important or craft beers I'm not that cool I'm not that cool he says you may recall two years ago my son Ethan and I wrote in about his investing journey and we do and this is a bit I know you'd like mate saving his pocket money and having family contribute to investments instead of more toys I'm pleased to share that he's stayed the course and has more than doubled his portfolio through contributions and returns.

50:27That is awesome, Ethan. Jake, I hope you listen to this. And Ethan, well done, mate. Congratulations. Keep it up. It will only get better from here. I was going to say that, by the way. If you think this is good, right? Yeah. This is two years in the journey, my friend. 20 years in, you'll be tap dancing. Do some compounds, mate, from where you are now. So well done, mate. Congratulations. Keep it up. By the way, there'll be rough times as well. I don't know if we said that two years ago, but don't think everything's going to be wonderful. There'll be some down times when you kind of, it feels like it sucks because you're losing money rather than making it.

50:57Guarantee. But remember, that's what happens. That's what happens. More than one of them. Yeah. More importantly, says Jake, he truly believes in the process and loved hearing his question read out and wearing the next Warren Buffett label, as you had titled the podcast, a pod machine episode, as a badge of honour. Thank you. Well, I look forward to hearing about your successes, Ethan, as does Ram. Now a question from me this time, says Jake. I don't know if we care, Jake. We'd rather hear a question from Ethan. No, okay. With growing pessimism around the US market and increasing capital flowing out, how should investors think about diversifying internationally beyond the US?

51:32I and Ethan currently hold a broad mix of ETFs across the ASX and NASDAQ, but I'm considering adding exposure to regions like Europe, maybe through the VanEck Europe ETF, and Asia through maybe the beta shares Asia Technology Tigers ETF. I've always looked for a 70-30 split of Australian ETFs, plus conglomerates like West Farmers and Saltpats, and internationals, predominantly US ETFs. I will say at this point, I own Saltpats shares. But in light of this growing pessimism, do you see this as sensible diversification at this point in the cycle? Or are there structural reasons why the US should still dominate a long-term portfolio?

52:09Thanks again from your continuing long-time listener, Jake. Thanks for listening and thanks for listening to us entirely in the pool. I'm tempted to say get a life, mate, but Ram and I do this for a quid, so he'll might have criticised. No, great question. Ram, I like this one. We've talked a little bit about it in the past and there's a real, there's a really interesting question because Ciclac, Jack's disappointed in the cycle. I'm not sure I think that's the right approach, but there is, I mean, you know, you're pretty negative about money printing and inflation and what the US might do as a country.

52:39And in that sort of scenario, there's a very decent chance that the US dollar is permanently lower against less aggressive money printing like countries from Australia. So at least in one version, I'm not putting words in your mouth, but in one version of the future, the US dollar is meaningfully and permanently lower. And that means the Australian dollar is higher. And that means the returns that you're going to get sending money to the US now may actually be selling in the headwinds of currency rather than either being flat or maybe a tailwind. In that context, we believe strongly in international diversification, but is the US enough?

53:13Is Jake Ryder the reasons to invest internationally outside the US to get that diversification, but without taking US-specific risks either at all or certainly only as the only additional geography you're investing in? I mean, I don't think so, but it depends.

53:37The trouble with these things is there's lots of exceptions to the rule. The US empire is declining. I don't think that's a controversial statement, but that decline will take decades. And within that, there will be some absolutely spectacular companies. I suspect the next wave of global tech giants will still be US-based, right? Despite all their troubles. I am very bearish on Europe. I mean, it's just, well, we stop extrapolating forward, just looking at the last 10 years. They have not managed things well. They have leaned very heavy into bureaucratism and other such things. They've shot themselves in the foot and a whole bunch.

54:24Well-meaning, well-meaning, but it's just, it's not, I mean, I don't, well, sometimes I say that and people get really upset and it's just like, I'm not. You? Look at the data. I mean, I agree. I'm not celebrating in it, you know. I've got a lot of friends in that part of the world. And it's a great place to live. Western Europe, really great place to live, given what we, you know, said before that, you know, most countries around the world are not great places to live because of the governments and institutions and the systems that they operate under. But the U.S. is special. I don't know. There is something about the U.S.

