Michael Burry’s big bearish bet. November 7, 2025

25:49He's looking just going, this doesn't make sense. This doesn't work. And then he - Everyone outsourced their work to the regulatory agency who were completely captured. If that is not evidence of regulatory capture, right there. Watch the movie, read the book. Correct, correct. The big show, wonderful book. And great movie. if you want to watch that. So Barry makes his bet that the housing market's going to collapse. It turns out during, and you'll see this in the movie, in the book, his investors hate the hell out of him, right? He basically takes their money, says, I'm going to invest it all in this.

26:17I'm going to short them my housing market. And they go, no, no, no, no, that's bad. No, no, we want the money back. Barry's gone, no, the rules of my fund say I don't have to give it back to you. Bad luck. You're going to hate me, but I'm going to make you a fortune. This is what happened. He was one of the most hated fund members. Made of a fortune. Yep. And then they took their money away. Yep, correct. The other part of that story that's relevant to this discussion is that I think the popular retelling of that story is that he saw round corners before everyone else, he placed a bunch of bets and he made out like a bandit.

26:47No, the reality was he was well early. He was calling this, I want to say, at least 18 months, if not two years in advance. And you see this a little bit in the movie where it's kind of like, we're down, we're down. clients, I want my money back. I want it now. And not, and not you're making me money, but I'm nervous of it. It's like, no, I am looking at my statement here and I am 20 % down. Give me my, and he's going, no, no, no, it's not happened yet. And so, and that again is, is really relevant because that is almost always the way, like right before being proven right, you're going to look really dumb.

27:23And you almost have, it has to be that way because if you didn't look dumb, it's because everyone agrees with you. And if everyone agrees with you, the price wouldn't be low because everyone would think that the price is too low. And therefore the very action of bidding it up would correct the impact. Like you must, incredible bargains necessitate a fringe view. Because you just, you don't get bargains when everyone thinks that this is a great bargain. Like it's axiomatic almost. And so again, it's really, you see these movies and they're romantic. Oh, I could do that. And I'm not going to be swayed by the crowd.

28:02I'm going to think independently and I'm going to buy it. I'm going to handle all the volatility. And I don't care if I'm a little bit early because I'll eventually be proven right. It's like, yeah, maybe, but you have to be, that's why, that's why when you look at, can I say this with the utmost of love, mate, you and I, and people in our industry are a little bit weird, right? We absolutely are. Like, think of the people we've worked with over the years. Like, lovely people, mostly. But weird, right? We're a little strange. You know what's weird? We think we're the least strange of it. It's not that weird.

28:39That's right. Everyone knows. We're all, I mean, we put up ourselves into it because they're all weird and we can't really seem to be egotistical. So we'll say we're all weird, but we really mean they're all weird. Buffett's weird, man. Yes, yes, totally. Like, all the sort of, you know, idol worship that he gets, like, he's a quirky character. right? Burry is a weird character. All of the, Stanley Druckenmiller is a weird character. It's the Steve Jobs, like, you know, the talking gives off the crazy ones. Like the ones, like you look at all the, the tech billionaires, they're all weird because they, it's, it's, what's the word?

29:17a truly independent thinker that can act on their own reasoning in opposition to the vast, vast majority of it is just by definition, a weirdo. Like in our evolution, if you were that person in the village, you got kicked out of the village and you had to fight the lions by yourself because you're just like, no one can deal with you. We're all one team, one dream, right? And And you're like out there talking weird stuff, right? Like we just want to get on with worshipping the volcano God and you're talking about weird stuff here and we don't like you. Speaking of Galileo. Right? And so now where you have to be careful here is it's – what's the term?

30:00It's necessary but not – Sufficient but not – yeah, but not sufficient. Thank you. Yes. In other words, where people go wrong is – you see this with contrarian investing all the time. 100%. Everyone hates this company. Therefore, it must be good. And I'm going to be the one person. No, a lot of the time the market's right. I really had that on for a while. Turns out. You could be an independent thinker. You can be contrarian. You can go against the crowd, but you still have to be right eventually. So there is a danger, and I see it with a lot of investors, where they'll be down on something. Well, I don't lose until I sell.

30:41And this is why it's a bargain. because everyone thinks I'm wrong, but I'm not really wrong. It's like, well, sometimes that's true. But oftentimes we have to respect the market. You and I love to tease Mr. Market because he is an idiot a lot of the time. Sometimes correct, yeah. But actually that's better sometimes. Generally not. And it's sort of like I've seen a lot of people in my, especially when I look in the mirror in the early days, of the amount of times I've got myself into big trouble just by assuming that the market is always wrong. And it's like, nah, dude, like more odds are you're wrong.

31:16And so it's the way I'm saying you have to be weird. You have to be independent enough to think independently and to not be swayed by the crowd, but also be honest enough where you can recognize when the crowd is right, you know, and not get caught up in the emotional psychology and behavioral bias of it all. And the contrarianness and yeah, exactly. So I need to be super arrogant to think that I'm right, but humble enough to know when I'm not. And it's like there's this weird middle ground where, yeah, I don't know. It's really hard. Investing is hard. So back to Murray. He's betting$1.5 billion that US tech is overvalued.

32:01Yeah. Which is no, and I was going to say, I said there wasn't even credit that takes some credit away. Only in the sense that we lionize people who get one call right. Yes. Like Noor Robini, Doctor Doom and, you know, Burry. Oh, such a great point. And I just, I say that only because, by the way, since the Big Shot, Burry's made some bets on water and other things that haven't worked out. Oh, lots of bets. Right. And that doesn't make you bad either because you only need to get one really big one, make 15 bad ones or one good one, you're still going to make a lot of money if you get it right.

32:28So I'm not saying he's wrong even to do it, but I just want to remind people that the whole, this guy called this thing, so therefore we should listen to him in future, is not always the case. I wouldn't ignore him because he was prescient enough to find it and think independently to your point. So someone saying, I thought it immediately before and I was right, should I ignore that person? No, hell no. But should I assume they're right necessarily? And again, why is it notable? It's notable because he was the guy in the big short. No one knows Michael Burry. If the movie isn't made, the book isn't written, no one knows this guy and we're not talking about it today.

