So… where does that leave us? December 27, 2024

25:51there'll still be a market for coconuts but not as much and again and and then you'll go okay turns out that people want this i guess i could i could tip my hand towards that and it it refocuses our coordinate our efforts and again that's that's what an a good economy whatever sort of macro measurement you want to you know sort of focus on like gdp i think misses the picture is A healthy economy isn't an absolute number for a specific period of time. A healthy economy is something that allows the discovery of value, something that allows for a fair and efficient coordination of resources. One that is going to reward people if and only if they create value, right?

26:38And that's a good thing. Now, again, it gets a little bit messy because a lot of people will sort of say, oh, but look at mega company X and what they have done. There are different flavors and degrees of what I'm talking about here. So, you know, so you've got to be absolutely careful here. But assuming there's no crony sort of capitalism or insider advantage or whatever, you know, and things are functioning as they should. And we want this dynamism in there, even if it turns out that, oh, over the last 12 months as a whole, we didn't slightly contract. But of course we did because there was a drought or there was a pandemic or there was a shortage of oil or something like that.

27:21Again, it's, is that a bad thing? Yes, but that's the world. A virus came and made everyone stay home for a little while. And again, it's like, oh, but that means that the GDP is down. It's like, yeah, it sucks, doesn't it? like it sucks but we will get through this and let's do what we can to get through this but to pretend it's not or to pretend that we can engineer that away by changing some digits on a database and and and manually directing the allocation of resources as he's done in communist china as he's done in cuba and it's just again it's well-meaning but it just it i think it misunderstands the nature of what this is and again what we what we should mean when we say a healthy strong economy it's not a number you know i i could point i could point to economies that have metrics that look good but anyone living there would go it's not that good that's right and there's a company there's a country over here who's actually technically in a recession yeah yeah but the level of homelessness is a fraction of this you know people are still eating there is still opportunity.

28:27And I was like, it's not the end of the world if people's portfolios are down 10 % in response to very real world situation. It is absolutely a tragedy if I'm operating in an economic system, which is characterized by cronyism and favoritism and even well-intentioned, but poorly allocated resources and capital. That's not a healthy economy. And I think that's what I'm sort of trying to sort of advocate for in what any institution that we have and institutions are vital to our society and civilization. They should be there to structure the, to help bound the rule set, the environment. But then once you've done that, to let the system function as it should allow things, and understand it's an emergent beast.

29:19Properties will be, they will arise out of it. A lot of the time, it'll be really unexpected. A lot of the time, it'll be really unforeseen. But a lot of the time, and most of the time, it should be a positive for most of us if we're doing it right. And that's the direction I want to sort of push things in, rather than some idiot chief economist at one of the major banks talking about how retail sales was 2.6 % when the consensus was 2.4%. And this is, oh, kill me now. Exactly. clip. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

30:00There's a really interesting conversation, mate, and this is where, I didn't intend to be all about the structure of the economy, but I still do it because it's fun.

30:11I think, you know, it does come back to the role of government, it almost kind of has first principles to your point, right? And it's kind of those questions about what do... I want to say governments. I guess I'll talk about the overall structure of institutions. So when I say governments, I kind of mean the RBA and I kind of mean the courts and things that aren't executive government, but right, exactly, exactly. And it's kind of... The challenge, I think... So there's a short-term, long-term problem. And in the long run, we're all dead. So on one hand, we've got to be careful about how much short-term we push off to the long-term.

30:42On the other hand... darkness, but then we'll enter a golden age of prosperity. On the flip side, if you only care about the short term, long term will come and kill you and it'll come and kill you much more quickly because too many bad short terms in a row lead to a long term disaster. So you kind of got to balance this out. I've had lots of debates on Twitter recently about the kind of impact of inflation on one hand and unemployment on the other. Now, notwithstanding your general ideological view about what we should or shouldn't try to do, I'm in your direction, believe it or not, compared to many, particularly even most.

31:15I had this conversation about cost of living on Twitter and someone says, well, I would happily pay more to keep my neighbor in a job. And I absolutely get that because of course you would, right? If we had inflation that was 0.8 % lower, but unemployment that was 2 % higher, that'd be an absolute tragedy for those 2%. And it's very, very natural for anybody thinking about this to be like, well, of course I would in the short term do that because I'd keep my mate in a job. And if he did the same for me, then we'd all be better off. And that's a really, really, really seductive approach because it is obvious, right?

31:44Not many of us know to the nth dollar how much a tomato is going to cost because it's volatile anymore, petrol is going to cost or shoes are going to cost. We're kind of like, well, if it's a hundred bucks, a hundred or one box for the next pair of sneakers, it's kind of the same price for me. And my mate stays in a job in the sneaker factory, that's a pretty good outcome, at least in the short term. The challenge is the long term of that, where we actually have an economy that doesn't remain productive, doesn't remain competitive, doesn't have that process of creative destruction that actually improves living standards over time, there's no easy way to illustrate this, right?

32:18But you don't want to go back to 1930s or 50s or 70s living standards to keep another couple of people in a job. Why? Well, again, tragedy for them, but there is a problem with national policy is it has to be national and aggregate by definition. You can't have a policy for each individual person. So you say, what is in the best interests of Australia as a whole, and Australians as a group, you also got to realize that the person unemployed in 1970 is still worse off than the person unemployed today because of that progression of living standards that, by the way, allow us to do things. We're not doing it well enough, by the way, do things like afford a welfare state to the extent we have one, which is the productive capacity of the economy pays for those things we want us all to have access to, whether that's public health or a safety net or whatever you want to call them.

