The challenges for the Australian economy in 2025. December 20, 2024

24:55We're recording this Thursday morning. Big news overnight on Wednesday night, and who knows what happens when it comes to the next couple of days of trading, so we'll see. I'm recording this before the market opens on Thursday and then there's a market day tomorrow, Friday before you listen to this. The US Fed overnight cut interest rates as expected and the market fell 2.95 % in the US. That's a big fall. If you look at the graph, it's like flat, flat, flat, flat, flat. Oh, God. And it just kind of got worse as the trading session went on. Now, the bit I left out was the why, which is because I'm very aware about to let you off the leash here, mate.

25:33It may be hard to get you back, but let's do it anyway. what did the market respond to? Not the rate cut. They expected that. The Federal Reserve said, yeah, okay, we cut rates. But next year, we had kind of before told you to expect four rate cuts in 2025. And now, because inflation is kind of a bit sticky and the economy is pretty strong, well, we think it might only be two rate cuts. And so effectively, what they're saying to the market is expect that the interest rate you thought you were going to get by the end of 2025 is maybe half a percentage point higher. now I gotta say if you're a bond market trader maybe there's an excuse because they work in fractions and percentages and you know I'd pick two numbers but you know half percent between two and a half and three percent proportionally is a big is a big deal right so if you if all you're doing is managing the difference in the yield that's a big difference in terms of money you're going to get for your for your investment so I almost kind of get it from that perspective when the stock market loses its collective stuff because rates at some point in 12 months may or may not be half a percent lower or higher than previously kind of maybe speculated or thought there is a lot of madness in the feds hubris to think they know what's going to happen over 12 months and maybe you're what about what's your point about the positive we expect we deserve though it's like so that even if that's true the market still goes oh i have to respond to it then it's kind of like you know it's like is the fed to blame probably is the market to blame yeah like Like, everyone's a victim here or everyone's a perpetrator.

27:03I'm not sure which way to put it. But either way, no one's making anyone do anything here. We're all choosing what we listen to and what we react to and how much we react to it. But 3 % fall is pretty big in a trading day. Yeah, it is pretty big. You know, zoom out, though. It's still pretty much spitting distance of all-time record highs. Yeah, right. This is the other thing, too. You're right. It's mad. I'm not going to do my usual shtick because it's just mad. Go on. You don't need encouragement. The Council of Elders has spoken. We come down from the mountains and we decree the price of money is thus.

27:39And I know we said that before, but we were wrong and we always are. But don't worry about that. This is what we're saying now. This is what we're saying now. Yeah.

27:50Yeah, it's a little bit more understandable, the market's reaction in the context of valuations. I think the most common descriptor used these days is stretched, which is just a fancy way of saying, relative to the underlying earnings that are being generated in the market, prices are pretty high, at least on a historical standard. And part of the reason for that was the expectation that the cost of money was going to be much lower. And that makes sense because, you know, cheaper money allows companies to invest more and do more. You know, so goes the theory. So, you know, and when things are – if the market as a whole was at a P of 16, it's long-term average, and that same event happened, that same bit of news happened, I doubt the reaction would have been as big.

28:42It's the same when you see a growth stock who's trading at astronomical levels because the market expected earnings to grow at 40 % per year for the next few years, and they delivered 30 % growth. Still an incredible result, but it actually does make sense when, well, but your expectation was a lot more aggressive than that. So I do get it, but again, it's another good reminder that the market is making these bets on things that you can't possibly know. probably won't come to pass, at least certainly not in the way that everyone sort of expects it to do. And as I always say, therein lies the opportunity.

29:21Do you have a better mental model of the world and its direction than what the market seems to impute? And if so, that is a wonderful thing. Just to tease that out a bit more, there's a certain smugness when you say that? I was like, well, obviously someone with my vision and clarity of thought can see that that was always silly. And now the market is just coming back. I'm not saying that whatsoever, but I am sort of saying that the collective delusions of markets and investors can be really profound. And there is a great deal of, there's great potential for error in the tacit assumption that so many of us tend to have that whatever the market does is right.

30:06Totally. Actually, let me clarify that. We think the market's wrong when we're buying or selling, but once we've got our position set, it's like, then it's a different story. Then it's like, well, everything the market does is wrong. Oh, it did this. Why did it do that? Oh, it must know something. It's like, wait a second. I thought you thought it was wrong, but now you think it's right. Like you can't have it both ways. Again, it really comes back to that idea for me is, you know, the market being something that is there to serve you, not to inform you. There's information in that. I'm not saying that I'm not being hardcore on this kind of stuff, but really it's just your job as an investor to sort of say, huh, thanks that.