32:56And so it's kind of a bit of a celebrity slash$1.5 billion slash everyone loves a bet against something. The shorts always get the headlines, right? We've talked about this before in terms of market shorting. You never say, oh, Andrew Page thinks that Bitcoin's a good investment. But as soon as you see, you know, John Smith says Bitcoin's a fraud, then that gets a million times the headlines, right? And the same. I use Bitcoin for fun, but it could be any company. Yeah, Kogan for fun. Drink. So, yeah, it's just worth calling out. I think I was talking about this the other week. I am agnostic a little bit on US tech valuations because the reality of we've never had, never, probably never actually, certainly not for a very, very, very long time, the big end of town growing this quickly.

33:39It just doesn't happen, right? Because by the time you get this big, you're slow, capital intensive, heavyweight, you're a telecom company, you're a train line, you're an oil company, and you've grown, you've got big, and you'll grow okay because you'll open more oil fields and you'll draw more oil and you'll make a couple of percents worth of extra margin because you're big and scale well. But we haven't had this. But you're going to grow 5 % per annum tops, more likely 2 % to 3%, and you're trading on a PE of 50. That makes no sense. Correct. These big techs are on a B of 50, but they're growing at double digit rates and have the, who knows, but have the potential, a realistic potential to do that for many, many, many years.

34:16100%. Very much. And that changes everything. I agree. And then on top, layer on top of that, you've also now got an administration and a Fed who are prosecuting an unwritten mandate of never let the market fall. The power put is in place. And it just, it changes things. And so I think this is what a lot of, we've talked about it too many times, but just quickly, it's like, it's the thing that the crusty old value investors miss. They're right, you know, and like a lot of the macro bears miss. Like, they're right. These things are not sustainable. It will not end well. Like, the logic and the maths is irrefutable, right?

34:55And in terms of the value investors, yeah. Like, historically, very elevated. almost all in fact in history virtually every single time there's a mean reversion there but it doesn't mean it's imminent it might it these cans can be kicked down the road and and and by the time you've made this point really well before by the time it happens and it drops 50 it might be dropping 50 to a level that's still twice above the level that it is now and that's the one in the short bit right because yes we don't know what the bury is saying I think Apple is dramatically overpriced way above its intrinsic value to your short word from before phrase or is just saying it's going to run hard if it drops 20 % because people just get cold feet for a couple of months I'll make a fortune.

35:37Yes. So is he betting against the crowd or is he betting on the value? And that's kind of the same thing but it's kind of not right because Or is he just choosing not to play? It's like it's too rich so I'm not going to do it. Right. Again take Bitcoin right we talk about rising five and falling five. If you had to bet against Bitcoin two days ago and it falls 5 % and you're like, hey, I was right. See, I told you it was overvalued. Now, in five years' time, maybe it's half the price, maybe it's 10 times the price. So the timeframe matters when you're making a short bet. Are you saying this thing is fundamentally broken or are you just saying, oh, I think sentiment will probably turn at some point?

36:07And they are. Now, both end up with whatever value you get. So I'm not saying it's a bad bet or it's wrong or it matters which one he's trying to do. But it doesn't matter if we're trying to read his tea leaves and say, oh, Michael Burry thinks X. So, well, he thinks the price might be lower at some future point. But until and unless you know specifically his reasoning his thoughts, his timeframe, that even the information of Burry's betting against the market doesn't help you much because it just doesn't answer that question in any meaningful way that we can look at. And yet, as I said, it gets the headlines because when someone goes short, bet against something, throw in some celebrity from Michael Burry and it gets plenty of airtime.

36:42And again, he called the sub-promise crisis, so we shouldn't ignore the bloke. But I just want people to keep it in perspective. Be aware of it, understand it, keep it in perspective. Maybe it happens, maybe it doesn't. Maybe he's right, maybe he's not. maybe he's right in the short term but not in the long term. And if you're trying to time the market, again, we get back into that conversation. So I don't know what happens next. Just take it with a, not a grain of salt, just be a little bit careful about what you infer from what's happening. Also, your point about psychology, might be careful of confirmation bias.

37:10You know, I think that too. And now Barry's giving me reason to justification to believe it or go with it. And the same as someone's, again, saying the market's going to go higher. So same thing in both directions, but it's worth calling out. Another example I like that's along those lines too. and I'm really not trying to throw shade here at all. Huge amount of respect for John Hempton of Bronte Capital and there's another guy called Jonathan Tepper of Variant Perception, both in their own right, very successful, very smart people. 2016, they shorted all the Australian banks and they shorted the Australian banks under the thesis that very, very much resonated with me at the time and still does and there's a lesson in all of this.

37:51is that these things were ridiculously overvalued. They were sitting on a box of dynamite and it was going to end very badly. Now, don't forget, this was only six, seven years after the subprime crisis in the US. Now, these guys weren't just going on vibes. They had data. They had done research. They had done on the ground research. Famously, they were followed around by a news crew. That's right. And they were pretending to be a gay couple at all these auctions, you know, so they could just sort of see firsthand what the dynamic was like there. And I would say it, I said at the time, and I actually even think now it's like, it was not a dumb bet.

38:29Anyway, we know what happened, right? Like they didn't, that short did not work out for them. Well, you say it's not a dumb bet. I don't know that it necessarily was a dumb bet. I think it wasn't a dumb proposition. Right, right, yes. And I only say that because the bet is then how likely is it to actually happen in the timeframe, I think, and this is where, this is what you're getting to with the short, which is let's say it's happened. Let's say housing falls 80 % by 2050, Just pick a number. It's not going to. Let's pick it. Let's see how that happens. Okay. By the time it gets there, if it's 2049, you've done your dough a million times over.

38:57Because not only have you borrowed the shares, in this case, you've borrowed to short the market. So you're paying to hold that position open. And you're paying every year to hold that position open. And depending on who you're betting with and what they're charging in terms of interest or fees or something else. When you're investing long, you just have to wait for things to turn out. Yes, you can get a subpar return, but unless you're borrowing on margin, it's not costing you anything to have that position. When you're short, you're borrowing. You can go short is borrow the shares. So you're paying effectively a fee.

39:23It's a carry cost. Right, to hold it. And so the longer it takes to happen, this is back to Burry, the longer it takes to happen, the worse your returns are going to be. Even if the market falls 50%, but it takes Burry 10 years, he'll do his dough. Because the cost of holding that short open for 10 years will cost more than the eventual fall, which is your point. Maybe three years, right? Two years. These things cannot be carried forever. There's not unlimited margin and they can go up a long way. Things can get – what's the saying? the market can remain irrational far longer than you can remain solvent, right?