32:59It's kind of how it works. It's the more value we generate, the more things we can kind of afford to do. And so that's, you know, these things are all feedback loops. And I think, while it feels really callous and it sounds callous to people who are listening and people who, again, see me on Twitter and say, well, hang on, don't you care about the people unemployed? Well, go to hell, you don't care. It's like, it's not that I don't care. It's that there is a bigger picture story here. And it's really, there is no perfect answer, right? Someone will say, I will take - It's the Nirvana fallacy. I might've mentioned this recently, right?

33:27Which is people will say hey that's not perfect so let's not do it yes yeah and it's like well no it's well no i agree it's not perfect but but there is no perfect solution but just the nature of reality is that bad stuff happens it just does and we can pretend it doesn't happen but but but in that that reality will come back and bite you no matter what what you know narratives you tell yourself whether they're true or not. I think to me it comes down to, you know, what you want is a quality of opportunity. And you want a system that is fair, that will reward hard work, you know, and that will reward people that are successful.

34:11And yet those that try and fail are not thrown to the wolves. There's a really a lot to be said for that. I'm very strong on all of that. Where people go wrong, again, heart's in the right place, but they say, no, no, no, I don't want a quality of opportunity. I don't want to say this, but what they're really saying is what I want is a quality of outcome. And a quality of outcome is, again, I would say that, yes, in an ideal world, that would be great, but there is no scenario under no system where maybe unless AGI takes over the world and perfectly allocates everything and puts us in our identical VR pods or something like that, but where everyone lives in a mansion with a boat and two cars and we all work five hours a week just it just doesn't happen so so you so you need to sort of say listen uh anyone is is willing to go and make it make a crack of things we'll make we'll foster the conditions to make that as easy as possible for you and if you're successful reward should come to you for that and if you're not we we should not make the cost of trying so onerous that it's just too much of a risk reward trade-off to even try and there's a balance in there and there's a lot of discussion there's a lot of nuance with all of that but too often these discussions just become binary and go to the extremes oh so you're a communist oh so you're a laissez-faire capitalist it's like no they're just there's a balancing act is all i guess what we're saying can i can i feel what i think you're saying um to add to it and again, tell me if I'm entirely wrong.

35:42Someone will listen to you and saying, what you really want is a world where capitalists all get rich because they take risks and they win. And so therefore, you've got this ruling class of uber-wealthy Bezos' and Jobs' and Musks. That's usually the response, yes. And I think what I'm hearing you say, though, and I want to add this because I think just so this is kind of get where you're coming from, is that you believe there is a broader social good for everybody in that progress being made. In other words, the person that's successful by coming up with a better mousetrap, sells a better mousetrap, people have better mousetraps, that person makes some money out of it, but we're all better off because we've got better mousetraps.

36:12So it's that kind of - Think of it, contrast that with a system, with some of the distortions we see now where it's like, actually your station in life, yeah, it's messy, right? Because it's a combination of a lot of things. Yeah. But I would argue if you're Caucasian and male and went to private school and mum and dad have got a lot of money, you are probably going to enjoy a higher standard of life and have more, forget that actually, you're probably going to have much more opportunity than someone who's got 50 extra IQ points, gets up earlier in the morning, works twice as hard, but has a very, very underprivileged background.

36:53So it's not sort of saying, no, the capitalists should make all the money because they're working hard or they're inventing stuff and everyone else too bad if you can't put your wheel to the shoulder. And it's not just about, I've got to be careful here too, It's not just about only someone, only like a super smart inventor and, you know, a Jeff Bezos type person should have money. No, he could be a garbo. But you're just, you work hard and you save your money and you're sensible with it and you should be able to get ahead. That's, you know, whatever ability that you have or whatever that you're trying to do.

37:24But someone who says, I am going to, I'm going to try, has an opportunity for a decent life, right? Even if they were an immigrant from a poor country, barely speaks English, happens to be female, mum and dad could barely send them to school, but they can do all of that stuff and they can make a better living for themselves and their family. as so many immigrants have done in the US and Australia. They came to the country and just, you know, worked hard, saved hard. They weren't inventing Uber or, you know, not actually, when you look at the US Silicon Valley, most of the founders there are immigrants.

38:03But you know what I'm saying? I just want to distinguish between the factors, because it can sound elitism. It's like you should be able to make a fortune if you're creating incredible value to society. If you're cleaning the streets and emptying the bins, you're creating value to society. You deserve to not have your wages and savings eroded away by poor fiscal and monetary policies, you know, by not being able. And if you happen to be a super genius, that you actually have the opportunity to pursue your dream according to your abilities, even if you don't have all of the advantages in the world.

38:37So I point that out as well, because the current reality is it's not as fair as it could be. and there's a lot of entrenched privilege in the system. So I know when you sort of start talking about this stuff, you do sound like an ardent capitalist and it's all about the rich being... It's not. It's about actually everyone having as fair an opportunity as possible. And Buffett, I don't think he was the first to say it, but he sort of said, when you're designing a system or a society, again, just for fun, because actually to implement any of these manifestos is a completely different thing. You want to do it from a perspective of you don't know where you will be.

39:15So it's just sort of like, I'm going to design a set of institutions and policies and systems and the general structure of how things should be. And then once I've designed it, I have to put my hand into the barrel and draw out a number. And I could be any number of people in any number of situations. And if you're saying, oh no, I'm super rich. Now I get to design the system. Well, you're going to design it for you, right? Like even if it's subconscious or if you happen to be really disadvantaged and you get the chance, well, I'm going to design it so that I really get the leg up here. But no, you have to approach it holistically.

39:49And I know it's a long run up again, just to sort of say, when you really dig into this kind of stuff, A, there's no perfect system. But if you care about equality and fairness, then this is ironically the better way of going about it, right? It is a better way than what we have now, which just means that so far, at least particularly in more recent times, and this is well publicized, is the growing wealth divide. The rich are getting richer, the poor are getting poorer. And people are saying, oh, but your system promotes inequality. It's like, what have we got now? I'm talking about fairness.