30:43Do I agree? And hopefully I don't a lot of the time. But again, as we sort of said last week, once I have positioned myself relative to that view, to assume that the market and everyone else is going to suddenly agree with you is the height of hubris. So I don't know. I know where I'm going with all of that other than to say that, yeah, markets are mad. It was a big reaction. I think outside of our little bubble, you talk to the average person on the street and they're like, oh, what happened? What happened? The market fell 3%. Is that a lot? I don't know. It doesn't sound like much. Well, it's not really.

31:14It's still ridiculously high. It's still done an amazing 2024. It got a little bit over. It got to the point where it was sort of like, gosh, I hope there was some pretty aggressive rate cuts in there because they need something to sort of help justify this current pricing. So, this is a good thing. This is a good thing, this pullback for people who are looking to allocate capital, I would say. Let's put that spin on it. Yeah, no, I think it's right. I mean, look, it's fairly right. I mean, we've got to be careful not to kind of, I'm talking about myself here, see what we want to see. You're right because over the last 12 miles, I've just done the numbers.

31:52I hadn't done this in advance. I just did it now. So the market was off 2.95 % on Wednesday night, our time, which means year to date, the S &P is only up 23.8 % plus dividends. More than double its long-term average. Right? And, well, like more than more. If you add dividends in, it's probably almost triple long-term average, right? You probably can't. Oh, maybe. You're at 25, maybe. So it's, I mean, it's a spitting distance, right? Yeah. Two and a half, let's say. Right. And so you kind of... So, you know, was the fall warranted? Well, it kind of depends. I mean, were the valuations ever justifiable?

32:27If they weren't, then yes, the fall is some sort of coming back to worth. If they were, then the fall is just a volatility in a steady upward path. I would say steady. I don't mean always upward, just, you know, unsteady, horribly volatile in the short term. But with a zoomed out kind of view, up and up and up to the right, that's kind of what the market tends to do. And by the way, some big falls during that 12-month period. If you kind of look back, I'm not going to try this on radio or radio audio because it's very hard to do. But if you look at that, the one-year chart, that's year-to-date, so not one year, but it's close enough for this time of year.

33:02If you look at that year-to-date chart, the market was, what, 5 ,667 points in July. It had fallen to 5 ,186 by August. I mean, that was almost a 10 % fall over that month. of that month in the context of a 23 % rise overall, or 24 % for the year, right? So it's kind of, it's what markets do. And I think that's the other thing to keep in mind is, you know, there will be times of exuberance and pessimism. What to learn from that? And you're right about the market informing us. We kind of, depending on our personality, we kind of, the market goes up and you could go, oh, that's good. Then it falls like, oh, what do they know that I don't know?

33:37It's like, well, you didn't ask that when the market was going up. You just assumed it was all good and I was right. Or conversely, those who say, oh, the market was always going to fall. It's like, well, yeah, but it's been 24 % for the year. So if you try to time that one, you had it all got out yesterday or two days ago, right? Because this is not a – if you've been waiting for the market fall all year, you cost yourself 24 % returns while you waited for a 3 % drop. So, you know, you've just got to be really, really careful what you wish for. You've got to be really careful how you read the data and just be really careful of your preconceptions.

34:06I'm a massive Tim Minchin fan. I was on a bit of a Tim Minchin binge this week. Great interview with BBC4 if you want to check it out on YouTube. It's really great. I'll look up the name of the podcast. It's a podcast. They also YouTube. I watched it. But he talks about, he's talking about in one of his famous speeches, interrogate your ideas really seriously. And he says, take it back to the back and whack it with a quicker bat. And just that idea of confirmation bias sneaks in when we form this view and then expect everything to conform to that and see everything that happens in the context of that.

34:38So if I think the market's going to go up, I say, yeah, but it's just a short-term issue. If I think the market's going to get out, I'm going to say, see how times are going to get down? It's about time I did that. Both, you know, neither is necessarily true. Well, neither is true because we don't know the future. But just be really careful about that and make sure your preconceptions, your, frankly, prejudices, I don't mean that pejoratively, I just mean the things you've prejudged literally, just make sure they're kind of based in some sort of reality, right? Because your worldviews can get really messed up pretty quickly.