39:51And there's a really good, there's a huge amount of wisdom in all of that. The other thing that is a really nice stat, and I'm going to butcher it, but I'll get the flavour right, which is that most of the gains on the share market in any one year happen over four or five days. Yes. In other words, if you were to look at the daily returns of the all ordinaries, up 2 % one day, down 0.1, you know, And you go, there's not 365 because there's however many trading days in the year, 250, let's call it. If you just take out the top five, you're fully invested, but you just take out the top five, your returns disappear.

40:29Suck, yes. And whatever it was in aggregate, you are materially blurred and you only missed five. So the way I think about that is it's sort of like this is what's nice about being long is that you don't there's less of a impetus with timing. You just need to be there when the party starts. Same with Bitcoin. Right. It's sort of I have no idea. But the stats the same. It's sort of like nothing, nothing, nothing, nothing, nothing. Oh, my God, I'm going to the moon. Nothing, nothing. Oh, God, it's all over. Nothing, nothing. Oh, everything. It's only like everything. I always forget the saying, but it's like that quote from the Vietnam War where it's like long periods of boredom punctuated by tiny periods of sheer terror.

41:12And that's what it is on the market. So most of us get, you either get bored out of a position or shaken out of a position. So you've got to have this ability to resist, as we said before, all of this volatility. but also you've got to have the ability to get past the boredom because most of it is going to be boring. Most of it's not going to – like most of the time nothing is going to happen. Yeah, exactly. And I don't know. We've probably gone well off our point here. As I said, let's finish this all off by just with the simple phrase, investing is hard. It is. And we shouldn't be saying – like I feel in one way it was like – Yeah, it's simple but not easy.

41:56Yes, love it. is how Buffett puts it. Go back to that. And it's just, I feel too often too many people in this industry. Well, it goes both ways. Fundies and stuff love to say that because you're too dumb and silly. So you need us to do it for it because it is super hard. And it's kind of like, yeah, potentially in a way. But also if you underestimate the difficulty of it, you're setting yourself up for failure as well. Again, it's one of these weird dichotomies. You've got to sort of speak out of both sides of your mouth and both statements can be true and consistent. Yes, yes. And I don't know.

42:30I feel as though it's far better to be realistic with our audience because commercially it's much better to go, oh, it's super easy, especially if you sign up with our service. I'll tell you exactly. And you'll make a million dollars and it's really easy. I'm like, yeah, yeah, but it's not. And it's just not. And whenever you hear anyone promising you that, just run a mile. Like there is no Shora a red flag from not giving it to you. It doesn't mean it's not worthwhile. It's incredibly worthwhile. Just know what you're getting yourself into, right? Correct, correct. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

43:13Let's go very specific from the very broad to very specific. Let's talk about Westpac. And our listeners know that you love the banks and you can't wait to wax a lyric about how wonderful they are. The profits were out this week,$6.9 billion for the year, if you don't mind, but down 1%. And it's just a really interesting, you made the point off air, I won't steal too much of you, but you said, you know, we've got this massive property boom and prices are up 7.5 % this year and they're only growing at 1%. And I think that's, it's worth unpacking a little bit. And I think there's a couple of reasons.

43:45You've got one in particular you've kind of highlighted, which I think is absolutely real. And we'll talk about Macquarie in a minute, But let's just do Westpac. What are your observations, reflections, thoughts on a$6.9 billion profit that actually is going backwards? Well, there's a bit going on. I'll let you elaborate on this point because you do it better than me, which is that it is more competitive, I think, than we all give credit for it. And the net interest margins are falling. And for those that don't know, banks, net interest margins, basically, what does the bank pay for its money?

44:18that it often will borrow. Banking is so fascinating because it's actually complicated, right? It's actually very misunderstood, and everyone thinks that we put our money in the bank and the bank then relends that out, and it's like it kind of doesn't work like that at all. So most of the money they just create out of thin air, but they do tap sources of capital from foreign markets and stuff. They'll issue bonds. There's all these different things, but they pay interest on that like any borrower does. And so they try and borrow at a rate that is lower than what they landed out for. And in the competitive dynamic of a, at least in a healthy free open market, that net margin gets driven pretty low because ComBank or ANZ or NAB will go, well, I'll take some of your market share, Mr.

45:08Westpac, by offering a lower rate of interest on mortgages, which means that they, I mean, they're borrowing all at the same rates. It's, you know, they're all more or less equivalent in terms of the amount of money that the cost of money or capital that they can source. But I'll just say you're getting 1.7%. I'll make 1.5 % and I'll still be happy with that kind of stuff, especially if I get more market share as a consequence of that. So there is that dynamic at play. It's a big number, but the margins are falling. And you can think of margins in the same way you think about a clothing retailer.

45:43You know, I buy my jeans at a dollar and I try and sell them for$10, you know. And that's the fascinating part, mate, because there is this kind of idea of banks are oligopoly, they're all profiteering. I mean, it's true. Straight politicians are in oligopoly, but they don't fully prosecute. Well, and that's the thing. So we kind of have this idea that if there's a few players in the market, we'll all pay overs and they will make fortune and it'll be, you know, we're all going to get screwed. And that's kind of the inference, right? And it's true that our banks make more money than some overseas.

46:16So to your point, the oligopoly probably is generating excess profits relative to what would happen if there's more competition. And I'd be for competition too, by the way. But it's also true that if you've got a system growing at X and probably 3 % or so a year, GDP, population, kind of throw those together and you get what you get. And your shareholders want five or six. What do you do? Well, you go and try and find ways of beating the competition. And so as much as they're making probably more profits than other banks overseas, and there's some, again, the oligopoly is real, as you rightly point out, mate.

46:45the margins will be coming down for pretty much a decade straight. Not every half and not all the time and not every bank, but over time, those net margins have been falling and falling. And it is really, you laid out the why perfectly, mate, in terms of the cost of borrowing and the rate you can get when you lend it out. The market for deposits and wholesale funding is really, really, it was both super competitive, but it's also pretty universal. You know, Westpac's borrowing cost is the same as CBA's borrowing cost within reason, not perfect, but close enough to it, because they're accessing the same wholesale markets, They're offering the same term deposit or at call deposit interest rates.