55:03It's the entrepreneurial spirit. It's the pseudo embrace, at least, of capitalism and free markets.

55:16There's a risk taking. I think all of these things are changing, by the way, but there was really particularly post-World War II. Like just what an incredible place. That has pushed the entire world forward, really. And so I'm with Buffett. Buffett always says I would never bet against the US. And I'm the first to point out all of its many, many, many, many problems, particularly on the fiscal and monetary sort of fronts. But two things can be true at once. And the other thing I tend to think is where I hesitate is that because you're an ETF investor, that makes it a bit trickier because you kind of have to go, you throw your hat in with everything there.

55:55And in that regard, I've said on the pod before, I just wouldn't buy Europe or Asia ETF. Only because they've just not traditionally been very good. There's no better data point than China. I mean, China is the gold-plated example of an economy that exploded from a rural backwater to literally a superpower and threatening to absolutely disrupt the global world in the space of a generation. Like, their economy is growing at double-digit rates there for a bit and up a single-digit rates for as long as you can imagine, And even though there might be a bit of funny bugger is sort of going on with the data there.

56:32It's just like, how is that? Like, are you not entertained? That is just incredible what they managed to do. And yet anyone who bought a Chinese ETF is underwater and just like really, really bad returns. And there's a whole bunch of stuff you can do to sort of unpack all of that. But I just, again, it's this complication of two things can be true at the same time in that it's as a whole, as an aggregate economy, things have gotten a hell of a lot better, investors not so much. And so I think that's why I struggle with the ETF side of things. If you're picking stocks, there are some incredible European-based businesses.

57:10There are some incredible Chinese businesses. There are some incredible Australian businesses. Even if they're in the minority, and I tend to think if you're going to go broad-based ETF, then just stick with it. Like that's the point. Just get the average. I don't know what the average will be, but the average will probably be okay. And if I'm going to do that, I'd much prefer somewhere like the US, at least like when you're talking 50 year investment timeframes, I'm kind of with Maynard Keynes and the sense that, you know, in the long run, we're all dead, you know, so it's like a bit too long term, even maybe not for you, Ethan, but you know, you know, but if we're going out five or 10 years, because don't forget, you can always, this is a game where you can, you can just get off the horse and change mid, mid-race, right?

57:58But if you're sort of making a, I don't make a capital allocation decision, really, beyond thinking out about that that far. I want things to still be okay at that point. But I think after that, it's just, it's too hard, particularly how fast the world is sort of changing. So I would still throw my hat in with a Nasdaq ETF over a French ETF, something like that, or emerging markets. I mean, emerging markets have been emerging forever. I mean, Here's the thing I like to point out. Think of a developed market that has developed recently. I mean, what do you got? You know, South Korea. Yeah. I think there's one, like I forget.

58:36Like it's really weird, really weird. And this is with the World Bank and the IMF and everyone sort of trying to sort of like, and like are people different there? People not as smart, don't work hard. Of course, stupid. It's an absolute ridiculous argument. so it's something institutional, isn't it? And institutions are slow and sticky and there's a huge amount of inertia and there's just, I mean, how often, but you know this, you look at an ASX company and they go, we're going to go to China and at this point in time you just shudder. You just shudder and they'll go, no, there's 1.3 billion people there.

59:12If we can only sell to one in a thousand, we're going to make a fortune. Or look at Africa. Oh, my gosh, the natural resource is literally just falling out of the, you know, falling out of the ground. How does that make sense? It's like pushing out of the ground, right? It's like, yeah, but it is a story of capital destruction and woe that you wouldn't wish on your worst enemy. And things can look good at a surface level and still be very, very, very, very bad for the individual investor. And I'm just – it's not that they can't change. I hope they can. But I am – there's no amount of resource tables that are going to convince me to invest in Africa until things radically change.

59:53Or in China. No way am I investing in China, right? I don't know. I'm rambling at this point. But things just get tricky when you start to really, really examine them. And it really kind of boils my blood a little bit because so many talking heads love to say things like that because they sound at first blush as very smart. You should diversify. Well, it's hard to argue against that. It's like, well, There's a lot of other places. Look, you've got these young, dynamic economies in South East. Maybe you should get some exposure to that. And actually, they've performed really well over the last few years.