40:31I'm talking about that. So I really want to make that point. It comes from a perspective of, I think it does the most good for the most people. And yes, some people will be born with horrible disadvantage or disability or something like that. A measure of a society is how it looks after it's underprivileged, and we should absolutely look after them. So it's not, it does irritate me. You weren't doing it, but it irritates me a bit. And people sort of assume that you say certain things and it's all about, you're either a super genius or you're not worth anything to society. And it's the opposite.

41:05And that's why I wanted to call it out. Yeah. And it's really hard, right? Like, I think this is where we've got to be really careful about what we do with the systems that we currently have. You know, democracy is awful, except it's the best system we've got. You know, I don't mean it's awful overall. I mean, you can point to it and go, it's not working in these 15 different areas. I'll go, yeah, you're right. So, what do you do? Well, you improve it. It doesn't mean you junk it. And I think that's where you talk about the current system and we talk about, is capitalism failing us? No. But does it have some serious flaws that we should fix?

41:32Some of our implementation of it is absolutely failing us. And again, it's not the system or the ideology or the thinking, which means, as I said, if you don't love proportional representation of the Senate or compulsory voting, you don't say, therefore, we should have communism. You say, actually, I'd like to change some of those things to improve it further. And this is where I think a lot of people, to your point, that idea of like, well, the current system allows for this, therefore, it's a bad system. Yeah. Well, no. Firstly, you may agree that those things have outcomes, but different people disagree.

42:05So that's the first thing. But second thing is, if we then agree, hey, this outcome is suboptimal, let's improve the outcome rather than junk the system. I think that's kind of your point. And that's the risk. And I guess that's where I go back to, mate, which is where are we at as an economy? We're in a really difficult situation because there is a real sense of, as I said, government swimming in money, yet individual people are going backwards. And it feels to a lot of people right now, if you think about the – And this is where I do have some sympathy for governments, although a lot of it they're brought on themselves.

42:34And I mean politicians are under governments. There's a lot of own goals. Well, and over the years, right, the idea of we can fix it for you, we are the people who grew the economy, we are the, you know, a thousand jobs were created under our government. They're responsible for the growth, but it's not their fault when it goes the other way. And in reverse, when they're in opposition, they blame the incumbent government for all the bad stuff. And then when that happens in their turn, they say, oh, no, it's not really us, it's them. And then that kind of fiction of, you know, what governments can control.

42:58I don't mean to the extent your view necessarily. I'm a bit back from that, as you know. But that idea of actually time to kind of go, hey, the economy's up. Hopefully, we helped a little bit. The economy's down. Well, maybe we were responsible a little bit. But the idea of – and I've got to love them. The Labor supporters on Twitter will say, yeah, but inflation has gone from 8 % to 2 % under this government. It's like, yeah, but so did the US. And are we saying that Albo and Chalmers are responsible for US inflation falling? Or are we – that idea of like – and in reverse, by the way. It's exactly the same in reverse where it's – they did this thing and they did that.

43:28And that idea of what governments can and can't control, they've taken it on themselves because they've wanted the credit and they've wanted to blame the other guy. It's like witnessing an eclipse and saying, look what I just did. I think there are some policies that do come to bear. I will say the current term, immigration and tax policies haven't probably been used as well as they could have. So I'm not going to say the government's not responsible for the outcomes, negative outcomes, by the way. But nor are they partly responsible because they've done some things. Most of it, in this case in particular, was just simply straight out global, right?

43:58There was a pandemic. I mean, you can influence things. There was global inflation. You can't control things. Exactly. There's a massive, there's daylight between those two ideas. That's why I've said so many times, the question should be, what actions did they take to make things better? Not what outcomes did we achieve, but show me the things that were done and not done, which could or couldn't, shouldn't have been done in the context of what happened. So what did the government do to help the fight with inflation? That's my, not what was the inflation number. Yeah. And the same one to the last government.

44:27What structural budget balance or imbalance did they leave? Not what was the actual budget surplus or deficit, because that's cyclical, right? What was the structural underlying policy decision-making changes that influenced the outcome? That's what we should be asking people and asking our governments. And once we fall for the fiction of – when the government associated with the – oh, the Morrison government, the Albanese government. No, I'm pretty sure it's the Australian government. We don't have a president, so I'm pretty sure it's not either of those things. You know, it's that stuff of they take it on themselves and then wonder why they lose our trust and primary votes are through the floor.

45:00And it's all that. And, you know, the Albanese government will probably get whacked at the next election to some degree, whether they lose power or have a minority government or lose altogether. I don't know. But because of the economic circumstances, most of which they're not responsible for. Now, again, I'm just very critical of the actions they did and didn't take. But that's not where we are. And I think as we finish this year, kind of just to bring it back to the economy, we're at a really interesting kind of balancing point, right? The Australian economy is growing just. Inflation is still a bit too high.

45:30We still have population dramas that you and I have talked about before. There are some really significant actions or inactions that we can very significantly point to. But I've got to say, Matt, I'm not going to make any predictions about next year, but I will say heading into next year, most outcomes are still on the table, I think. yeah and i guess a lot of that was a run-up to to to make the point that a lot of the negatives that we do observe today are as a consequence of past decisions and we we talk a lot about it's a great you know it's a phrase that gets used all the time kicking the can down the road right yes yes and we've everyone seems to acknowledge even like you know different sort of views philosophical views on economics i think everyone tends to agree that oh there is some whatever you think we should do without doing it.