47:17And then they're lending it out. And again, similarly, you've got mortgage brokers and others who are doing a deal and saying, well, I can give you a mortgage at 6.4. Some say, well, I can do 6.35. The other guy comes back, I'll do 6.3. There's an argument the market's actually working relatively well, at least from a historical perspective, that the competition is actually driving down margins. And that's better for consumers, whether it's home loans or depositors or both, we can argue about. But I'm not here to defend the banks at all. I just think it's worth sometimes checking the received wisdom, the so-called common understanding.

47:46In this case, it's absolutely true they're making more than the overseas players, but they're also making less than they used to. And so competition's kind of working, at least directionally. It's not a popular view, unless you're a bank shareholder. It's not a popular view if you're a talkback shock jock or you're a politician. And again, I'm not defending them. They do a truckload of stuff wrong. We've bashed them most weeks because they deserve it. But it's also true. The numbers are just the numbers are the numbers. and net margins have fallen for the best part of the last decade. The other end, it's kind of poetic in a way because they are dealing with the consequence of something that they play a very direct role in, which is all this inflation that they have inadvertent, maybe inadvertent is not even the right word, that they have directly played a role in by incredible money creation.

48:31But they are facing increased costs for workers. and then, oh, you know, all the usual BS that goes with all of that kind of stuff. But it's kind of like that's another thing hurting them. But the thing that's really hurting them, well, is something that has been as obvious on the nose on your face and it's been apparent for at least a decade and not longer, is that these banks, Westpac in particular, Commonwealth Bank I've made mention of is ahead of the curve here, but maybe no surprise why they're doing much better than the others. But these – let's focus on Westpac. Westpac is running on dozens of legacy systems that go back a long way.

49:11And that's fine because that was the certain computing, IT technology, and infrastructure build of the day. Yep. And it worked. Yep. And when you've got enterprise-level software systems, these are incredibly complex, very difficult to switch out. usually costs loads of money and have all kinds of teething problems when it happens. So it's a classic another can being kicked down the road. And all of the – I forget the dude running it now, but all the former CEOs were well aware of this. So what do you do? You go, well, it's 2020. We're in the 2020s. Let's build a modern, capable, robust IT system.

49:55It's like, okay, but that's going to cost literally hundreds of millions of dollars. In fact, Westpac is now running this program called Unite, Project Unite, and they're going to modernize their tech stack. And all of these duplicated platforms, and they're going to, I'm trying to Google it here. I think I've got the right number. One article here is noted up to a$2 billion spend through to 2028. Billion, right? The other one I saw in the Fin the other day was maybe$400 million. So I don't know what the exact number is, but an insane amount of money is needing to be spent here. Now, that money hits the bottom line, even if you amortize it over a period.

50:33It certainly impacts free cash flow, and that certainly impacts the capacity to pay out dividends or to reinvest in growth initiatives. This is a huge amount of money being spent just to maintain things. Yeah, right. But when you look at this as a – forget the share market and trying to, like, maximize profits over a one-year orbit around the sun and just, you know, as any sensible capital allocator would think. It's just like you would probably want to nurture and improve your capital base. But there are sacrifices with that. And in not addressing this need, they are running – they are dealing with – it's not just to say, oh, they're running old systems.

51:16the consequence of running all these old systems is huge levels of inefficiency. I mean, people are talking about productivity, like, oh, productivity, we need more productivity. Yeah, well, okay. It doesn't come out of thin air, right? It comes out of making investment in better tools that allows people to do more with less. They could get rid of a bunch of stuff. Let's not get into this as a separate side quest here, but they could be far more productive and efficient as an operation if they had better IT systems. I don't think that's an outlandish thing to say. In fact, they are saying it. They're saying it themselves.

51:46Yes, yes. But because we're running on, you know, a bit of code written in 1987 that connects to another bit of code that runs on a magnetic tape somewhere in the basement and that has 14, you know, we have all these IT staff who are just kind of sticking it together with craft glue and Blu-Tac. And, you know, it's like that's part of the reason why they're doing so badly. And it's why you can, and the market I think is largely of this view as well. It's like they're going to struggle to grow profits over the next few years because they're at the point now you've got no choice but to spend up, to bring yourself into the 21st century.

52:25And so I guess what is my point here? My broader point is, and whether it's a bank or it's any company that you're looking at, anyone that neglects proper maintenance capital expenditure, CapEx as it's called, is going to make themselves look really good in the short term and look really bad in the long term. Yeah. And, and I have mentioned on the pod many times before I, it's, it's something that it's more and more a focus for me. I love these companies that are from a high level metric perspective. They're not growing that much, you know, the earnings per share aren't doing a lot of wonderful things.

53:07but over the last three years they've just invested all of this money in infrastructure and assets that lay the foundation for future growth growth just doesn't appear like sometimes it appears because you just a whole bunch of people just turn up for no reason and wow this this is great but more often it comes because you have invested in new products or better service delivery or or or things that give you lower costs that allow you to pass on those cost savings to your custom. All of this growth comes from somewhere. And the market who myopically just looks at these, this is where things are so backwards on the share market.

53:44It's like, here's a company's earnings have been growing really, really, really well. And here's another one who's hasn't. Everyone piles into the former and excludes the latter. And it's not that it's always the case, but it's often the case that the reason that you're seeing this is the company A is completely reckless and imprudent with nurturing and growing its capital base, the foundation for its very success and growth versus the one that is doing the right thing. So one is taking short-term benefit at the expense of long-term pain and the other one is doing the opposite. Correct. And there is, if you can do the work, there is great.

54:25And all of a sudden it's just like all this growth appears and wow, it's really cheap and it gets re-rated. And it's like, yeah, because they invest. And Westpac is just at the other end of that spectrum right now and chickens are coming home to roost. And it's not that you can ever avoid it, but it's probably better to be consistent doing lots of little ongoing maintenance expenditures rather than just completely ignoring it for way too long. Think about it with your house, right? It's like, I've got a bit of water damage. well, it's only a little bit of a problem right now. I'm going to ignore it.

55:03I'll probably spend money on holidays instead because I'll worry about it later. Well, I'm just a landlord. I'm an Australian landlord and I don't do maintenance because I don't do maintenance and because it impacts my cash flows. It's actually, now that I think it, it's actually the perfect analogy, right? And it's just like, so I ignore it, I ignore it, I ignore it. And then there's the other legitimate, proper, intelligent ethical landlord who goes, well, that's a problem. Let me fix it. Now it obviously costs the money. They send out the tradie, they find a crack in the tile, they replace the tile, they fix the roof.