1:00:27Maybe that's going to keep continuing. But what you're really betting on in a great way is a very significant, lasting structural reform to institutions and political entities, which is a hard thing to think. You might have said 50 years ago the Catholic Church is on its way out and they're still pretty dominant. And so it's just, and that's a medieval institution that's been around for hundreds and hundreds and hundreds of years. And so I just, I don't, as much as I desire and cheer for some really radical structural changes in these places, until you see very firm evidence of it. I just don't, the numbers can look good.

1:01:08The story can look good. The narrative can sound good. But again, don't take my word for it. Go and look at a lot of these things and how they have actually performed in the last 10 years. and they'll struggle to keep up with the NASDAQ, I bet. So I mostly kind of agree.

1:01:30I do... I think the only thing I would say, and maybe just by way of balance, is the UK was the only place to be until the Second World War. And maybe it does take a war for those things to change. Maybe that's the exception rather than the rule. And I suspect you're right, mate. And I suspect, I mean, I have a significant investment in the NASDAQ ETF and the US total market for my unblock. I've talked about that before. So I'm actually making that bet, Jake. And so to the point you asked a good question, I'm going to try and answer it. But I will say my money at the moment, at least, is saying the US is the place to be, at least predominantly.

1:02:09Now, I've also got an international ETF, which I'll talk about, because Ram, you mentioned the whole, if you're going to be passive, be passive properly, which I think is probably where I'll end up. But I only want to hold open the possibility of change where the future doesn't look like the past. And whether that is from the UK to the US in the middle of the 20th century, whether it's from the industrials to tech in the 2010s, 2020s, the massive growth of that stuff. you know the extrapolation gets us so far and then occasionally and semi-regularly things change and i don't know whether this is the this is going to change or not i suspect that most of the growth is happening in the u.s and i see no reason why it would change but i wouldn't assume it will always necessarily be that way that the things the u.s has will be forever u.s uh you talk about the crumbling empire or the fading empire whether you call it ram and i think that's that's right right so if if in 50 years time we look back and go remember when we thought the wasn't going to be huge it turns out that the growth actually came out of france or germany or russia or india or new zealand you go huh didn't say that coming but interesting that happened and i so i think which gets me back to your point about the passiveness i think if you're going to be passive and you want diversification why only the us and i don't have a good answer for that which why i own uh it's a the vanguard msci global x australia ezf as well as the us ctfs uh because that that's my that's my passive bit of the rest of the world um it's not bigger than my u.s holdings so i'm making a very specific bit despite my point i just made then uh jake so i've got i've got a foot in both camps i am not changing anything though based on the current circumstance which is kind of the nub of your question and i think for me at least as i think about the i suspect the current circumstances won't last and why do i think that because kind of to ram's point actually as much as i just sort of said maybe it won't happen the the exceptions tend to be the exceptions rather than the rule they tend to be the the the bumps in the road rather than changes in direction and i wouldn't bet that there's a massive change in direction this time around i do worry a little bit and not enough to change anything yet to be fair but I worry a little bit about the risk that the US dollar is permanently higher or lower against the Australian dollar sorry and that does impact what I can get for my US shares when I convert back to Australian dollars so I'm being very mindful of that in some version of the future if the US currency is debased one way or the other literally with money printing or something else the default or whatever am I sure I'm going to get the money back you know at a reasonable exchange rate no do I seem to be atrocious no I don't otherwise I would take the money out but I am kind of half thinking about that.

1:05:01As much as I think we have problems here in Australia on policy grounds, we've talked about a lot, I'd rather be us than them, at least at a government level. The question really is, what does that do to the companies that are trading there? Is Google less successful because of a US government issue? Probably not. Earned shares in Google. Is Apple? I don't earn shares in Apple. Netflix, Tesla, Nvidia, I mention them all the time. Are they likely to be less successful? I don't think so. Will the dollar depreciate so much that it impacts my returns i don't know and i think it's possible but again we kind of talked on friday about you know the bets in different directions i'm not entirely sure that the bet i don't make the bet i'm not sure i would change things yet based on that because it might happen or it might not all of the things and we talk about this all the time the stock market history financial history business history is full of all the things that could happen and didn't or might have happened but didn't.