46:16Kind of problems and we can disagree about how we address them, but we've just kicked the can down the road. At least do something, yeah. You know, so as we enter into 2025, I look at a lot of headline figures that don't look bad, as you say, but I guess my perspective is they don't look bad because they've kind of been engineered to look better than they otherwise would. Yep. And while that engineering has – I think we've had a lot of false growth is what I had. Yeah. I mean, think about my pet peeve, right? Property. Which one? Okay. Let's narrow it down. But it's just like we have this circular system where banks lend money.

47:00They create new money. They give it to someone. They go buy a house. That house gets used as collateral. Other people, so all this money gets drawn from the future. We buy more houses. We push prices up and the cycle kind of continues. Now, this kind of credit creation, which is the dominant form of credit creation, I'm not actually against. I think it's a great idea. It's a brilliant idea. Fractional reserve banking has been responsible for a huge amount of the growth that we've had. I would do it to a less severe degree if it was me. I think we're there. I don't want to get into the debate of fractional reserve banking, other than to acknowledge very rightly, I think, that it's actually got a lot of positive things.

47:39But it hinges on not so much that you have this system, but what that credit is used for. So what we, I think a lot of the problems that we find ourselves in Australia is that we've drawn all this money from the future. And we've just offset, we've matched it. It works out from an accounting standpoint because the banks match it as a liability on, do you promise to pay that back with interest? Yes, I do. But here's the money now. Okay, great. And that's cool. Now, if I go and start a business or I buy some land and develop it or I create stuff in the economy, goods and services, that's actually a really good thing.

48:21Everyone wins. No one's worse off. When you have, and the key word here that I want to underline is when you have excessive lending to nonproductive assets, i.e. property. Now, property is incredible utility because that's where you can live. But when you have excessive lending in that space, we create more and more money. We direct it more and more to unproductive assets, which when you stand back, it's sort of like, well, the amount of stuff in the economy didn't change, but there's a boatload of extra money that's now in the system. Yeah. And these are the problems. These is cost of living crisis.

48:56This is the inflation crisis. This is the housing affordability crisis. It's all because of this kind of stuff. And my point is, as we enter into, that's been the narrative. And then that sort of COVID came in and like really just sort of exacerbated everything as well, right? Yeah. But we were already on that path. It was like, you know, it brought every, it's like work from home. COVID brought what was already in train forward. Accelerated stuff, yeah. And this has accelerated that kind of stuff. But as we enter into 2025, we are still having to wrestle with this very slippery hog of, gosh, we really made ourselves very rich on paper and some people more than others.

49:35And now we've got to try and sort of manage our way out of this without crashing everything. And I guess we can just open the floodgates border-wise. I guess we can just relax lending standards. And again, it would be different if it was like, yes, because we're going to build, build, build, and we're going to make things better. But it just seems as though we do all of this stuff and it just gets sucked into more and more non-productive. That's the point here. And that's sort of the key economic philosophy that I come from is like, create all the money you want. Just make sure that you get a good return on investment.

50:09Because if you don't, the maths just says we have more money, less stuff. We have inflation. We have cost of living. We have growing wealth divide. We have all of these kinds of problems. And as we enter into this year, all I see is more policy discussion around throwing more fuel on the fire and kicking the can further down the road. And that's why we're election year. We're going to get more of that for the next six months. It's hard not to be pessimistic, right? Yeah. Same in the US, same in the UK, same in France. Oh my God, look what's happening in France. what was that politician recently came out and said he started advocating for it was framed as austerity but I think if you dug into a little ball he's just saying you can disagree with his approach and I do it a lot of ways but it was like we're spending too much and what was the result?

50:58He's in the gutter, boom, see you mate of what? Don't take welfare off the French is rule number one. Right and again the discussion gets down. Oh, so you think we should do it? And I'm like, no, it's just acknowledging a problem. And maybe we should do something about it. But it is so politically impossible that that is a real life recent example of the person who dares advocate for a change of course correction is thrown to the wolves. So what happens in 2025? We keep muddling forward, and maybe we can do it for quite a while yet. But I guess my point is there's no good resolution to this. It's a big long, sudden, nasty, deflationary bust, or it's a long grind of reducing real living standards through increased inflation.

51:51Or we get very lucky. Can I give a quick plug to a podcast that you haven't heard yet, and I haven't heard yet, because it's actually out tomorrow, our time, but two weeks ago in podcast listener land. I did an interview with Warren Hogan, the economist. He's a Chair of EQ Economics. He's an economic advisor to Judo Bank. He was fascinating. It's only a short chat, about 35 minutes on the Good Oil podcast, the Good Oil with Scott Phillips it's called, because I've said before I hate it that my name isn't the title, but there are other Good Oil podcasts, so they made me put something to differentiate it.

52:20So it's the Good Oil with Scott Phillips, unfortunately. But really fascinating, fascinating conversation. Do yourselves a favour, check that one out. That period between Christmas and New Year, as you said, I didn't intend to do a plug, but some of the stuff you're talking about, mate. Hogan is a massive fan of AI, but also kind of makes the argument that it'll be AI that needs to save us because we have a productivity issue and we have insufficient amounts of working age labor supply, which is his key thing. So we're talking about supply and demand. He says for 60 years, we've had an excess supply of labor, of working age labor.

52:53So it's kept kind of lit on inflation. At the moment, we've got the reverse. Even with the immigration we've had, his view is that we haven't had sufficient immigration of working age labor that's kept up with the growth in demand. So that kind of, yeah, that imbalance is what he sees. So he sees AI as kind of coming to the rescue there. So if, yeah, just to that point, mate, and that's the luck bit I mean. I don't mean luck necessarily, but just that kind of idea of where we take that. We joke a little bit about tradies making bank, right? Like it's good times. I'm not saying it in a negative way or it's not deserved or whatever, but of course there's just a huge amount of demand.