55:34Everything's good and well, but okay, I made less. My net rental income was lower this year because I had a bit of maintenance expenditure. The other person who didn't do that has a much better rental expenditure. It's just in five years time, there's black mold everywhere. The house is completely ruined and you have to knock it all down. It's like, which is the more prudent financial response. In fact, not just prudent, which one maximizes, we always talk about the value of an asset being its lifetime cash flows, which course of action is going for purely capitalistic, selfish, you know, self-interested profit motives, spend the money.

56:12Not because it's ethical, although it is, not because it's the right thing to do, but it is, but because you will make more money in aggregate over time. If you do it. Yep, 100%. If you do it. 100%. I want to turn that into a quick chat about Macquarie Bank, actually. We'll probably finish on this one. Numbers out this week. So Westpac down. No, no, no, no, no, no. We've got to talk about it. We missed the interest rate decision last week, so we have to at least squeeze that one in. I see. We talk about rates all the time, and I thought you would actually be like, here we go again. So I was going to live that one.

56:42Well, we can do it quickly. All right. Let's talk about Macquarie and go back to rates. I think there is an expectation that we discuss at this point. I was trying to move this away from the usual repetition, but we'll happily go back there. So let's do Macquarie and then do rates. So Macquarie was at Westpac grew profit, profits declined at 1%. Macquarie was out this week, and I don't think it was a profit number, but there were some mortgage numbers released. Macquarie's mortgage book grew last year 22, I think it was 22.3 % from memory, which is extraordinary. Off a smaller base, but yeah, incredible.

57:16Well, not as small as you think anymore. I mean, yes, smaller, absolutely. But even if it wasn't, I mean, double the base, it's 10 % growth, double it again, it's 5 % growth, they are bringing in a truckload, more customers than they used to have. And this is both talks to the other banks' net margins falling, but it also talks to a couple of things that we've kind of touched on when we haven't. One is that tech stack. So Macquarie's kind of gone, hey, we should start offering mortgages. Let's build a system for that. And so they build a system. That's been around for a while, Plus, it's not brand new, but they've got a system that is just fundamentally much newer, much more user-friendly, much more fit for purpose.

57:49Because they didn't start in 1960 with the magnetic taper, as you say, mate, and then try and leverage that more and more and more on top of that. They basically said, hey, let's build a mortgage lending business. And the power of incumbency is enormous. I read about that this week. Enormous. The big banks have seen off so many would-be competitors, right? Every regional bank, every building society, every neo-bank, they bought a couple, put a couple out of business. they are just the ultimate survivors except macquarie ends up being the exception maybe doesn't prove the rule but the the advantage of incumbency all this is we just talked about the scale the size the brand recognition the branch network macquarie's gone i'm gonna use that against you i'm gonna use that momentum it's the old martial arts analogy i'm gonna use your momentum against you you guys are big i'm gonna be little you guys got branches everywhere i'm not gonna have branches you guys got this massive big lots of systems that do all the bells and whistles i'm just gonna do these things and so to your point about analogies before with rent this is the Aldi Woolworths analogy.

58:44Yep. Where Aldi's walked in and gone, I'm not going to try and beat Woolies in an in-store bakery. I'm not going to have more individual items of baked beans. I'm going to have two baked beans in a store that's a tenth of the size of Woolies. I'm going to have one tomato sauce, a couple of oranges, some meat, and a middle of the aisle that people absolutely love the hell out of. And that's my point of difference. I'm just going to plonk a pallet on the middle of the floor. And let people just kill each other trying to get to it. And this is the Macquarie example. So Macquarie's gone, I'm not going to have branches.

59:10And by the way, I'm not going to feel sorry for the banks, but the political and community expectation on bank branches is absolutely hamstringing these big guys. They would have, I'm going to say, a quarter of the number of branches. If there was a political amnesty, like, guys, okay, you've got to close many branches as you want, but after that you've got to stop. They would close three quarters of their branches, I'm sure. Why don't they? Because there was massive political community grief about it. Macquarie gets to go, I'm the new guy. I'm not going to open any branches. Sucks to be you. And they say, well, I'm going to only offer it online by the phone.

59:39Okay. I'm actually going to only offer a certain number of products. And they're going to build their systems from scratch in the modern era, so they don't have this legacy tech stack. Exactly. I'm going to only offer a certain number of products. I'm going to have a couple of deposit products, a couple of mortgage products, that's it. And I'm only going to make loans to really, really good risks, so I can offer lower prices. So if you're not a great risk as a borrower or you're a bit complex, well, again, that's your problem, not mine. I'm not going to do that. I'm just going to do the Aldi strategy.

1:00:02I'll sell you home brand tomato sauce and that's it. You want the other stuff? Great. Plenty of people offer it. That's what I'm going to do. And Macquarie have just done a spectacular job. People say their app is great. Their customer service is better. And so they've literally just walked in and gone, we can disrupt this market. And as it's taken the, it's called the innovative dilemma. Westpac, Commonwealth Bank, ANZ have gone, I want to be this big with this margin, with these people. By the way, I just mentioned people. I'm not going to criticize bank employees, but imagine the culture in a calcified financial services organization that's 100 years old.

1:00:31Imagine the layers of people. I don't need to. I've been on the inside of that wall, man. So I worked for a food company. I just have nightmares about it. It was scarring. Different on the mind I talked about the other day, by the way, for anyone who's keeping score. Yeah, and so they're basically more like, we're going to have these people doing this job in this area for this cost, with this systems, those products, and that cost set up in terms of branches. And they just absolutely make money hand over fist. And is it Westpac's fault? I mean, to some degree, yeah, because to your point, they've not modernised for decades, but also they have the draw, so they've got all the benefits of incumbency but all the drawbacks of that.

1:01:10They've got a unionised workforce and again, I'm not anti-union at all. We've talked about that last week. But they're a unionised workforce. They've got ways of doing business. They've got career managers who just are there punching the ticket. In some cases, there are some great people at banks. Again, I'm not blaming everybody but by the way, the good ones at those banks are like, oh man, yeah, like you've just said. Yeah, I mean, seriously, if I was in charge, I'd fix this as well. And it's just all that. It's a really, really great story. Jeff Bezos says, your margin is my opportunity. And this is not exactly that, but it's not miles off.

