Moody’s downgrades the US. May 23, 2025

26:28And the incentive is make money. Like, know tomorrow the best business in town with virtually no downside risk. Like, I'm sorry. I think that we should put some conditions in place. I don't even understand why that's a controversial take. No, it's not. It's not. I'm trying to. No, I'm not. I'm not saying you are, but I can tell you from lived experience it's a controversial take.

27:00I don't... I guess I'm probably... A couple of things, I suppose, mate. I am not sure... You don't have to solve the problem the same way it's caused. I say that because I'm about to say. I'm not sure easy credit is the problem I have to say. In the sense that... when I look for something that's going wrong or gone wrong, you're looking for something that has changed to cause an impact. Yep. And while rates have been lower recently, so the price of money has impact, and, yeah, arguably you could say lending standards maybe have fallen a little bit. I'm not sure that they've been meaningfully, credit provision has been meaningfully changed in the last 20 or 30 years.

27:47Now, this is 1975, sure. But if I think about kind of where is the problem, I don't know that I would finger credit as the culprit or easy credit as the culprit. Of course, we're less credit, we have less borrowing. Yes, I agree with that. It's a multifactorial problem, you're right. But it is the enabler. So the intent and the drive and the desire for housing and investment is always there. But if you had, and just to take the example, extreme example, if you had the lending standards of the 70s, we wouldn't be at these levels now. I'm not saying that's necessarily a good or bad thing in and of itself.

28:21It's a complicated issue. But it is without that credit expansion, you just don't get a property bubble. Sorry, aggressive bull market in property. No, I think that's absolutely fair. So, yeah, look, I think the price of – I'm going to go up to two places, which is lending buffer and population growth, right, which we talk about all the time. And so, you know, my view personally is I think I would – if you ask me to pick the most important metric for housing costs, and I'm talking about rents and house prices together, because they're largely a function of each other, but I think more often or moreover they are a function of supply and demand, right, which we kind of know.

29:02And I still think if you ask me for one stat, the vacancy rate is my answer. We've not had – I haven't seen any recent data in the last month or two. we've got record low vacancy rates and if you believe supply and demand is a thing when you're at that sort of level and particularly in pricing is on the margin as you and i say regularly um i i would i would make some changes to the bank lending to help the problem um i would also change capital gains tax and give gears we've talked about before but if you kind of if i'm if i'm if i'm rank force ranking these things i think i think the vacancy rate and the answer is more supply and growth in population or household formation more and i've said this before um i'll say it again uh speaking of renting on the same things over and over again um i just it's just it's just a vacancy rate right and i kind of feel like yes the availability of credit is an enabler to your point but would i borrow if there were three vacant houses and you and i both were bidding for for them and there was only two buyers for three houses are you and i going to max out our credit we're like well actually i'd like that one a bit but i'd happily take the other one yeah me too okay well i'll pay half a million dollars rather than million dollars for that house because like by the only one if you don't that's kind of for me you know the the i feel like the the the growth in credit is a function of the supply and demand conversation far more than it is a credit issue in and of itself and it doesn't mean we won't solve it that way so that's why i said before there's a between what caused you don't have to solve it from the way it was caused so i I have no issue with your suggestion.

30:31But I kind of feel like even if you do that, you've still got too few dwellings for too many people. And so we're kind of in this weird situation where, yes, at some point there's an effect of a cap because you just can't borrow anymore, but you don't resolve the housing affordability, you don't resolve the availability question. And the pricing on the margin is still, maybe there's more renters because they can't afford to buy because the people with the money can afford to buy because they don't need the capital. That's it. There's a mess there. I just think we're talking about house prices and we should.

30:59we almost need to talk about dwelling costs and kind of somehow merge the idea of renting and buying and owning together and say, why is housing so expensive? And to be fair, it's more expensive to buy than to rent in most places because the yields are tiny for reasons that we've talked about before. And part of that is creditors. You're absolutely right. But I don't think you pay$4 million for a dog box in the middle of nowhere unless you don't have a choice to do anything other than that because that's the price that the underbidder has pushed you up to. And you can borrow it, so you do. And to your point, if you couldn't borrow it, they're probably more cash buyers.

31:28and probably frankly more investors who are cashed up who'd buy more because they can and the price would be cheaper for them to do and the yields would be better. So we'd probably end up with more renters and fewer owners, I suspect. Yep, absolutely would. But that's the point. You're not wrong. You're not wrong. I totally get where you're coming from. But the demand is enabled by the credit. So you are so 100 % right. In fact, you can say that with any – whenever you're trying to talk about the price of anything, you know, it's supply and demand. It's just that the demand is enabled by the credit.

32:01Do I want 12 investment properties? Yes, please. Do I have 12 investment properties? Well, no, because I don't have the credit or the means to do it. But if the bank turned around tomorrow and said, hey, we're going to give you a 30-year loan at 1 % and no recourse. Now, even I am, I'm too much of a bear on property to probably say no. But I put it to you that 98 % of people would go, yes, please. Yes, yes. So you're right. Easier credit is always more likely to create more borrowing, by definition, to your point. Absolutely. And again, if we were a serious people with serious leaders, we would sort of say, well, let's use this as a force for good.

32:39Let's increase supply. Let's give credit to new construction because that will help address the problem. We're swapping Easter Island heads amongst each other. It's just these things that we just trade back and forth. The existing property. This is the problem, right? We're getting, ultimately we're getting rich on resources, right? Which we've been punting into these houses, which was doing a shell game where we're swapping them back and forth amongst each other. It only works because there's always some person getting on the bottom rung of the ladder that lifts everyone else up. And the only reason someone's able to get on the bottom rung of the ladder is because the credit availability is there for them to do it.