1:05:56I think that, to my mind, is really where the key question is for investors is the things that might happen are different from the things that maybe will happen. And how do you handicap those odds? So now, for me, for right now, I would invest outside the US internationally as well, Jake, because I am already. Honestly, what you should do, mate, I can't give you advice. if you're going to invest passively why just choose the us and bet on that rather than everything else including the us so the vanguard global i think is still something like 63 or something percent north america which is us plus canada and the us is the vast bulk of that so i'm i'm hedging my bets i'm investing internationally across all developed markets i suspect i've said before i think in the next 10 years i don't know what i've actually said specifically, but something like, if a Chinese company is one of the top 10 businesses by value in the world in 10 years' time, I'll be shocked.

1:06:53Why? Because it's a massive market. It's gentrifying, becoming wealthier really quickly. Some of those Chinese companies own some of the properties we use here and in other parts of the rest of the world. So it's kind of almost, it's unlikely that it wouldn't be the case. Now, is that enough to invest in the Chinese market? no i'm not doing that directly um but is it unlikely you know they're the they're the kind of the questions you're asking and honestly my answer is i don't know so if i don't know what am i going to do i'm going to be passive in that part of my portfolio that is the passive part which is the international diversification part um but i wouldn't personally i'm not changing my u.s investments or the weighting of those because of the current issues um but if i did think there there was a chance they would become permanent and that value destruction, not entirely, but some amount of value destruction was likely, that I might reconsider.

1:07:47Yeah, it'd be silly not to. So it's a watching brief for me. Anything else you want to add to that, Ray?

1:07:56Sorry, sorry, sorry. I had myself on mute. I didn't want my keyboard clacking to be disruptive. I like the dog chewing thing.

1:08:08I mean, again, the past is no guarantee of the future. It's the boilerplate disclaimer on anything financial, and for good reason. Over the last 10 years, the NDQ ETF is up 453%. The European one is up 90%, and the Chinese one is up 18%. I mean, there is daylight between. It doesn't sound like a lot. Well, maybe it actually does sound like a lot, but visually it's even more striking. It's more striking than that. And it's just like it does. And again, hindsight is 20-20, but if I went back in time and said, oh, by the way, in the next 10 years, this is going to happen and this is going to happen and this is going to happen, it's just like, oh, my gosh, all bets on China, all bets on that.

1:08:49You know, it just, and oh, this is what's going to happen in the US, like not touching it. Vesting's hard and it's counterintuitive. And sometimes you can have like a general malaise and decline with some absolutely exceptional outliers, you know. I say it all the time in defense of ASX small caps. Oh, they're risky, volatile, and they're mostly crap. Yep. But I don't invest in those ones. That's right. You know what? You're noticing a category, right? Let me back step. I don't intentionally invest in those ones, right? Because there are exceptions to the rule, and there's enough of the exceptions that make it really, really, really, really worthwhile.

1:09:26while and and i and that's why these thinking i think jake is is so seductive because nothing that you're like the the general framework that you're operating under actually makes a great deal of sense it's just that it well i would at least want to have a very very clear understanding is to explain those three numbers that i just read out right and as to to to be confident as to why it might be different in the future and and you could say with i mean the um the european one i went with ieu which is uh the i shares europe uh etf yeah yeah so that launched uh kind of before that sovereign debt crisis do you remember that remember that sovereign debt guy i do i do it'll never happen again it'll never happen again um it's just like wow our memories are so short so so obviously i had a terrible run between 2008 and 2012 or so so if you bought that thing at inception, you've made about 2.1 % per annum nominal.

1:10:28So you've lost money with inflation. Even if you picked the bottom of that and you waited till the sovereign debt, which had never resolved, it was just socialized and the losses were real and they were borne by people and probably explains a lot of stuff that's going on now. But again, let's not go into all of that. But even if you sort of pick the bottom, but over the last 10-ish odd years, you've made 6 % nominal. And let's, let's call that about 3 % real. I mean, not the currency risk. There's like, there's so much like, at this point, it's like, open up an ING high interest savings account, right?