1:01:39I love big, dominant businesses. Yeah, and great brands, long stories, all that kind of good stuff. Except that can go from an opportunity and a benefit to a mill stand around your neck really, really, really quickly. I think that's part of the story. Yes, it's about, you know, oligopoly behavior. Yes, it's about all the things we just talked about. But Macquarie have pretty much gone, I'm going to build a better mousetrap. It's going to be smaller and more niche and fit for purpose and very specific, and here's how I'm going to make money. Their mortgage book, you mentioned the size, now a quarter of, I think it was ANZs that was reported this week.

1:02:09A quarter of ANZs. Talk about the big four banks. Give it, I don't know, three, four, five years if we're going to keep this up, it'll legitimately be a big five. And their biggest question will be, how do we stop the bloat that's happened to these other guys? But if they can do that, they're in a massive, massive advantage. I mean, well done to them. It's not, I'm going to annoy all the mortgage brokers and it's not a hard business. It's not. It's not a hard business. Especially these days with everything computerised and putting in databases. I've got access to capital. In fact, I've got the cheapest access to capital that is out there.

1:02:44Oh, I also have a banking licence, so I now can create my own capital. I'm also considered too big to fail, so even under the worst-case scenario, I'm okay. And at the end of the day, I'm lending this collateral against my loan. And as you say, if I look, just make sure that the person you're lending to is not a terrible credit risk. Make sure that the thing that they're going to buy is actually a reasonable asset. And there's very little downside. It's very little downside. Yep, correct. Just do it a bit more efficiently. And it's not hard to do it more efficiently given the incumbents are so woefully inefficient.

1:03:20Yep. It's so easy. You know, I made mention, I won't talk to the company who was being referred to, but it was on Twitter and someone was joking. about their ad. They're talking about, they're in private credit and they're talking about innovation. Let me lay this out there. Whenever you hear the term innovation as applied to financial services, run a mile. Finance really shouldn't be any different to how it was in ancient Babylon, right? The role of a finance industry is to take excess money from savers willingly who give it to you and then allocate that to productive uses, give the return back to the people that lend it to you and take a clip.

1:04:03That's it. That's it. That's finance. That's what finance is. And in fact, I'll go as far to say is it's incredibly noble and civilizational building enterprise when done properly. When there's innovation. I mean, a CDS, a mortgage-backed security, collateralized debt, CDO, sorry, collateralized, debt obligation. Whenever you see innovation in the financial space, it's just some whiz kid cooking up a very clever way. It's just financial. And you'd never, ever, ever, ever, ever want, I personally, you do you, but for me, I just run a mile whenever I hear some financial organization talking about how innovative they are because you're just like layering obfuscation on top of obfuscation that's really on top of nothing and it's just like you're just playing with fire.

1:04:51My point here in regard to Macquarie is they've just taken an extremely simple, old as Adam business model and prosecuted it intelligently. And lo and behold, it's working, right? Like, yeah, hats off. Hats off. And the other banks, you deserve what you get. And this is the consequence of not caring about planning, you know, saving the seed stock for next year's harvest. for not tending to your fields. This is what happens. I said I will hold out a little tiny bit of credit slash challenge for that. They are fighting with half a hand tied behind their back because of government and community expectations.

1:05:35And that bit of, you know, Treasurer loves nothing more than bashing a bank. I called the bank CEOs in for a meeting so I could do this and that. Performance art. Right? And I'm not saying the banks are hard done by necessarily or it's necessarily a big deal. No, they are not. But at some level, it's like, well, if you must maintain branches as a community business, then we shouldn't be advantaging other businesses that don't have that same obligation. The differential obligations, probably don't care. There's not going to change ever, ever, ever, because why would you bother? Everyone hates the banks.

1:06:04It's the easiest thing in the world to say, I'm going to bash the banks too, and you go up with the opinion polls. Again, this is not the problem, but I suspect if you said to the banks, all right, well, yeah, show as many branches as you want, get rid of as many people as you want. You've got 12 months, and we'll come back in 12 months and start again. It'd be a very different story. And so they are dealing to some degree with political community, unrealistic, unreasonable expectation because those things aren't applied to everybody, in my view. Yeah. I mean, I've got zero sympathy for organisations that make billions each year and have all kinds of – I mean, they may have that pressure, but they also enjoy an artificial backstop.

1:06:39100%. And they absolutely are immune for any real competition because government helps keep the competition away, right? Like, anyway, won't go too far down that rabbit hole. Well done to Macquarie. Well done. Well done. And serves you right, others, for not investing for the future. Now, are you ready, listeners? Andrew is going to quickly do rates on hold. So. Stop, watch, go. How hilarious. I mean, again, just the first thing is, only in Australia do you get, like, stop the press, breaking news alerts when the central bank makes out a decision, right? Like, it's sort of like, you know... Partly for structural reasons, to be fair.

1:07:24Oh, of course, yes. No, but the variable rate mortgages rather than the fixed rates, is what I mean in this case. What do you mean, sorry? Well, the Yanks, 85%, 90 % of their mortgages are fixed rates, so it just doesn't matter when they change rates. Whereas here, it impacts almost everybody every month, at least everyone with a mortgage. So a third of Australian adults are like, oh, look out. So, again, only to be a little bit fair to say there's a reason why it matters more in Australia than it does in the US when they change rates, for example. That is true. But when you have a society where a quarter of 1 % potential change or not radically changes the equation for huge numbers of people, I mean, it probably speaks to some, gosh, this is an incredibly fragile system that we have built here.

1:08:05Whereas like, we're not talking about the cost of borrowing changing 2%, not even 1%, not even half a percent. 25 basis points. oh my god this changes everything and then the next day there's like every talkback radio every inch of newspaper column is just this and that and then we roll out the usual talking heads who you look into their crystal ball and tell like i know by the way we were completely wrong and everything we thought you know even a week ago but now we know you know and the reserve bank itself oh we were surprised by this like yeah because you're always surprised because you're always wrong.