35:06And frankly, particularly in a social media age where you can set an algorithm them or it'll set it for you, which all it does is say, see, you're right. See, you're right. See, you were right. And it's like, yeah, I told you all, it's right. Again, sometimes you are, but sometimes you're not. Just be really, really careful of that. Yeah. I mean, I think having the right expectations is half the battle. If you know that it's going to be all over the place, when it happens, you're less, I wouldn't say you're immune to all of the normal emotions and reactions, but you're you're more guarded against or you're more tolerant of it or more accepting of it.

35:40So one of the interesting things is, and I'm not, again, I have fuzzy memories of very accurate data that I anecdotally put forward. So don't trust, verify is what I'm saying. Go out and verify this for yourself. What follows may or may not be based on resemblance to the truth. May or may not be, but I'm reasonably sure there's a number of different sort of studies that show So when you look at one-day movements, the biggest one-day drops tend to occur in bull markets. And conversely, the biggest one-day gains tend to happen in bear markets. In fact, if you go back over the last 20 years, I want to say that the biggest one-day gains on record.

36:22So if you just look at every single individual trading day over the last 20 years and you rank them top to bottom, some very high percentage is in the GFC, like when things were unfolding after Lehman Brothers. It's like, wait a second, but the market plummeted a huge degree. Yes, it did. Yes, it did. But there were days within that where it had massive relief rallies, you know, and short coverings, all kinds of funny business sort of going on behind the scenes. So, to look at what – let's just take the current example. Let's do it in real time. Oh, market – NASDAQ was down something like 3%. That is a very big move overall for a very large market, right?

37:00Versign even, yep. But again, is that unusual? No. In fact, that's even more usual during periods of a bull market. I'd say we're very much, who knows what happens tomorrow, but we are, I would say, looking at the last 12 months of price history, we are very much in a bull market. We're 100 % in a bull market. And you know what? In aggressive bull markets, you sometimes get big pullbacks. Like, hmm, okay. And here's the other thing I'll say as well. It's like if you were of the view, and I am of the view, not in individual stocks but in terms of market averages, and I've said this before for Australia and also for the US, I think things are a little bit heated, right?

37:38I think there is quite a – I don't want to use the word froth per se, but there's some pretty positive sentiment. It's just inferred by the valuation. If you had that view and then the market fell 3%, let's say, it's still overvalued, dude. Like, yeah, exactly. Yes, exactly. You know, it is not the confirmation bias you should be celebrating in that sense. You are not that good where it was like, you know, yesterday, oh, too expensive. Oh, 3 % lower. Now I'm interested. It's like that meme with the dude in the puffer jacket, you know? He's like, no, no, no, no. I don't. $100? No. $97. Hey. That's right.

38:17You know? It's convinced about this. You might still be right, but it's just sort of like if that's the margin of error that you're working with there, like, give me a break, right? Give me a break. I mean, look, if you liked it,$100, and you get a chance to buy it for 97, you might as well. Sure. Oh, absolutely. It's better. You can do it. But don't go from the$50 jacket to the$100 jacket because you're saving$3. Right, right. Yeah. No, it's interesting. I guess just on the catalyst for all of this was Jay Powell sort of saying what he said here. I thought it was very interesting also too is not just the equity markets, but did you see the Aussie dollar?

39:02That got smashed. Yes, I was going to mention that. It was 62 cents or something at the moment. So down 1.9 % as we record this over the last 24 hours. And it's big for currency, very big for currency. This is my fault because I tweeted yesterday morning that the dollar – so the Aussie dollar against the US – and look, I said it. It doesn't need to matter for most of us in most circumstances. So I kind of didn't suggest there was an implication necessarily, other than it's notable. The dollar was trading very, very close to, at that point, a two-year low and effectively also very, very close to a post-COVID low.

39:37It got smashed during COVID because everything was smashed during COVID. But if you look at the chart over any significant length of time, it is as low as it's been in two years, especially after this fall. I'm just going to pull it up now and see if it shows the number. Yeah, it's now the lowest it's been in two years after the overnight fall. It's also now the lowest it's been since 2020. So basically the COVID crash. The COVID crash, yep. Yep. And then before that, just to fun of it, I'm going to go back and say it's the lowest it's been if we exclude COVID at least 10 years. And I say that because I've got a 10-year chart in front of me and it's the lowest point in that period of time.