33:17Correct, correct. And that's the challenge, yeah. And we're hitting, the problem is, and this has always been my point, and I probably never articulated it well, but it's often misunderstood, is that this will continue for as long as we allow it to continue, right? It's not to turn around and sort of blame borrowers or to blame this or to blame that. It's the drug dealer down the alleyway handing out easy, cheap credit that is enabling this, you know? Do people like to get high? Apparently, you know, right so it's like it's like if you you supply you supply the drug there there will be the demand for it because it kind of feeds on itself and it's such a it's probably not a perfect an analogy but it's not it's not a terrible one either and just look just to come full circle here it's just the elephant in the room I'm not saying any of this is easy I'm not saying any of this is straightforward but it just drives me to insanity to see all this hand-wringing about oh on one hand, we need to lower interest rates.

34:20On the other hand, housing, what do we do? And it's just like the answer is just like, it is right there. It is right there. It's just like, let's restrict lending in a prudent and sensible way to existing property. The only people who are going to be upset about that are those that are relying on that engine to push the Ponzi. And I use that word deliberately because a Ponzi is something that only works by the introduction of new people coming in, which is exactly what property is. If you're selling your property for 20 % more than you bought it for, it's because someone else has come in with the available funds, most likely, mostly come from credit that has enabled you to do that.

35:00The moment that stops, property stops going up. And that's not a bad thing. It's not a bad thing. And I know people go, it's easy for you to say that, but my net worth will go down. It's like, no, You still live there. You've still got the utility. You've got nothing has changed for you. This is the thing that, again, drives me insane with, you know, most property owners. They feel richer when their property goes up, but it's a completely fake wealth. Spend your money. You can't. You either have to downsize or you can't, right? It's like markets up, down, doesn't really matter. Sideways, I'm selling and buying in the same market.

35:39Is that an existing property? There is no real wealth there. The only way to extract that wealth is to give up the size or location of what you've got. And very few people do this. I know economically it makes a huge degree of sense. But count the number of 70-year-olds living in four-bedroom houses. A single couple, the kids of empty nesters. Like, should they? Yes. I'm talking to my neighbor the other day. They're complaining about not having enough money. I get it. They're the classic boomer where they are cash poor, asset rich. And it's like, you're the perfect person. You are the perfect person to go, yeah, maybe we'll downsize to a three bedroom townhouse, free up a million dollars and live our best life in retirement.

36:22But no one does. It's just, I don't know, I'm off topic. I'm segwaying off segways here again. I'm going to go back to, we've got to get on another topic. Back to the lending buffers just for a second. Really, really simple example. Right now, if the bank has to add 2.5 % to their current mortgage rate and assess the lender at that rate. So if you're, I'm going to make my numbers easy. If you're charging 6 % on your variable rate, you've got to assess the lender at 8.5%. The second rates fall down or grow down to 5.75 % after a 25 basis point drop, you can now assess them at 8.25%. Now, what does that do?

36:57it means they can borrow more money because the same repayment at a lower interest rate means you can borrow more capital. You can simply take more money out of the bank. That's why house prices will go up as interest rates fall. Now, you want interest rates to fall to put more money into the economy for reasons we've talked about before. That's a good thing. But here's the so what or what do you do? You can have that happen if you simply say, well, okay, the official cash rate has dropped, the mortgage rate has dropped, but we are going to make you still assess that lender at the same level. So instead of when you were at 6%, assessing at 8.5%, rates are up to 5.75%, you simply say, you must still assess at 8.5%.

37:37What does that mean? It means you go to the bank manager and say, how much can I borrow? And she says, well, the same as I said yesterday. You say, yeah, well, rates are cheaper. You say, yeah, good news for you is you can borrow the same amount, but your repayments are actually cheaper. So you get both results. You get a situation where you have more money in the economy, if that's what the RBI is trying to do, or to take less out if it's restrictive and now less restrictive, whichever way you want to frame that one. But the benefit is you get to do it in a way that doesn't push up house prices, doesn't create asset price bubbles.

38:04And that's, it's not, speaking of not controversial, there is zero reason not to do it. There's no reason at all. And if you're worried about not pushing prices down, it won't push prices down, just stops them going up. And by the way, why I say counter-cyclically is when you then raise those interest rates from five and three quarters back to six whenever that next happens you simply keep the lending buffer where it is why for exactly the same reasons as long as as long as the lending buffer is set appropriately in the first instance you don't change the borrowing capacity and and similarly you let people borrow as much as they want when the rates go up you just take more money out of the economy you don't you don't create a price either because you haven't increased the lending the lending buffer it's just not i don't know i don't know could you imagine lending money to someone for 30 years, like, well, considering doing it.

38:49And you go, well, I think I've got a bit of money. Scott needs some money. I would need this kind of interest rate to sort of compensate for me. The RBA lowers the interbank rate. This is just the rate that banks borrow off the central bank or off each other when they need, like, liquidity requirements. So it's actually a little arcane, a little bit interesting in sort of how that works. But anyway, they've done that. and so now I'm going oh I'm gonna lend you more like but but we just saw interest rates change and almost always they never go the way that people think but for some reason that one change in this one point in time over a calculus that should span 30 years I've now said I'm going to lend you more like it is the height of madness I mean well again depends on the context it makes perfectly rational sense.

39:40If you understand that the more that there is a demand for credit, the more interest that you can charge on the money that you just created. It's a great gig. It's a great gig. As I say, it is the business to be in banking if you can be in it. So yes, yes, a thousand times yes, you're making perfect sense there. And as I said, this should be non-controversial. It's super easy to do. The Treasury can come out tomorrow and do it. Instead, we're talking about the most non like ridiculous stupid things that are on the political agenda at this point in time yeah and and but but again i like politicians are really dumb when you look at it in the normal context when you look at it in their context they're actually just being hyper rational it's like yeah but yeah but andrew i hear what you're saying but i want to be elected and people like to feel richer even if they're not really richer and those that are absolutely not richer.