1:11:05Like, why take the risk on something that's going to, I don't know, maybe the, maybe the Germans invent fusion and I'll have egg all over my face here. But it's just, I just think anyone who puts forward these arguments as to why you must, you must be here. You must be that you must diversify. And this is this, you need exposure to that. It's like, well, explain to me why that's a good idea given history so clearly demonstrates that, that, that, that it hasn't been. And, and you've often, I loved your phrase, like the Noah's Ark strategy, two of everything, you know, and it's just like, I I'm with Munger.

1:11:41I'm with Marx. I'm with Druckenmiller. I'm with all of the great investors, aligned thinking with the great, not in performance in any way, shape or form, but the great investors. Buffett, Druckenmiller, Page. Yeah. They roll off the tongue. They really do. But you listen to them, right? And they all say that diversification is BS. Now, not all your eggs in one basket, but it's like good, high quality ideas are exceedingly, exceedingly rare. So you don't back up the truck and put everything into one asset or even three. But really, once you get to 10, I think, in fact, the maths, the academics who have studied, I think they center, depending on the study, it's somewhere between 13 and 18 stocks, after which, or assets, non-correlated.

1:12:31So don't own all the banks, for example, or the retail, but non-correlated asset. That's the full benefit of diversification. So when you see people who have 80 stock portfolio, I mean, people do it because a lot of people just like it for the interest and I've got no harm in it. But you're not getting any value out of it. In fact, all you're doing is you're diversifying. You are protecting yourself from the upside. You're diluting your upside, correct. Well done. Oh, I bought NVIDIA 10 years ago. I was like, great. Oh, my gosh. How many yachts do you own? I was like, none, because it was 0.5 % of my portfolio and the others didn't do that well.

1:13:05And it's just like as much as diversification protects you from the downside, it protects you from the upside as well. so you just i i i really reject the the the idea of it and and you can just it what it means and this is why you said earlier was it in the mail uh no this is the mailbag it's a long episode um uh you you don't what am i trying to say here you you can buffett said that he could do really well if he had a million dollars and that's because he can be really really really really really selective. With a million dollars, you're basically saying to him, 99.999 % of investable assets around the world, you can't invest because you're either buying one cent of everything or not at all.

1:13:49And this is a wonderful, wonderful, wonderful thing. It is the edge that you have over the Hamish Douglas's of the world, or I don't know, pick your high fly and front page front manager sort of dude that's out there. It's like, you can, if you can find some 10 10 really good companies, oh, sorry, 10 really good companies with really good potential, you are done. So why am I going to buy an ETF that gives me Europe? Or, you know, just like I just feel as though you'll go okay, but it'll probably prove to be mediocre. And moreover, when you look at it as you should in risk-adjusted terms, I mean, 6 % buying the low of a European ETF, it's like, well, you could say that's not the end of the world.

1:14:35It's like, yeah, but given I could have had zero volatility in a high interest account or a bond, God forbid, it's sort of like when you risk adjust it and you put them next to each other, it's sort of like, it is awful. It stinks. You don't want to get anywhere near that as a return. Now I have egg on my face because they'll go incredibly well from here. But I just don't get the argument and it's really good process. I really get the question and we've all had that thought. I would just pull at that thread a bit. You might disagree after you do that, but I would at least encourage you to pull at that thread and try and answer some of these questions I've posed.

1:15:11Yeah, it's a very fair one. Here's an interesting bit of data though, mate, while you were chatting and just looking it up. The trailing PE of the S &P 500 is between 27 and 30 times. Wow. For the European market, it's 16.8 times. Yeah. Which is not necessarily indicative of anything other than – and this is why it's so hard using the past, right? I was like, how much of the past is PE expansion versus profit growth in either case or PE contraction? How much of those PEs are being dramatically undervalued because the growth is going to be different in the future? I would love to pay a PE of 28 for a company growing 50 % a year.

1:15:48I'd mortgage the house and do it. On the flip side, I wouldn't pay a PE of 10 for something that was going to go broke next year, obviously. And so the PE is not making a point other than just to kind of, you know there's a there's a very different expectation now i've got to say to your point i'm not even sure that directionally is wrong because the american is other ones growing there are other ones innovating the other ones you know how many how many great world shaping companies are based in europe how many great world companies are based in the us okay well that you know is if and is uh tech going to be the future yeah okay well where's tech base okay tech are Fast and industrials?