40:13So we're now at the low, yeah, ex-COVID, we're now at the lowest point. I'm just going to make sure I'm right with that graph. Yep, lowest point. It could be a tenth of a cent higher than October 2022. But effectively, it's at or around the lowest point it's been for 10 years. So why? Why is that? What does the utterances of a senior citizen in North America have to do with the relative exchange rate between two nation states? So there's two parts, I suppose. The fall overnight is that question. But the other issue is it's dropped precipitously since September when it was 69, since it's out of 62.

40:52Which, again, in currency terms a lot. And that's not only just predominantly, probably a little bit, J-Powell. Jerome Powell, by the way, is the head of the US Federal Reserve. For those who are wondering, if you don't, if we didn't mention that, you didn't pick it up. So yes, there's the overnight fall, which is absolutely about US rates. But there is also the fact it fell from what was already effectively almost a two-year low anyway, to an absolute two-year low, or at least bloody close to it. How was that? Go on. Oh, well, just to flesh it out a little bit, and this is a narrative. This is one interpretation.

41:25Other people have others. But basically, it's actually been in the news a little bit this year, which is this idea of a carry trade. We had a relatively higher rate of interest. Take your greenbacks, put them over into Australia, get a higher rate of interest. And there's money to be made there for certain operators. Well, if the US sort of saying, actually, we're not going to cut rates as much as we were planning to. And now our reserve bank sort of signaling that, yes, we've talked tough, but we will roll. Of course they are. You know, that differential isn't as good as it was. And I would suspect that that's a big part of why the currency is falling.

42:06And so there's that as implications for people who are trading currencies. The more broader implication is for a country that imports everything except for rocks, most of what we do is we sell stuff overseas. So it's actually good for that, but it is bad for inflation because the iPhone, all the stuff that you're going to have in your Christmas stocking was not made in Australia because we don't do that. We don't make stuff, and that's going to potentially sort of feed on itself to some degree, right? It's sort of like, oh, actually, inflation is kind of stickier, so there's going to be a rate reaction to all of that kind of stuff and so on and so forth, and around and around we go.

42:51I don't know what my so what is out of all of that other than it's complicated. I mean, you don't do currencies, right? So it's kind of not overly – as we say, this podcast kind of just has two tracks. We can't try and comment on economic circumstances and policy and business environment, that kind of stuff. We need to add individual stocks and investing and what we do with that. I think we absolutely can. We have, frankly, for years done both, and we'll probably continue to do both. So there is the kind of this is a big deal, but also what does it matter? So a couple of things with a lower dollar.

43:22Firstly, by the way, really good for exports. So if you're selling Australian products to the world, particularly the price in US dollars, think about primary production, think about mining. It's all priced in US dollars too, by the way. Right. Right, and so we actually do really, really nicely selling a lot of that stuff around the world, selling particularly to the US, even the stuff that's not priced in US bucks. If you're sending wine or something else across to the US and selling in a US bottle shop, then you're getting more Australian dollars for your US dollar, or you can drop your prices and make it more volume.

43:49But either way, lower price, lower exchange, really, really good for exports. Terrible for tourists if you're going to go to the US for Christmas, my apologies. And as you say, mate, puts the price of imports up. Now, a couple of things there. Firstly, that adds to inflationary pressures. That's bad. What I love about a floating dollar, though, frankly, is that it actually means that we're less likely to buy the imported product because it's more expensive and prefer the Australian product, not from a free trade is bad perspective at all. I love free trade. I love global trade, international trade.

44:23Really, really important. But what it does do is it actually cushions the Australian economy because, I mean, we're selling more exports or exports for higher prices. That's a win. Australian consumers are proportionally less likely to buy the imported product and buy an Australian alternative or not buy the imported product at all. It actually supports the Australian economy, which is really, really nice. So while it's nice to have the reserve currency, and you'd probably always choose that, I suppose, what the US doesn't have that we do have is the ability for our currency to become effectively a cushion.

44:51We talk about automatic stabilizers. We talk about fiscal policy mostly. The currency does exactly the same thing. When the currency is high, the imports get cheaper, exports get more expensive. It retards economic growth. When it's low, it enhances or it supports or it accelerates economic growth. Those are really, really good things, all things being considered. So we've got to be a little bit careful. People kind of – there's a lot of cheer – I think mostly because we think about ourselves as tourists. We also want to cheerlead this, right? High dollar is good, right? Yay, we're up. That's a good thing.