40:33Well, don't care about them because they're in the minority anyways. So let it rip. And actually, because no one understands banking or finance or economics, I can just point to the meanies and Martin Place. So you really should do that. Oh, the bank, you should pass on that interest rate cut. I wish I could do something about it. But who am I? Just the government. not much I can do and the most amazing thing of all is it works and it kind of like when you understand that it's kind of like yeah I guess so I can't believe it worked but it worked so like I guess I'm just going to keep doing this until it stops working and I don't think there's any sign that it's ever going to stop working because we're all so gullible and easily misled shades of the treasurer saying we're doing everything we can to help the RBI on inflation what did you actually like what thing did you actually do people buy that though yes absolutely they do to the point where I've said a million times on Twitter to everyone who's used that comment, well the government's trying show me what specific action they've taken, what have they actually done, what program, what spending what policy, what change no I've not, I don't think I've got a single I'm, it sounds ridiculous I haven't got a single response but I'm pretty sure I've got a single response where someone's gone, I don't know this it's like yeah, no no, no, that doesn't help.

41:56Did they throw some money at people to help, quote, deal with the cost of living, end quote? Yeah. Did they actually help the RBA deal with inflation? No. Not for a second. No, actually, worse. It made it worse. It wasn't like a null impact. It made it worse. The problem that you're upset about, we're just going to make worse. It's just that it's disconnected in time and space. So by the time that you start thinking, wow, everything's really hard and more expensive and my savings have gone down and my real income's gone down, it's like, what's going on there? Oh, it's China and shipping lanes and logistics and Trump and what?

42:29Oh, that's outrageous. Yeah, we should cut rates and get more stimulus and more money. We should, we should totally do that because that didn't work the last 18 times, but I've got a good feeling about this time. Yes, let's move on because we probably should. I just got to cry into my desk here because my keyboard is, what else can you do? What worries me is the next topic. It's not Bitcoin, thank God, but it's close. Because it's... Can I just say, I'm watching my screen, all-time record high right now. There you go. I just got to squeeze that in there. 110 ,000 US. Nice. It's only worth one Bitcoin.

43:04Absolutely, you're right. I'm glad you pointed that out. I only say that because it's just fun. Well done, mate. Congratulations. Still cheap. You've jinxed it, by the way. Yeah, of course I have. Now, you put it on the public record on a podcast, this will be the high. I know. I should short Bitcoin now. Exactly. You totally should. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

43:30Let's go a little bit macro again. We will come back to individual company stuff in a sec. Moody's has, I think we can say finally, I think we can say belatedly, I think we'll say, oh my God, how long could it not have done this by now? Downgraded the US credit rating. It's lost its final AAA credit rating in the United States. Fitch and Standard & Poor's did it yonks ago. Moody's has finally decided to come to the party. Apparently, the US has got some things that may possibly cause them not to be completely squeaky clean. And Moodis has just realised that. Yeah. Oh, man. Gosh, you're getting from one topic.

44:02I know. I'm really angry about it. I looked up and went, oh, no.

44:07So just to paint the picture here. So there is probably three major ratings agencies. They're private entities. They're for-profit organisations. and they sit in their ivory towers and tell you how safe assets and credit can be around the world. Gosh, when you hit mute there, I really noticed the sound of the rain on your roof cutting out. Sorry, that's why I did it. I'm trying to minimise the rain. My apologies. I'm in an office, a little backyard office thing, and it's a corrugated iron roof with zero insulation. It's got wooden. It's actually really comforting. I love rain on the roof, but then when you hit mute, it was like, oh, am I dropped?

44:47Should I leave it off mute? Is it better to have a consistent rain than it coming and going? It throws me, but I like it. You can chat with rain in the background. Go for it. We're going to have the sounds of the rainforest on playing in the background as well. Just help me calm down a little bit from my tirades. And if we're putting people to sleep, a little bit of white noise on top of that, it's not going to hurt. This is perfect. This is perfect. You're welcome in some of the acts of the world. So these noble institutions have a long and proud history of completely effing it up, frankly. They somehow missed the biggest credit collapse in 100 years, not that long ago.

45:25And we've all forgotten that. Anyway, so S &P, who's the other one? Fitch. Fitch. Yeah, Fitch. Fitch. Sorry. They downgraded the US yonks ago. Because, why? Well, their deficit is 7 % of GDP. This is World War II levels, just to put that in context. So they're taking, in terms of what the economy generates, 7 % of the entire US economy is how much the government there is in deficit. They're living well beyond their means. They've got 36 trillion, I'm losing count. Every six months it grows by a lazy trillion or so in debt. And so the other rating agencies years ago said, no, this is not sustainable.

46:11I mean, our whole raison d 'etre, our whole point of our existence is to rate the quality of credit. And we're finally calling BS on this. So Moody's has joined the party really belatedly. And what does it mean? It means nothing in a lot of ways, because I think anyone who knows what they're doing in bond markets is like, yeah, thanks. Thanks, Sherlock. I figured this one out for myself. For a journalist, it's a nice little headline. At the end of the day, the bond market is going to do what the bond market is going to do. But it's notable just in the historical significance of the fact that you do, again, have these industries that are, again, classic case of regulatory capture and crony capitalism, all the things that I hate about our modern financial system.

46:57You know, the fact that they're now sort of, they're all in unison sort of saying, yeah this is this is not great and it would be different as we've spoken about before if it was like well yeah it's not great but here's all the things that we're doing to right the ship everything that we're doing when i say we that i'm talking about the current administration in the u.s but it's not even to be mean towards trump because that's very easy to do um but you you go i mean the last time the u.s ran a surplus was clinton 2001 right was it or something like you know it's like and that was sort of at the tail end of the tech boom like that was the last time that they ran a surplus can I change off that for a second yeah I've heard people say to me when government ran a surplus then there was a recession so therefore surplus has caused recessions which makes my head explode oh my gosh honestly every time I mention the holiday of surplus someone said well it's either private private deficit which is like yeah but we're all the same or it's the whole well that just causes every time there's a surplus that causes a recession it's like man Man, talk about causation and correlation.