1:08:41A, because you're idiots, I'm sorry, but also because the height of hubris to think that you can predict this stuff. Anyway, I won't go down that rabbit hole. But I will say this, and I'm going to do a little bit of a victory lap here because I've been saying on this pod for as long as I can remember, it's like, of course, inflation is not yet under control, right? And you did three rate cuts prior to this in an economy with virtually full employment, record high property market record high share market uh you know and it's like and it's like oh we we we decided for whatever reason that we needed to add extra stimulus into the economy and lo and behold inflation is right oh okay well now now we're gonna have to change this change and it it's sort of it i don't know how that you can be so consistently wrong in your expectation and so consistently wrong in your decisions when looked at, admittedly with the benefit of hindsight, and still be taken seriously, it boggles my mind.

1:09:49And where are we at? What did we get, 3.2 % in inflation? Is that where we were at? Yes, 3.2%, correct, yes. Yeah. And even higher if you annualise the reading? 1.4 for the quarter, so it'd be 4.2 for the year. No, 1.3 for the quarter, so 4.2 for the year. Okay. So the only hot take I really have, other than the usual shake the fist at the sky here, is that, and I made this point on Twitter, the RBA will talk a tough game. Oh, that's not, we like to bleed you out slowly. That's a little too fast. We're debasing you too fast. So we're going to talk a tough game on, I don't expect the interest rate.

1:10:32Again, why we take any kind of thing they say seriously when you're so consistently wrong. My point is this, I can't predict the future in these kind of, but my, I don't, I recognize that it's unpredictable in this, which is why I don't think anyone should even try to predict it. Not because they're dumb or evil, just it's stupid. It's like, what's the weather in four Tuesdays going to be like? No meteorologist is going to tell you and they're not even going to try to tell you, right? Because it's a stupid thing. My point is, is that when or if, maybe I should be more careful in my language, if there's any slight wobble in the economy, all this tough talk is straight out the window.

1:11:11It is straight out the window. Everyone will love to tell you. And this is where all the economists, I think, are wrong. Because they all go, oh, oh, yep. Well, the RBA needs to put up rates. Because, again, everyone's got an opinion on this. It's for our own good. We're all spending too much. It's our fault. It's not the ridiculous amount of money we've pumped in the economy. It's all our fault for demanding too much. So we're going to do this and this is what needs to be done. And it's like, look, within that ideology and framework, yeah, that's true. But what all of them miss is that the other part of the dual mandate is not just price stability, which is hard to say with a straight face, but also full employment.

1:11:53And it's so politically - Still a misnomer, by the way. Yes, right? So anyway, the moment that these are not on an equal footing because one is slowly painful and one is immediately painful. And despite what everyone says, and I will die on this hill, it is a very political institution, based institution. And while you might be out there going, oh, bugger, I was hoping to get a bit of a cut in my mortgage rate, just note that if the market was to fall 20 % tomorrow, No. By the way, I'm not even talking about unemployment at this point because they will, again, forecast their way into the preordained decision here, which will be, well, if the share market's down, people are going to be cutting jobs.

1:12:38We've got to get ahead of it. We've got to cut rates. And so, again, I'm not trying to – I think it's silly to try and forecast these kinds of things, but I would not – for anyone out there feeling a little crestfallen that the elders of money have not moved the cost of capital in your favour. The second that there is a wobble, they will cut and they will cut aggressively. They have to. They kind of have to because of the system that they've built here. And I'd be interested in your thoughts, although without getting too far into the ideology, and again, this is a short space, do you disagree?

1:13:12Like, do you think in a world is a hypothetical, I'll paint this out for you. Inflation stays above 3%. Let's even say it stays between 3 % and 4%. We're not talking about anything ridiculously excessive here, but well above their sort of target there. And unemployment spikes up. That's the key, yeah. Or the share mark, let's be real, the property market drops 10%. Yeah. No, no, no, I'm going to walk that back. 5%. The property market drops 5%. I don't care what number you want to look at. They will cut like you will not believe. And that will put a lie to this idea of first and foremost price stability.

1:13:55It's not. Well, when everything allows us to focus on that, we will. And they will to the best of their ability. But this is going to like fold like a cheap suit the second that asset markets wobble, in particularly if unemployment spikes. Yeah. So you asked me the question. Firstly, I have to point out that you're making a forecast and I have to blame people who make forecasts. But not a general, non-specific forecast. Directional concept. Directional, yeah. I'm just fucking fun. No, you're right. Because I'll bet you$100. I'll bet you$10 ,000 right now. Do you know what they're going to do? I'm way too Pollyanna and more Pollyanna than you.

1:14:39So I think I have to believe that they would do the right thing at the right time. and we have historical example. Paul Volcker in the US Fed is the famous one of just smashing rates. You have to go back 50 years for that, dude. If that's your best example, you have to go back half a century. That's the last time we had this situation. That was kind of the point, right? So that was the last hyperinflation or high inflation period we had. Yes. And so I'm not saying it will happen. I'm not prepared to - He was pilloried at the time, Volcker. Yeah, but he did it. So the question will be how - Do you think Powell has the political autonomy to do that under a Trump administration?

1:15:16I don't know. That's a good question. Also, I think it's a false equivalence there because while Volcker was very aggressive with rates in doing, quote, unquote, the right thing, at least seen with the benefit of hindsight, he was dealing with a debt to GDP of 30 % or whatever it was. 100%. Like they're 120 % at the moment. Mathematically, it's sort of he had enough rope to be the tough guy. That's probably true. I guess I'm just not prepared to – I don't agree. I don't accept, without question, the politicisation of central banks. If anything, Powell has shown some independence, at least for now, or maybe to your point, he can afford to.

1:15:51By the way, Trump's going to appoint a new Fed chair next year. Right? So that changed everything anyway. But it's an independent body. Right, exactly. It's not political. We know who that's going to be. So that's kind of – well, yeah, not political in its implementation, I think it's probably fair to say. I mean, again, like or hate Phil Lowe, he got himself sacked because he did the right thing. What he thought was the right thing should actually more clearly. So I don't know. I'm not prepared to – I'm not cynical enough to believe that central banks will fold without – Let me lay it out more specifically because I think you're making a grave error.

1:16:25You wake up – it's a new year. It's 2026. You open up the fin and it's been reported that the Australian property on average has fallen 5%. And you can imagine within that average that there has been some brutal corrections within all of that. Everything else is the same. But inflation was within 3 % and 4%. Yeah. Are you saying that you think the RBA won't cut rates under that scenario? No, I'm not. I don't have a forecast. I'm saying I hope not. I'm not prepared to assume they definitely will. But again, if they were true to their mandate, they would. Because you're not out. There is nothing in that charter that says pump property or pump equity.