53:30Like everyone's renovating their house and building, you know, government's big grand infrastructure projects and the rest of it. It's just sort of like market economics 101, supply and demand. The reason that they can attract a decent wage is because of that, right, shortage. And generally speaking, you'd sort of say, you know, there was a stage where it was sort of like the university qualified person had the better salary. because there wasn't as much of a supply. There was a sort of a special, oh, that's not the right word, but just a less common skill set but one that was still valuable. In a world where everyone's got a degree and everyone works in HR and marketing, and then you look around and go, is there anyone left to actually do the real jobs here?

54:18Apologies to anyone who works in those sectors. But, you know, it's sort of like that's why you're going to get those imbalances. So that point that you make there resonates with me in terms of the labor supply there. Again, though, I would say, so how do you fix that? He's like, you know what? High prices are the solution to high prices because everyone will look around and go, I don't know if I want to go to, I might just do a trade and have a really satisfying career and good money because there's a lot of work that's out there. It's also how we go from low wage to high wage jobs over time anyway, because at some point the economy says, I can't do that thing profitably.

54:55So I might say the economy. I mean all the actors. I know you hate the summary, but what I mean is at an aggregate level, the things that can't be done profitably with high wages go away. And those people who get high wages, get high wages in other professions, other companies that can justify those high wages. And that's how we win. That's literally, you talk about the penny farthing business. Not only would we sell penny farthings, we sell people paying two pounds sixpence to make penny farthings because we couldn't pay any more because people won't pay more penny farthings. It's like, that's the point.

55:19Let's go and make BMXs. Then they can make electric bikes. and they can make Teslas and they can make space holes. The growth of that industry, the value creation, yes, we've got to make sure, as we talked about before, there were regulations so it doesn't all accrue to the owners of capital and nothing to the workers. But broadly speaking, if a boss can say, I really need high-trained, high-paid people to do a really good job in this thing so I can sell it, the boss is going to pay more for people. She's going to get a great number of staff at a much higher wage than they're working on penny farthings.

55:48That's kind of how the evolution happens. And again, to be really clear, some penny farthing workers will not be able to transition because they just have the skills or the experience or the mentality or whatever to go and make space shuttles, right? So, at some point you say, all right, we'll look after some of those people. And is that a tragedy for them personally? Yes, absolutely unequivocally. But as a society, are we far, far better off than still making penny farthings and being told to be happy about it? I think that's a pretty clear answer. Yep. Yep. I agree. Let's go to the market as we finish this off, mate.

56:17We started by talking about the growth in in share prices. I read an article the other day saying the PE, the price earnings ratio of the S &P 500 has expanded by 17 % this year. I'll give you a figure because it just happens to be on my screen. The S &P 500 Shiller CAPE ratio, CAPE, cyclically adjusted PE. So rather than look at, it sort of smooths things out over, it looks at, I believe, 10 years worth of average earnings and then divides it by the price. So anyway, it's basically a PE, but it's a very well regarded one um and it's now at 39 the only time it was higher going back to 1871 mind you on this chart uh this is on the guru guru focus website and it comes from data from the from from case shiller themselves uh the only other time it was higher was in the dot-com boom there you go so just to give you some color on on as you continue what you were saying and so what is my next question and so what so you can make you can make definitive statements i'll start with them and then we'll get to the opinion yeah definitively it tends to be a series that mean reverts now doesn't mean a mean reverts tomorrow doesn't mean it doubles before it starts to mean revert uh doesn't mean it stays just going sideways for the next 20 years but right it can be revert two ways, right?

57:42The price goes down, the earnings go up. Right. That can happen as well. But it tends to mean revert. And armed with that fact, it means that the market today, you're sailing into a little bit of a headwind, I would say, on a valuation basis. It's not that the company's, and again, the price is not the company, right? They are two separate things. So you can have a great business that's overvalued, a terrible business that's underway, whatever you know but it just it turns out that if you buy shares today on average you have to ensure that you have to be confident in the rate of earnings growth being greater than the historical average for there to be value because that is the way that to your point that that will sort of correct that ratio will sort of see it come back to more quote unquote normal kinds of levels.

58:36If it doesn't, and we still see decent earnings growth, but just not to the extent that the market seems to be forecasting, then you're going to have a bad time. And I think you can say that pretty objectively. There's lots of ifs in there. So you choose which path that you think we're going to go down. And isn't it just everything I say lately just makes me sound like but i think it's an objective yeah i know forever i was born in this i just born in this place and time scott i can't help it all you can do is tell the truth mate oh yeah you can just you know say what i say but but do you do you not do you do you not do you not agree just in that not and again i'm not saying it's going to be really hard don't buy of course i'm not saying that right i'm fully invested pretty much and and so it but it is just sort of saying note that when you buy shares at elevated levels.

59:29It just generally means that it's harder to make good gains going forward. I think that's right. So a couple of things for me, and again, I'm not going to make predictions, but a couple of things that are, I think, objectively true, or at least subjectively true about the economy. Can you have subjective truth? Probably not. But I think are true. Let me put it that way. The first is that the biggest end of town in the US is as big or bigger than it's ever been in terms of its contribution to the overall indices. So the top half dozen or dozen companies as a share of the total S &P 500 market cap is as big or bigger than it's ever been.

1:00:06Magnificent Seven. Exactly. And there's probably others if you add to that. But yes, the so-called Magnificent Seven, the seven tech companies, and I can't name them off the top of my head. I'm sure Ram will look them up on ChatGP10 and tell me what they are. But the BNN is about as big or bigger than it's ever been. Now, that means one of two things to me. Sorry, I should say, by the way, we've had that in Australia for years with the banks and miners, and we've done okay, so there's that too. The reality of that is either the market has realised these companies are going to have an outsized influence on the future and therefore their future sales and earnings and therefore are justified to have that sort of PE, or they're not.