47:59Anyway, that was a massive tangent. We call that a spurious argument is what we call that. That is unbelievably dumb is the best word for it. So anyway, so it kind of matters in the other sense is that these create an important reference that a lot of financial products are sort of based off. Um, so it, it, it, it, it might force certain large institutional investors who operate under fairly strict mandates to allocate capital a little bit differently. That was a word salad. Let me, um, sorry. What, what that, what that means is, is that massive insurance company, a might have to allocate a little bit less to us government debt because of the ratings change.

48:47I don't think it actually, even on the margin, I've seen that out loud. Or it costs a little bit more sometimes as well. Yeah, exactly. But not really because what else are you going to do? I mean, at the end of the day, it's an IOU. And the best IOU is from someone who has a money printer, right? I mean, it's a pretty good IOU. The irony of that, though, is that they still will do that because it's like funds that can only invest in stocks in the ASX 200. It can be the best company in the world. It's just outside the 200. You can't buy it. and that there are there will be funds that say you must allocate 35 to triple a rated bonds but buy fewer of the u.s maybe a couple more of australias just because that's how they'll have to make so it will it will happen to a to a degree but you're right you'll see a lot of funds change the amount it's pretty fast when that if that's caused them to have to bail out u.s bonds particularly if they're a u.s denominated um fund because they you know they will want home currency bonds they won't want to be pushed out of it just because the rules change although sorry because the rules aren't changed.

49:39Yeah. Can I just encourage everyone to watch the big short again? Because there's a really wonderful scene where they're meeting with one of the ratings agencies and she just basically says the quiet part out. I know it's obviously a fictionalized version of events and it's a movie, but it's pretty spot on in my book. Okay, so what does this mean in the real world aside from that? I mean, it's already playing out. So last night, as we've, again, I said to you off air, it's sort of like the biggest story in finance, just completely not being covered because we're equity guys and it's the bond market and bond market is boring and we don't talk about it.

50:15But the US had a whole bunch of these bonds come due, so they pay them out and they don't have the money to pay them out. So you've got to like start a new credit card to pay off the old credit card essentially. And they tried to auction off, I think it was 20-year treasuries and it was really soft. Like it was really, they do it, mechanism's complicated, They do it through these primary dealers, blah, blah, blah. The point is they said, hey, world, here's some of our debt. Would you like it? We'll pay you back in 20 years and we'll pay you this much interest along the way. And usually that's just snapped up, right?

50:48And it's usually snapped up because the US has such a massive trade deficit. In other words, it's just sending money out into the world, US dollars out into the world. people like places like China and Japan in particular, but everywhere, Australia will go, okay, cool. I guess, I mean, what can you do with the US dollar? You can buy US assets or spend in the US economy or anywhere where US dollars is accepted. And admittedly, that's a wide rule. That's right. But generally what you'll do, unless you want to consume it, which is what you, when you spend money, is you'll invest it and you'll buy treasuries.

51:24But after what Trump has been doing and given like the deterioration in the in the finances of the u.s the fact that the scenarios are worsening people have said no so there's there's three possible i'll let people decide for themselves what they think the likely outcome is but there's three there's only three outcomes somehow they get their i was going to say another word act together stuff and family family podcast they get their things together and they convince the world that yeah, actually we're on a more sustainable path here and people go, yeah, I'm happy to lend to you at a lower rate again.

52:00So that could happen. Or people, these bond buyers will say, listen, I know you'll pay me back because you've got a money printer, but you'll be paying me back in funny money, which basically means in purchasing power terms, which is the only term that really matters when it comes to money, I'm actually going to get a lower than stated return. So to compensate for that, I will demand a higher yield. And to get a higher yield, I will just pay a lower price. It's the inverse nature of this relationship. So in other words, a government that's already buried under debt where its second largest line item is interest is now going to get much, much worse.

52:35This is why people talk about a debt spiral. And we understand it in the family context with a credit card. I've got too much debt on my credit card. The interest comes in faster than I can pay it off. And the debt gets bigger and bigger and bigger and it runs away. It's like a black hole. It just eats everything around it. Well, the US is potentially in that kind of situation, right? It's like you have to keep offering higher and higher rates to convince people to buy your debt, which means that the deficit gets worse and worse and worse, which means you have to issue more and more and more debt.

53:07So that's the kind of path that we're on. Or, hello, Japan, we can do what, you know, I'm turning Japanese here and I can say, Mr. Central Bank, can you buy it for me? Yes, we can because we create our own money. And that's what they've done. I think in Japan, like 40 % of the Japanese debt is held by the central bank itself. And this is what will never be called anything other than some highly technical term like yield curve control or quantitative easing. Yeah, exactly, yeah. So what is very likely to happen in my view is that, well, I don't know how we convince the world that we've changed our ways when everything points to the fact that we're not.

53:51I don't know how we can possibly mathematically stomach higher rates. We just can't. So I'll take door C, please. And door C is the Federal Reserve comes in and prints a bunch of money and buys those bonds. and and I guess that people again it's just like okay so so what what is that what does that mean to me average Andrew working in saving and living my best life right well it means that well I've had to work for my money you've had to work for your money I've hopefully been prudent and I've saved some of this money and now you're just diluting me with freshly printed like you're stealing from me and I use that word very deliberately and in very literally you are stealing from me.

54:34And if you don't think that's true, we should have a game of Monopoly, right? Where I just get to give myself$800 when we pass go and you get$200. And it's like, well, you know, it's for the good of the economy, right? It's literally that. And it's a big deal. And you've made the point before, which I think is an excellent one, is that this has been talked about for decades. So I've got to be careful when I lay all this out that people will reasonably go, well, gosh, that sounds super urgent. And I think it is urgent. Dealing with it is urgent. Dealing with it is urgent. Doesn't mean the consequences are necessarily particularly temporal.