1:17:08Nothing there. But they will. But they will. And again, I will bet – I'll put the tax on the BS here. I will bet serious – anyone out there who wants to take this bet with me, we can draft it up so we're specific. I will bet serious money that in that scenario that they will cut – and we rationalise. Well, when this happens, it's going to have a wealth effect. That's going to mean people spend less. People spend less. There's going to be people that are fired. That means unemployment is going to go up. Unemployment is our mandate and people really hate unemployment. By the way, every shock jock, every pundit, every politician in the world is telling us right now, you must do this.

1:17:51And if they were to go up there and go, yeah, but inflation is 3.6 % and that is more of our concern than what the property market or the share market is doing, It's like, well, good for you for saying that. I just call BS on it. There is no way. There is no way that they are going to not cut and cut aggressively in that scenario. That's my point. We will see. And that's all I wanted to say in this episode. I'm not sure you're wrong. I just, I hope you're not right. That's my kind of fear. I hope the central banks have the fortitude to do the right thing. RBNZ's done a reasonable, the Reserve Bank of New Zealand's done a reasonable job of managing that through a price decline in the housing market.

1:18:29So I think there's, you know, I don't know. To your point, though. By the way, what happened in New Zealand? Recession. House price falls. What happened to property prices? I got smashed. 20 % plus. I'm just putting it out there. The only point I'll make on it, it happens. Yes. It happens. But everybody goes, well, first world is parallel to Australia in so many ways as you can get, and it's gone down 20 % in recent times. It doesn't mean anything other than it's possible. but my argument is the central bank there did not cause or allow hyperinflation they've got three percent inflation rate at the moment and they had house price falls i'm i'm i'm only just i'm living in my pollyanna dream world mate which is probably completely unrealistic which is i think i i i have left confidence by the way in the u.s fed that i do in the rba and again maybe that's home bias and wishful thinking um but i i i am not prepared to concede that the rba will unquestionably and unavoidably fold like a cheap suit to your usual phrase at the first line of trouble.

1:19:28And they may. They may well. Actually, you know what I think is more likely, mate, to your point? I think it's more likely the treasurer of the day does what Josh Frydenberg did during COVID and instruct the regulator to lower the lending standards. That's actually what I think is likely to happen to house prices. I would suspect in terms of tools being used, they will do exactly that, which was designed then to pump up house prices while the rest of the economy was struggling. Yeah, that will happen. Yes, that will also happen, which is why I often say this is not capitalism. We don't live in a free market.

1:19:58This is a managed economy. Like it just is definitionally right. 100%. No, I think that's a fair point. But it's interesting that you bring up the US again. It's sort of like this saying of, you know, the US needs as the rest of the world catches a cold. Mechanically, it's hard to envisage a scenario where the world's dominant central bank, and the central bank that not only controls the currency for the largest economy in the world, but the reserve currency of the world, the very oil that lubricates the global financial system, aggressively cuts rates under this scenario. And Australia has the choice to not follow suit.

1:20:39Think about this. Think about a scenario where they go at odds, just like a distinct at odds with the Fed and the unintended or unexpected consequences that come from that. You're going to get carry trades all over the place here. You're going to get a massive spike in the Aussie dollar. All of a sudden, our export industries are going to be hit. It's turtles on turtles and wheels within wheels. And it's like the RBA almost has to follow the Fed. And historically, when you chart major Western, European, Canadian, New Zealand, Australian, central bank moves with the – kind of in lockstep. Not exactly.

1:21:19Not all the time. But on average. And so I just – you're not saying you disagree. I know you're not. I'm not trying to have a go at you personally. But I'm very obviously emphatic and high conviction on this view. It's not a fait accompli. maybe they do quote unquote the right thing, I would just be highly, highly, highly surprised. And when given the choice of two evils of falling asset prices and a potential for spike in unemployment or higher for longer inflation, they will choose the latter every single day of the week. Yeah, fair enough. I, yes, I will say, by the way, I - By the way, just very quickly, I just looked up, But RBNZ, Reserve Bank of New Zealand, cut 50 basis points just in October.

1:22:08Like, they're doing exactly what I like. But the inflation rate's at 3%. So it's, you know, it's not. Well, it's up there, right? Yeah, totally. That is a big cut for something that's at top of range because of the asset market. So they're not, you know. I still think it's way too cynical, mate. I think, is it because the asset market, is it really? Of course it is. Why else are they doing it? Because the economy is in recession. But why is the economy in recession? Because the interest rates were too high. When you build your castle on a speculative market, right, and it's like you paint it into a corner.

1:22:53They kind of have to. The only reason that residential property has the potential to cause an economy-wide recession is because we have put it at the centre of our economy. In no sane civilisation does the flipping of houses have anything to do with our productive capacity and what we do and produce and live. It's complete madness. And it's kind of like you're right, you're absolutely right. It's because of the recession and that. But in any other sane world where there wasn't some excessive, overinflated debt burden property market and property was to go down a little bit. It's like, well, okay.

1:23:30Anyway, that's not our mando. So we're not going to do anything, but we have to do it. And that is why Michelle Bullock will blink the second that there's a wobble. Anyway, put it in your diaries and I'll be eating my hat in a couple of years time, but I will take a sizable bet for anyone who wants to take the other side of it. There you go. You know how to get him at Sage underscore Simeon on Twitter at Strawman Invest. you can get me at TMF Scott P or on Facebook at Scott Phillips Money. That was a longish short bit on rates, but it was fun anyway. And that was the short version, my friends.

1:24:04Let me assure you of that. Oh, one day we'll do an after hours podcast and it may have to go live because we made it every end. We'll see how we go. Will you come back on Sunday? I've got so much more to say. Of course I will. How good was Diesel, by the way? Did you hear that little mic before? I did hear that. That was my mic, just to be clear. Very good. but Matt Diesel is asleep behind me, so we'll see if that happens. During the podcast on the Mailbag episode, which is coming up in about 15 minutes for us, but in a day and a half for you in the world of the pod machine. Until then, Fool on.

1:24:33Cheers. The Motley Fool and people appearing in this program may have positions in the companies mentioned. General advice only. Please speak to your financial professional to understand how it may pertain to your situation. Subscribe to the free newsletter at fool.com.au forward slash listener. The Motley Fool operates under Financial Services Licence 400691.