1:00:44And that's kind of – you mentioned the dot-com boom, man. I think that's kind of the challenge that we've got right now is, you know, the rise of NVIDIA. It's put on, I want to say, a trillion dollars in market cap this year alone or something stupid. Now, sales are growing through the roof because they're powering AI. And if AI is actually the future, the difference with the dot-com boom is it was largely built on hopes and dreams. If the market is overvalued now, particularly in the US and particularly in tech, it's not that these companies don't have a thing or aren't profitable or aren't growing really fast.

1:01:12It'll be the market simply expected that growth would be too high for too long rather than pets.com will take over the world. There were companies listed as cash boxes with billion-dollar valuations. We've got some money and we're going to try and do a thing in the internet. Hey, here's some money. Here's a valuation. Well, there is that too, right? Yeah. But that was kind of the dot-com boom. So this time around it is different, which are the four most dangerous words in investing, but it is objectively different in terms of the facts. I'm not saying the outcome will be different necessarily, but there are some meaningful differences.

1:01:41I can absolutely foresee it. I'm going to sit in the fence, mate. I can absolutely foresee a future where these companies do go on to capture larger and larger, not only value, but share of the global, frankly, economy because they do power the things that we increasingly pay increasingly more for. So you think about the growth of NVIDIA. I don't own shares. I do on Amazon. I think about the growth of Amazon. Will it be 10 times bigger in X years? Very possibly. Now, it's already enormous, but more and more of us are spending more and more money online and more and more of that with Amazon. That trend, I think, has played out.

1:02:13So you kind of go, okay, well, if it can grow up those sort of rates for an extended period of time, I don't know. Is it worth something more? Probably, maybe. Does cloud computing keep growing? Yeah, okay. Well, Microsoft and Google are likely to own Google. I'm likely to continue to do pretty well on the back of that. The growth of social media, the growth of digital media more broadly, think about Netflix. Again, I'm not making a prediction. I'm not saying you should buy these shares. I'm not saying you should own them, not saying you should sell them. I'm just saying I can absolutely foresee a future or a possible future where that is a thing.

1:02:42Not because it's definitely going to happen. But if we look back in 10 years' time and went, huh, turns out the E did catch up, I will not be surprised in the slightest. Do I think, however, the market is front-loading a lot of expectations? Yes, absolutely also the case. So it's already assuming that's going to happen because that's how it's being priced. And if you didn't know it was going to happen, you thought it was a lower chance of happening, you mightn't do quite so much. And that's kind of the story. And on the point too, if it does happen as the market expects, definitionally the return you get will be an average one so in other words exactly a very bright future that we're all expecting cool i might get about nine ten eleven percent per end because it's priced for that future which is price for that future but if it doesn't or it's just like it's just not it's good but not as good yes then there's only price is the only thing left to correct that that's the hard part when you're when things the the phrase is it's probably not exactly relevant, but not, you know, the phrase is price for perfection.

1:03:39Yes. And I hesitated there because, well, perfection would probably be, we could grow even three times or five times as fast. But in other words, as you said, it's a lot of the expectation is sort of front loaded. So to get outsized returns, to use that phrase, you need to see not only this bright future where real cash flows are being generated here and very significant ones, but more so than what the market is already expecting. Exactly. Or it just gets to the stage that for whatever reason, we're collectively happy to pay much higher multiples than we ever have historically, which could happen as well.

1:04:13But again, that's why I started off by sort of saying it's just objectively true that things are higher than average and typically that tends to mean revert, but it doesn't have to, but it can mean revert in multiple ways. It's just that if you're expecting it to mean revert in the good way, you need to not you can't just say oh yeah but things are going to be great you have to say no things are going to be even greater than what everyone expects and that's kind of wrapping it up I think it's probably about that time in the podcast that's kind of share investing as a rule I mean when we buy shares we are saying we think the future share price as long as you're an investor rather than speculator the future share price based on the future of the business is better than the market expects because otherwise the market's saying we think willy shares are worth, I don't know what they are now,$30, because we think sales will go at this rate, and profit will go at this rate, and the market will pay this PE, so this is a fair price.

1:05:09And a fair price means, academically and theoretically, that Woolies share price will grow as fast as the market. That's kind of how it's... If the market's right, you'll get a market average return. And from here, Woolies will either outperform or underperform, may possibly exactly do the same as the market, but probably not, based on whether the market's right in that assessment. And so to Ram's point, this is where it's important for some of these big tech companies is if the share price effectively assumes that sales will grow at 25 % for the next seven years, then that's just fine today's share price if that assumption comes true.

1:05:44If it's 20%, we should talk profit rather than sales, but you know, profit's got profit. If it's 20%, then the market will go, oh, we thought this was worth 100 bucks because we're going to go at 25%. If I'm going to go at 20%, okay, it's worth 80 bucks. Okay, well, there's your problem. If it goes at 30%, oh, we were wrong. We underestimated it. And literally every company that's done better than the market over any period of time that's long enough to be actually about the business, not just about speculation of prices, is because the market underestimated the future. Amazon is an example. It's up a squillion percent.

1:06:13I didn't know, unfortunately, at the beginning. David Gardner did. One of the Motley Fool co-founders has done very nicely on Amazon. Not very beginning, but pretty bloody close. Why has Amazon outperformed? Because the market didn't believe it would get to where it got to. Had you known or assumed that it was going to get to this price in 2024, late 2024, you would have paid$2 ,000 a share rather than$2 a share back in 1997. Why? Because you would have earned a market matching return. Equally, buying AMP at almost any price over the last 20 years has been terrible. Why? Because even though you thought the price was cheap enough, based on the fact, well, it couldn't get any smaller, things couldn't get that bad.