55:13They're not immediate and they're not obvious. That is the issue. And in 10 years' time, we'll be talking about inflation again or cost of living, all kinds of things. And it will stem back for actions that are taken today. And you, even though you're in Australia and we were up with 2 % of the global economy, you will be poorer as a result of these actions than the counterfactual of not doing that. And it's just, I don't know, am I right to make such a big deal of it? Or is it just like, is it a nothing burger? And if it is a nothing burger, why is it a nothing burger? That's what I want to know.

55:47Talk me off the ledge. No, no, I think you're right. I think that the hardest part is the twofold question of what does it mean and what do you do? Yeah. And that's why – and you're not wrong at all, mate. It's for the same reason I've been banging on about writing structurally balanced budgets, for exactly the same reason. And at some point, someone pays the piper. And you may not pay the piper with a – the train doesn't run off the track at the end of the thing, but it just gets slower and slower and heavier and heavier because you keep loading it up, loading it up, loading it up, and the metaphor breaks down at this point.

56:21But, yeah, you're right. There's more nominal money out there. We're all poorer as a result. We've been diluted. right exactly and that's it's it's it's it's it's worse because it's a political solution because politicians can't be able to do it because they know they don't have to right if i it's like inflation itself it just it just silently steals it steals you that's what we've had inflation for as long as we've had you know fair currency central banks right yeah so so that's and that's not and again it's not it's not bad in and of itself other than to the extent that people have to the extent that people have if your nominal wealth goes up, as long as you're getting a real increase, it's irrelevant.

57:02It's only relevant for those who aren't getting a real increase, largely because they're holding physical cash or some version of that. If I've got 5 % inflation, my wage goes up 6 % and my assets go up 7%, I'm fine. I'm not as fine as I think, I'm not as good as I think, but it doesn't hurt me. And that's not to say we should do it. When I say it's fine, I say it's not. Theoretically it's not, and it's not if you hold cash and it wouldn't be ideal. You wouldn't choose it. Well, some people do. That's why we have it, I suppose. That's why we're an inflation target. But the issue is for those with cash and the risk, the very real risk particularly, and this is not necessarily about the US or about debt even, but when you have high amounts of inflation, I mean, I'll do this because they're printed money, so it kind of goes back to your point.

57:41But when you have high amounts of inflation and we don't keep up wages-wise or don't keep up asset price-wise, that is genuinely bad. That's why we go back to the very beginning. We talked about people who are sleeping in cars. Part of that is absolutely the cost of housing. part of that is the fact that they got to housing plus the fact they haven't kept up with inflation so housing was already expensive for them and now they're spending even more of their money on the things they used to buy the exact same things they used to buy there's less left over for housing and so you've just that's the the erosion of living standards we've seen that um just getting off your attention a little bit i'll stop in a sec but we've seen that if you look at any of those graphs of real incomes um australia's been absolutely smashed relative to the rest of the world when it comes to osu when it comes to real incomes over the last four or five years ironically the US is doing better than us despite all the money printing and maybe they do end up having to pay the price.

58:26But it is one of those things. I think when real, what's the word? I was trying to find a word to income and wealth in one thing. When real numbers, when real wealth and real income are growing, inflation is less of an issue, it needn't be as much of a problem. It may still be a problem, but the impact is less. When you're going backwards in real terms, where you're not keeping up with inflation. That's when it gets really, really bad. And the more money has to be printed, the more inflation there is, the less likely you are to keep up with it. And that's, to my mind, to your point about the ledge, it may not be a ledge.

58:58It may be a six-foot diving board when we're only at the first step of it, right? But at some point, you get closer and closer and further and further out and things... It's like alcoholism, right? Like the best way to get off the grog is early on. Yes, that's right. Like it's harder. The longer you leave it, it's not like we can reverse course, but it's like it becomes... And the damage done on the way is a nice combination because the damage you deliver all the way. So not only is it hard to get off it, but you make yourself less healthy as you go and then at some point you've still got to confront the fact that you're an alcoholic and you're going to get off the grove.

59:29Absolutely. And the tragedy of it all is it's just like it's only a problem for the middle and lower classes because when you've got a lot of... Correct. I mean, you can't print housing as easily. I mean, there is a reason that the share... Despite... I said to you off air, this is the most bearish bull market I've ever experienced in my 30 years. Oh, that's absolutely right. You know, it's like people are so bearish. I'm super bearish. And you go, wait a sec, the stock market here and in Australia, I mean, ostensibly it's at record highs. Maybe we're a percent off or something. But yeah, we're at a record high.

59:59Throw dividends in where am I certainly there. Magic internet money is at a record high. Like that is a symptom, right? That is a symptom of this is because the things that you can't print relatively are going to get more valuable because it is a safe haven. No one's buying 12 houses for any other reason than it's just like it's going to do what you said. You said, yes, we're going to have inflation, but the rate of credit expansion and nominal growth here is going to outpace that, so I'm fine. You go, okay, that's good for you, buddy. But the 19-year-old has just left high school. He doesn't have the asset.

1:00:33They're screwed. They are screwed, and they will never have the same opportunities. The damage that we are doing is so – We're just growing the wealth divide massively. Here's a thing. I'll speak against, I'm absolutely speaking against my own interest. You and I, dear sir, here's a humble brag. Go on. We've got to be in the top 20, 30 podcasts in Australia. I think we're up there, right? No, overall. I think finance, I think we're in the top three. Oh, there you go. Nice, there you go. Good. Well done, Mr. Page. Congratulations. Thank you. And then congratulations to you too, sir. Oh, thank you.