1:16:25Probably. Okay, well, I mean, that makes some sense. So I'm not even saying it's good or bad. It's just more a question of what the future looks like from this point. And I think it's probably reasonable. The US should have a higher PE than Europe. Is it enough? Is it too much? We've started by talking about Cochlear, and we're back here. You know, the US market's trading on Cochlear-type multiples. Look, I own some of the biggest companies over there. I own Amazon. I own Berkshire. So I'm not shying away from it at all. But the question of what comes next is always the question you need to ask yourself.

1:16:58And maybe there's a mean reversion. Maybe the US declines or doesn't grow as quickly. Maybe the US catches up. Or maybe the US continues to race away because the companies there continue to deliver just greater and greater profit growth. And that, at the end of the day, is what's going to determine value. I'll give you another really good example here. So Germany is the powerhouse of Europe. It's something like between a quarter and a third of the entire euro GDP. Right. Now, I keep talking about how crap GDP is a measure, but, you know, you've got to. At least it's a like-for-like comparison, nothing else.

1:17:30Yeah, exactly. Right. So it gives you that, you know.

1:17:37Sorry, 24%. Here it is. I looked it up. So, yeah, it's a quarter of the Eurozone. As an economy, it's 28 % larger than the UK. It's 50 % larger than the French economy. And the Germans were known for being the industrial powerhouse. Right. And yet GDP growth over the last five years has averaged less than 1 % per annum in real terms. Now, just let that sink in. Again, I'm not talking about the future and I'm not talking about some Borat-based fictional East European, you know, basket case economy. It's not Hungary, right? It's not, I could point to a million places that have been horribly mismanaged.

1:18:17This is Germany. This is Germany. and they're not even at one percentage point of average GDP growth over the last five years. You go, okay, well, that was then, this is now. They're getting their ship in order. It's like, well, pay attention to the policies that they're doing because like every other short-sighted politician, you know, they're just basically raising huge amounts of taxes and just desperately throwing it at the economy, hoping that it'll spark something. And it's not working so far. It just seems like a really long shot bet to me. Maybe long shot's not the right word, but it's not.

1:18:56I like making conviction calls on things. And I know a lot of my convictions will be proven to be laughably flawed. But I feel as though I can muster an argument. You know, it's like, here's why this is going to be good. And it's like, I'm yet to see even the most bullish, the big Euro bull out there go, oh, let me tell you how they're about to reverse course here and go back to their former glory because it is just slow motion car wreck at this point in time. So it's like when you look at a business, right? So I've invested in businesses that have terrible track records. But after a year or so where it's like, oh, maybe they've got their house in order, okay, they've got their costs under control, sales are growing again, margins are growing.

1:19:39You know, it's like, okay, I'm prepared to sort of look past that legacy, you know, or at least to give them a look and give them the benefit of the doubt. But I'm not throwing everything into this company because it happens to be cheap when there's absolutely no change in the pattern. And I really hope for the sake of Western liberal democracy that they do get their house in order. Ain't happening now. And I'm going to invest in that in a scattergun kind of way with currency risk and moving to a multipolar world. And by the way, NATO is collapsing, right? So much of the money that they're going to be investing is going to be in military.

1:20:20And military is nonproductive. And, oh, God, it's just really depressing and scary stuff. And I'm throwing as much possible cold water as I can on it, Jake, which is probably the reason to do the exact opposite. Exactly, exactly. Nice question, Jake and Ethan. Thanks again for listening, mate, and well done. Stay invested. Send us another email, mate, in a year or two. Let us know how you've gone since then. In the meantime, mate, this is the moment before the moment. This is the last time we'll chat before our thousandth episode. So you've built it up a bit now, haven't I? Way too much. I don't know what we've got planned or anything, but it's like you guys really took that up.

1:21:02It kind of felt pretty much like every other week. And that would be absolutely true to form. And you can bet that's exactly what it will be, our thousandth episode coming up this Friday. Tune in just because. Tune in because it's fun. Tune in because you know exactly what you're going to get and it's exactly what you always get. And if you're here still, as Andrew would like to say, that's on you. So thanks for listening and until our thousandth episode, Fool on. Yeah, cheers. The Motley Fool and people appearing in this program may have positions in the companies mentioned. General advice only.

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