1:06:48Things got worse, the company's worth less, and therefore your share price fell. That's exactly what underperformance and outperformance comes from. can only come from that relative to the current share price. And that's our job as investors, is to find those opportunities, which takes us back to the market and back to US in particular, but Australia as well, is at a market level, the same is also true. If you're going to get whatever return, then you need to get growth that justifies and delivers that return. And from the current price, which assumes certain levels of growth. Now, some people are asking us right now, how do I know what the market's assuming?

1:07:20You can kind of try and find the data and you can do whatever. But even just the PE alone, Ram talked about the CAPE ratio or just the standard PE, it's just, hey, on this PE, the market's expecting a lot of growth because the average PE is 15 or 16 times. If we're looking at 39 times, you can assume the market's expecting a lot more growth than as usual. And therefore, the question for us is, are we going to get more growth than as usual? Or if not, then are we prepared for a underperforming, maybe a negative, but certainly underperforming future, at least in the short term, while that corrects?

1:07:49Yeah. So we've got to wrap it up, but I'll put two quick thoughts in there. So while I agree with everything that you said there, I hate this phrase because it gets used all the time and it gets used by idiots. But I think it's just increasingly a stockpipers market. Can I say, I've used exactly that sentiment recently. I hate using it, but it's kind of true. It kind of helps. Exactly. It's like, I hate it because it's some smug outside analyst Just trying to say, well, you can't buy an ETF because it's a stock picker's market. Or you've got to have a good stock picker at a good stock picker's market.

1:08:24So come and talk to me because you don't have to be seeing the old schmuck picking stocks. It just grates a little bit. But nevertheless, you will find that this thing called the market, like the economy, it's constructed of lots of little different things. And I will say without hesitation that there are absolutely dozens of companies right now. I don't know for sure what they are and time will reveal who they are. That's right, exactly. But there are dozens, if not, you know, oh gosh, hundreds of companies that we will look back on in five years time and go, oh, that was really good value in 2024.

1:09:00It really was. And so you just need to be a little bit fussier with things. And for those who are listening and going, wait a second, you guys often preach about ETFs and passive investing. well just remember that the the benefit of doing that long term is that you you still will do or particularly with dollar cost averaging the rest of it it's just that it's just that as some parts of the cycle you'll be sailing into the wind other parts of the cycle you'll have it against your back and we could be totally wrong on a lot of this stuff as well so i would never ever advocate for anyone to switch away from that but for those of us that are more sort of uh specific in in our approach don't lose don't be disheartened so i wanted to make that point the other one i wanted to make quickly as well was the, in regard to the AI boom and that will save us and, and that'll create a lot of value.

1:09:48I actually agree. I agree with a lot of that, but I think, I think there are good parallels with the dot-com boom and bust in the sense that everyone was right in the dot-com boom in that the internet would create immense amounts of value and would create fortunes. We just didn't know how, cause we didn't know what the business models would be and who the winners would be and the rest of it. And I think that's a very salient point to keep in mind with AI because too often, we've talked about this on the pod before, people take a thematic approach. EVs are going to be big, so I'm buying anything to do with that.

1:10:22Or AI is going to be big, so I'm going to do anything to do with that. I would say, we talked a bit about the gorilla game and sort of waiting for a winner to emerge and then giving a little bit more concentrated, etc etc but the the lesson of well gosh of so many different um uh technology adoption goes but the internet's a good one is that yes value accrued in in immense in an immense fashion but in unexpected ways right we all thought the domain names were going to be super important right like whoever had you know whatever dot com yeah yeah was going to own that space we just did It seems naive in hindsight, but it seems reasonable.

1:11:05And I'm just cautious when I hear people talk about AI now. I'm not saying you saying this or your guest was saying this, but they'll go, AI saves it. And they're like, well, okay, but I bet you it's a huge driver for change and hopefully a good one. But I don't know if it's going to unfold in the way that a lot of us are presupposing it will. I very much suspect we look back in 10 years ago, oh, yeah, AI is integrated into everything. Everything is smart. Everything is the age of intelligence. But that's how the business model will move? It's microtransactions being streamed online. It'll be something that is just really weird.

1:11:46So just be careful with two broader thematic approaches, I guess what I'm saying. I would say two for what it's worth. I wouldn't be investing in AI companies at all. So my view, and I don't know if it's Warren's view on the podcast, we didn't get into it in depth. But my suspicion is a little bit like I mentioned Excel at the beginning, a little bit like Excel kind of taking over from accounts clerks. There is just that the productivity boost that allows us to do a little bit more with the same. And that's how we improve us. That's what productivity is, right? Sure. It's more with the same or more with less if you want to.

1:12:12But, you know, if I want to keep people employed, more with the same would be nice. Yeah. To the extent we have a labor shortage, if that is the case, as Warren supposes, the ability for us to go, hey, I can do 11 people's work with 10. Yeah. Or six people's work with five. Whatever those numbers end up being, that incremental productivity of just twist the eye a little bit harder, a little bit further, get a little bit more, use Excel rather than the accounts clerks writing literally on pieces of paper called spreadsheets because they were big sheets of paper. People don't realize that's actually where it came from.

1:12:41That idea is kind of where I think the incremental gains will hopefully come. But to be really, really clear to your point, I'm not investing in AI companies or a company because it's doing AI anymore than I'm investing in internet companies. I invest in Amazon because a really good retailer happens to use the internet, not because it's an internet company, right? That's the difference. And I think for me, that's absolutely my approach to AI as well. Yeah. Oh, I could go on. There's so much I could say on it. Wrap it up. Wrap it up. Oh, I'll just say, this is pure navel gazing. Who knows? I could just say that no one's going to know how it unfolds.