1:01:05But why? But why? Why is a nerdy finance podcast so listened to? Well, hang on, hang on. That's because we're smart and funny and good looking and interesting. Well, yes. I mean, I can't argue against that. No, exactly. But in a sane, well-operating system, most people wouldn't give a stuff about that because why would you give a stuff about it? But this is the bastardization of our system where it's like every John and Jill, Joe Blow out there has to become a financial analyst in their part time. There's a bunch of people listening to this because they're just like us. They're hardcore investing nerds.

1:01:44And there's a bunch of people who's like, oh God, I guess I have to get my head around this because I can't save in money anymore. Money's core fundamental properties of storage of value, like that is like the whole point of it, you know, a large point of it doesn't work. So I have to save my money in shares or in property or in emu farms or in art or in antique cars or Rolex watches or God even forbid magic internet beans. Like, like that's why, right? And it's sort of like, wouldn't it be better? Think of a world where people who could just focus on their craft. I'm a really great hairdresser.

1:02:27I'm a really great plumber. I'm a really great, and And you know what? That's what I do. I create value for the world. People love what I do. They pay me for it. And I spend less than what I earn. And I save money. And I save money. And I just leave it in the money. I don't have to then become an armchair VC and invest in different companies just to outrun the money printer. It's so egregious. Why is Australians obsessed with property? Because it's the only way to get ahead, right? Or at least that's the way that people sort of see it. because working and saving is not going to cut it. It's just fundamentally not going to cut it.

1:03:04And if that doesn't say to you the system is broken, I don't know what is. And people get really angry at capitalism for all of this, which is where I do push back. It's like you're right to be angry. You're angry at – it's not capitalism's fault. Find the right part. Because this is not capitalism. Let me tell you right now, right? Okay. Hey, listeners, are you ready? Bitcoin fixes this. It actually does. I know. Oh, dear. Hey, let's finish off. Let's bring it way back a little bit. I have another bank, but that's where we are. Interesting to me, well, not as interesting as those people who have been laid off.

1:03:44Westpac are going to sack 1 ,500 people, largely because they can't find growth. And it's kind of everything we've just talked about, nothing we've just talked about. The big four banks, the oligopoly, a system growth that's not, despite everything else, doing much. The big four banks, three of the big four, Westpac, ANZ, and NAV, I'm pretty sure I got this roughly right. I think I might have said this last time. Zero growth between them in the last half. One was up 1%, one was down, one was flat. CBA did grow about 6%, so credit to them. They're doing something better and different and making it work.

1:04:18Business banking actually was the highlight, Andrew, you'll be happy to know. So I think you said last week you're happy to see them get into it. but yeah so Westpac Westpac Saki people I think I'm gonna I'm gonna sound a little harsh I don't mean to be and I will catch it but it's kind of what's supposed to happen and I say that not because I don't care about those people but because businesses are supposed to be as efficient as possible because it's good for us it's good for them it's good for customers it's good for suppliers it's good for the economy it frees up resources all those good things you know successful businesses are successful and if they can run more cheaply and deliver better results and maybe even lower prices, because that's what they're going to do some of that with, is try and use those savings to go and fight for market share.

1:05:00That's not the world's worst thing. Now, it sounds awful because people are losing their jobs. And I'm not for a second saying that. I don't want anyone to lose their jobs, but also the reality of what is capitalism is creative destruction and efficiency and finding better ways to do things and productivity. And that's a really, really good thing. If Westpac can do as much as it can do now, but with 1 ,500 fewer people, that's great because those 1 ,500 people are going for another job doing something else and they'll create more value. And guess what? Westpac has created the same amount of value.

1:05:25Those people go somewhere else and create even more value. That's productivity. That's exactly what we're trying to do. It's a reallocation of scarce resources. In this case, the scarce resource being the human capital. Perfectly. And it's just like we don't need. And it's not, that's what you'll get. Sorry to interrupt, but I mean, you're making such a good point here. It's not a callous human driver here. it's sort of like the market has said you're over capitalizing here. We don't want that. That's right. You know, and there's, you know what we do need? It's like people get upset when tradies cost so much.

1:06:03Well, me too. Like, you know, I don't like the cost of anything getting up there. But that's the market doing the markets. It is sending a signal. It is going, we need more of this. We need more. Oh, there's not enough of it. Back to you, you made the point before every price is determined by supply and demand. There's a lot of demand for tradies because they're amongst the few people in our country that actually do anything besides speaking to microphones in their rug boots, right? Like they actually do real world things and there's not enough of them go around. You double the number of tradies, their price plummets, right?

1:06:34So that is the invisible hand at work. And it just, this is, you're right to make it not about the human element to it. It is just about the, like, not the bank. we the customers the ones who interface with this operation haven't demanded their product enough for them to be able to justify those costs so they have to get rid of them yes and there'll be other there'll be people who are considering going into banking don't go into banking anyone listening please don't go into banking but anyone considering going into banking might now consider going into something more productive and and then over time we're all bet we are they and us and everyone is all better off as a consequence of it so yeah and and by the way westpac you could have bought shares in 2013 at the current share price.

1:07:19And at that point in time, you were getting $1.80 or so in dividends per share. Now you're getting$1.66. Tell me again. Tell me again how these are good. I'm sorry, but it's like, how do you do that in a housing boom? Like, if this is the return you get for shareholders in the good times, my god tell me again why like i'm gonna i'm gonna defend the banking system rather than the banks themselves okay in the sense that for everything we've talked about them being you know protected species everything else you know what's actually happened is competition has actually worked and and it sounds stupid i think i've said this before it sounds stupid to say because people are oh i know banks are oligopoly they all do hand in glove they're all just you know nudge nudge wink wink we'll all do the same thing net margins have fallen over that period of time and so i kind of like i'm not it's not a defense of the individual business effects of criticism of them because i haven't got as much pricing power as other people believe they have and there's no cartel profits that people think they have they're profitable in scale because there's not many of them and that's the thing with this what's the woolies and coals thing is like people think a duopoly or oligopoly is somehow a wonderful thing they get to that point by gobbling up the other guys and they get there and go well now i guess it's me or you and and so yes i mean frankly virgin and quantis are are the exception.

1:08:40They are absolutely raking it in because neither is putting on capacity and it's just different cop talk we won't go into. But the banks are actually fighting harder against each other. Net margins have been falling for the past, I want to say at least five years, probably seven, maybe even 10, which is great. Like it's what's supposed to happen. It's how these things are supposed to, you know, competition's working. And it sounds, speaking of things you're not supposed to say out loud and people don't believe, you know, for all of the banking oligopoly, banking cartel thing, are they giving the little guys a hard time?

1:09:08absolutely should we do more to protect small businesses yes all those things are absolutely true but in the meantime they are killing the little guys but they're also by fighting hard against each other um and that and that's been the problem that they're not able in that boom normally when interest rates go up what's supposed to happen is you say well i'm not going to give depositors much more but i'm going to charge borrowers much more and so i'm going to make more money my net interest margin is going to grow because my costs don't grow much my revenues grow more because I'm charging more, I get more money.

1:09:37And then Ethereum rates go down, they're supposed to shrink because you can't give deposits much less than zero. So that's a kind of a flaw. And yet your borrowing rate comes down, so you make less money. This cycle, really, and since the entire period of COVID, when rates went from effectively zero, 0.1%, you fixed a loan at 1.99 up to, what are you paying? Six and a half now. The banks didn't make any extra money. In fact, they made less money per dollar of deposits, per dollar of borrowing. So it's just, you know, it's worth, again, I'm not, I say it just kind of highlight. It's not defending or giving anyone credit or anything else other than to say, careful what assumptions you make about who's profiteering, who's making money, and who's doing this, who's doing that.

1:10:16The banking sector, at least for consumers and for businesses, is working better than ever has been, at least in terms of the margins that the banks are keeping compared to what they're paying us and compared to what they're charging us for our loans. And that's a good thing. I can't argue with that. I mean, it's hard to argue with the numbers. I know. That's it, right? And that's why I was in a reasonably recent kind of, I've done the whole oligopoly cartel, they all moved together. It's so easy to fall into that bloody trap, right? And it must have only been maybe 12 months ago. I looked at the numbers and went, hang on.

1:10:46And every time the bank's profits come out, I've looked at it. It's like, yep, they're still flat or coming down. Still flat, coming down. It's working, right? Yeah, I mean, true. I mean, you could argue that they were really making super profits 10 years ago, right? Again, let's remember the time that was sort of particularly pre-GFCS, making out like banded. People who did well in banks did it because they bought it in the 90s and they really held through to 2009. That was the golden era of banks and that solidified into the zeitgeist this idea that they are super low risk, super high return, exceptional businesses.

1:11:20But part of it is just coming back to something that is more reasonable. That's true. There's that. And there's also, it's not so much that I'd say that they are egregiously profiteering by outright collusion, but they have that constant, that via that concentration, they have made themselves too structurally important to fail. So even with all of the tax breaks, even with all the government subsidies, even with all of the APRA, you know, wet lettuce slapping around of like, don't, don't do this, please, please don't do this. Let me find you another million dollars. I want a million dollars. That sounds like a lot.

1:12:00It's like Dr. Evil, one million dollars. Oh, let me get it out of petty cash. Correct. Yes, yeah. But yeah, you're right. But again, to me, the point with all of that is it's just sort of like, wow. Every man and his dog will tell you that we have an extremely elevated property market, get an unbroken run of economic growth. I mean, we are just such a statistical outlier and our banks haven't grown in that time. And now the rubber band is so tight, right? And now you've still, I mean, what is it? I have to look at it. I'm pretty sure there's probably buy recommendations slapped all over this thing.

1:12:48Sorry, I can't help myself because I just love to poke fun of the sell side analysts here. Oh no, it's staying corrected. At least according to ComSense, it's a moderate sell. But isn't that interesting too, right? So it's got a P of 15, a 4.8 % fully franked yield and they're saying sell. Okay. I take it back. I like you guys again. Yes, that's right. It's, yeah, I think it's, I just think it's actually speaking of that, I don't pay attention to this, but I've just looked at that same thing you're looking at. there's 6, 10, 15 15 analysts 1's a strong buy, I'm going to tip that to Westpac but 5 holds 4 moderate sell, 5 strong sell I mean it's only a moderate sell on average take off that I don't know how you get to a strong sell, I do the maths on that but it can't be miles away from that so it's fascinating It really is fascinating CBA it's even worse there is 0 strong buy 0 moderate buy, 2 holds 3 moderate sells and 10 strong sells and yet the price keeps hitting all-time highs.

1:13:51CBO bank analysts are going to be fired. Yeah. So... Yeah, it's fascinating, mate. You think about the way you... And yet the price is still through the roof, right? The collective delusion of crowds is a phenomena that is... It's just a social phenomena. It's like, how do you account for it? I don't know. Can I throw some thoughts in on the banks? You mentioned the bank profitability. and I think they were unseemingly profitable. We saw the same thing with Woolies and Coles and I think just to, we'll finish up in a sec, but just if you think about the way this kind of, the way this goes, the way the history is kind of built is you start being small or, you know, medium sized.

1:14:39Woolies and Coles were the same. These four banks were the same. There was more of them. Remember the State Bank of New South Wales? It was united permanent. There was building societies up the wazoo. there was, you know, whatever, whatever, lots and lots of them. And Westpac bought St. George, you know, the Bank of SA. They were small. And so what happens is you find a thing you're good at, your secret sauce. And for whatever that is, or whatever combination of things those are, you just grow a little bit, and you grow a little bit, and you grow a little bit more. And you start to take market share, and you either acquire or put other people out of business.