1:13:12Yeah. But I suspect that as AI becomes more ubiquitous, it actually commodifies to some degree. It's like it's amazing, super intelligence in a box. and yet I don't know if that is necessarily where most of the value will accrue and I think the bedrock of the digital realm is data and so when I look around like who wins from AI those that have that have access to more and better quality data you know will Pro Medicus win in imaging yes is it because their technology is better part of it but they've got a lot of data that's super important will Catapult win in the sports field well they're tech's pretty cool but they're collecting a lot of data, you know, name a thousand examples like that where it's just that anyone can get a subscription to Anthropic or OpenAI or whatever.

1:14:01I agree. Who's going to make the value? Well, you've got a subscription. I've got a subscription. I've just got access to something that you don't. And I can build, I can leverage the intelligence to create value from that. If we've all got geniuses in a box, no one does better unless what, I guess that That's my current state of thinking and it'll radically change over the next 12 months, I'm sure. I agree with you. But where I see the implication of that for me is not – again, I don't think it'll be a winner from AI. I think productivity is the winner from AI. Oh, yeah, yeah, yeah. I don't think it's a company that beats – I don't beat you or you don't beat me because we use AI.

1:14:36We both employ fewer people or we both produce more with the same number of people because we've got AI. I think that's for me that it's a productivity win specifically, not a company specific or industry specific or anything. I mean, someone will because they've got better data. I've used the example of Upstart, the US kind of loan assessor software in the US, which is amazing as a business. I don't know about the investment, but it's a business. Because it's got all this data, it's got more data than any of the individual banks separately. So it's better to pool that data and assess borrowers on that basis.

1:15:05Yes. But I suspect with AI, the biggest winner is not an AI supplier. It's not going to be a better AI, right? Yeah. But both of them could probably be more productive because only fewer staff in the warehouse or fewer delivery drivers or automatic trucks or whatever it happens. My suspicion is it improves productivity, not that it actually gives one company a win over another. I mean, there'll be specific examples we look at and go, Amazon used the internet better than Walmart, right? So did it create a winner? No. Did Amazon use it better than anybody else? Yes. So there's that. But overall, the internet benefited us all because you and I aren't traveling to do this podcast.

1:15:38We're doing it over the internet. The podcast exists because the things that we can create because of the, you know, no one wins the podcast war because the internet exists. But podcasts as a rule are better off. We're more productive. We're using less fuel and less time to get to where we're getting to because we're doing this podcast remotely, for example. Stop saying interesting things. Sorry. So the good analogy is I go back to 1998. Again, my DeLorean, my preferred vehicle of time travel. The only one. Some people will choose a TARDIS. I'm going to DeLorean every single time. You've got to choose DeLorean, don't you?

1:16:13You've got to choose DeLorean. Tartus is kind of cool in a kind of, you know. Just for the fire tire marks, like, you know, for nothing else. Flex capacitors for the win. You fly off the flex capacity. You go back to 1998, you say the internet's going to be a really big deal. I know you know that, but I'm here to confirm for you, it absolutely is. And you go, right. Now, a really sensible, seemingly sensible approach would be, I'm going to buy all the ISPs. I'm going to buy all the internet service providers. You just told me the internet's going to, everyone's going to have the internet. I'm going to buy Cisco and people who make the switches and the cables, because that's going to be, we need all this cabling, all these switches.

1:16:48You didn't do awfully. It wasn't a terrible investment. It wasn't great. It wasn't great. I used OneTel, for those who remember OneTel as my internet provider. OneTel. OneNet, they called themselves at the time until they went broken. There's Packers, right? Yeah. It was Packer and Murdoch, both. Jamie and Lockley. That's true. That's true. But again, here are some billionaire tech, not going to say tech moguls, but billionaire moguls going, here's the future. Everyone wants the internet. Let's get into the internet business. And they lost a fortune. And the lesson there, again, is just to reiterate the surprising nature of things.

1:17:19I suspect history will rhyme in the sense that AI will be a massive force for change. But yeah, where the real value accrues will be very surprising, I think. And we will leave it there because the future is upon us. In fact, in only a few days' time, it will be 2025. Because we're pre-recording this podcast, I neglected entirely to remember that last Sunday's episode was the last one before Christmas. So a belated Merry Christmas to all of our listeners. Thank you for spending the year with us. A lot of you have been through every minute of every podcast episode, and by God, you people need to get a lot.

1:17:54What is wrong with you? But we really, really appreciate it. We love bringing it to you. We love the questions. We love the conversations. We hope you're enjoying them as well. It's been an absolute blast this year. We also want to wish you the best for 2025. These kind of wishes are a little bit empty because we can't do anything about it, but we're all hopeful that, of course, the things do improve despite Andrew's persistent doominess. I'm going to go positive for 2025 because that's what I do as well. And let's hope that despite elections and spendathons and whatever else, we do manage to improve and we manage to get some decent returns despite Andrew's gloominess about the NASDAQ and the S &P.

1:18:28But no, we really appreciate it. We will be back in full throat, full voice in 2025 to bring you more hours and hours and hours and hours of podcasting. So, yeah, thank you for listening. We hope you have a great break. If you are having a break, if you're not having a break, by the way, I try and say this most years if I remember, thank you to those who are still working through this time, whether you're in retail, whether you're in emergency services, whether you're working in hospitals or whatever, keeping the lights on in one form or another. Thank you for the work you're doing while the rest of us are off doing our thing and kind of, you know, gallivanting around the country or just simply sitting at home in front of the cricket.

1:18:58We do appreciate what you're doing. But whatever you are doing, whatever you do, we really appreciate you listening. We do wish you the best for 2025. I can't add anything to that. That was very well said. I concur. Very good. That's from Andrew Marty McFly, Page, and me, Scott Phillips, for the last time in 2024. We'll see you next year. Full on. See you next year. Cheers. 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.

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