1:15:10And you get to a point where things stop. And what we've got to be really careful of as investors is recognising the point where growth becomes maturity. It doesn't mean you have to necessarily sell, but you've got to think about your expectations. I would bet, the other thing about the CBA, people say, oh, they own the bank for the income. Have you seen CBA's dividend yield? It is tiny, at least relative to the other three banks. You can get more lending to the bank than buying in the bank. Right? And so, I mean, maybe Frank and Gregson or whatever. Buy one of their term deposits. So in other words, give them an uncollateralised low interest rate loan.

1:15:45You'll do better. Yeah, and that's, you know, so, but what people do is say, well, but they've done so well. Comple Bank's a great business. It's done really well. And I think that's, those things aren't necessarily not true, but they are different points in time. Is CBA still a good business? Yes, by the numbers. It's growing better than its competitors. You know, again, as a business, as an organization, is it making money? Is it making a lot of money? Yes. Will it sell it to me for a dollar? And I, 100%, right? But will it pass? Will its future look like it's passed? Well, no, because it grew.

1:16:15and Coles are always easier to do than the banks on this one because there's only two of them which is easy to see. They built and built and bought and bought and built and bought and now they're 85 % of the dry grocery market and yes, there's Aldi and IGA but they're not going to grow in the next 10 years the same way they did in the last 30 because they just can't and that's the same with the banks. Just be really careful. People, you mentioned the kind of delusion of crowds. Part of it is just the whole this is what I used to see and this is what is now happening and I will just think CBA has done well.

1:16:44It's a good business. therefore it will keep doing well. It will always be a good business. And I just think that's a really, really dangerous thing. Not so dangerous, it's not going to blow up. Strapolation. For your returns. Exactly, that's the problem. By the way, that is 90 % of people, how they invest. Yes, that's so true. Price is going up, I buy. Price is going down, bad. It's that first order kind of thinking. Why is CBA good investment? Because it's going up, it's at record highs, it's a good investment, it's blue chip. No one's going to look at you funny when you say I'm buying CBA shares.

1:17:11That's right. You're what? Yeah. So if you talk about some small cap little$40 million company might have metrics that will make CBA weep. And you're like, you're some degenerate like speculator. But CBA, oh, very smart, very prudent. Hats off to you, sir. You know, to me, it's a phenomena of the larger issues that we were talking about. There is just a, I'm convinced that the reason that you have companies like Woolworths and CBA trading where they're trading is that people are just like, yeah, well, what else am I going to do with it? Yeah. Not buying a paper from the US. What else am I going to do with it, right?

1:17:51I can buy some shiny yellow metal, I suppose, right? You know, I'll buy this. Like, oh, but the yield's really low and the total return expectations are probably low. It's like, yeah, but you've got to think like a rich person here, which is very different to, and I'm talking about really wealthy people. The game isn't wealth accumulation. You've done it. You've won capitalism. for the big money the one the money that drives market it's just it's all about wealth preservation at that point it's just like all i yeah this thing is ridiculously overvalued but it'll probably be around in 10 years time and my purchasing power will probably be maintained right and i really couldn't give a stuff if i underperformed some index or some notional historic return threshold i just want to preserve my money you know and and you've got these what the other dimension to it is at least part of it.

1:18:38We can argue to what degree, but the massive passive flows that are just flying into the big end of town. It's just sort of like I'm allocating to CBA because it's big, so it gets a bigger weighting, so it becomes bigger. There's a little bit of a feedback loop there. I don't know how significant it is. We've talked about it before. I think it's definitely, active fund managers certainly overblow the significance of it, but I can't help but think it's a it is a phenomena but it's a lot of a lot of passive money going to these assets i think that's kind of right i'm not 100 i'm not 100 sure the passive thing because they should add to all of the 200 yeah that's true like west bay yeah and then bhp and then woolies and then true true csl and then i think where it's part of it for sure i dare say there's part of it which is actually big money which is kind of i got i want to invest in currency uh in a commodity currency and so it's therefore Australian dollars.

1:19:35How do I do that? I'll just buy CBA, BHP or whatever. I'm sure there's part of that. That's probably the larger flows. I don't think it's pure passive, but it might be that kind of indicative token of I'll just buy CBA because that's Australia or that's a bank or whatever it is. And you're going to buy a bank, you buy CBA because everyone says CBA is the best bank. And so I think it's all probably all that rolled together. Yeah, it might be more passive in the not technical descriptive sense of it, but just sort of like I've got some money. What do I invest in? It's more of an unthinking investment.

1:20:01I'm thinking that's a great, that's a great one. Yeah, I like it. Yeah. I'm thinking more than one way, by the way, you've all just said about CBO. Yeah. I'm just, I'm just waiting for the inevitable. When things go sour, it's going to be, Oh, someone's going to help me. Mr. Government helped me out. It was like, okay, we'll, and they will, right? Yeah, they will. They will. Absolutely will. And, and it's the kind of help you really don't want. You think you want it. Yeah. You don't really want it. Well, maybe you do if you're rich enough, I suppose. Well, that's it. At least worst is still better than worst.

1:20:35Look, yeah, it depends where the dust settles. Again, don't be poor because you're going to get screwed harder than anyone else. Oh, man. That's depressing. On that happy note, do you feel better? A little bit. This has been another episode of the Andrew Page Therapy Session brought to you by Motley Fool Money. A little bit better. All right, mate, will you come back on Sunday? Yes, let's do it. Good. Until we do, speak again. and enjoy the first half of your weekend or your Thursday lunchtime. I'm Scott Phillips. He's Andrew Page, full on. Cheers. The Motley Fool and people appearing in this program may have positions in the companies mentioned.

1:21:13General 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 License 400691.