45:24Plus it feels like Australia is winning. Like it feels like go the green and gold. Yeah-ha, suck on that, you know? And, you know, look, and to be fair, at some level it is a sense of relative economic success or performance because the currencies do move with rates and economic growth generally. So, yes, it's absolutely saying at the moment we're in a bit more trouble than the US is, at least in terms of short-term economic growth issues. The long-term debt question is still an open one. We'll get to that in a sec. But, yeah, I just think it's just we've got to be a little bit careful of cheering a higher dollar or being sad about a lower dollar, to the extent that it's a reflection of our circumstances, that's worth thinking about in that kind of positive, negative sense.

46:04But the fact that it is moving as a result is actually a nice automatic stabilizer and is really good for the economy. Well, I 100 % agree. But what's really interesting... Oh, good. I'll just agree for a second. No, I 100 % agree. But I find what's very interesting is that when you look at the biggest trading pair in the entire world by a very significant margin is the yuan USD trade. And China doesn't let its currency float. China very, very strongly manages that currency. They have artificially suppressed the value of their currency. So that's a square that needs circling or circling, well, you know what I'm trying to say.

46:48Let's circle that square, shall we? It's been a long year. So everything you said is true. There's great – I mean, really, it flows from our discussions on free markets and what they really do. And, you know, the supply-demand dynamic arrives at prices that are sensible and reflective of the real-world situation. And yet you've got the biggest international trading pair in the world, which is artificially suppressed. So why would you do that? Why would you do that when it has all of these very well-known, very established sort of benefits? And the answer, at least to my way of thinking, is because there's certain vested interest because it depends on where you sit.

47:34When we say it's good, we sort of mean in aggregate, on a net sort of basis. But it's also, you can only do it for a little while because this is where it gets very complicated. Because when you say, what do you mean it's managed? Well, it's like, well, the Central Bank, the People's Bank of China, the PBOC, is an active participant in the market. They will take their reserves and they will trade currency. They will provide support or they will offer resistance to manage it. So they're actually using sheer force of money to manage that currency pair. Which, by the way, Australia used to do before 1983.

48:15It's not a communist plot. This is kind of like we've – Most countries do it. Most countries do it. And you think, okay, well, Japan does it, by the way. Speaking of third largest economy in the world, right? They do it. And you think, okay, well, that's your choice if you want to use your reserves and do things in that way. But at a point, you're pushing against a tide that is stronger than you just by sheer force of the market at large. So then you have to start creating money to do it. There's other distortions. So this is why it is like the most interesting thing on the planet right now when you sort of look at sort of the geopolitical situation, the global economic sort of situation, the major players here.

49:04And we're all sort of going around and around doing this sort of dancing here on a trading pair, which is heavily, heavily manipulated. And whenever you manipulate something, there are distortions that intended and unintended as well. And it's going to be very interesting to watch that play out because one of two things has to happen really on a long enough time scale. However, the currency just gets so debased internally because you've just had to print up squillions and squillions and squillions to keep sort of selling yuan to keep it down and keep buying USD. Then you get these currency imbalances as well.

49:44I'm struggling here because it's such a big thing to say and I don't know how to say it concisely. Enough to be said is like if you think you don't need to know the mechanic. Let me just say it this way. Again, think of a domestic currency as a gift certificate. If I'm going to go into a Westfield and Westfield will only accept Westfield gift cards, I need to convert my currency at some point into that. So I walk into Westfield, I take my Australian dollars, I turn it into a gift card. It can only be spent there. That's what the Australian dollar is. It's a gift certificate for Australia. You can only spend it and they're useless elsewhere.

50:24You might be able to find someone else to swap it with if you need to move things around a little bit, but you want to hope you do. Other than that, it's only good for that. So, if you're going to be changing the volume and amount of gift cards that are out there for the explicit purposes of managing the conversion of your gift certificate with other people's gift certificates, you don't need me to sort of flesh that out for you in great detail other than to know there will be consequences of doing that. It's like giving a builder a tape measure and say, go build a house. And then every couple of hours, giving them a tape measure with different units on it.

51:01That's kind of exactly what's going on here. It's like, well, gosh, they were all three feet long. Now three feet is actually a little bit longer than what it was. Is that not going to screw up the building of the house? And that's what is happening there. So I did an awful, awful job of trying to articulate that. But maybe you can help me out a little bit. No, I think you're right. I mean, it's the ongoing challenge of inflation and of money printing and all the stuff that happens as part of our modern financial system is trying to work out how to manage that. And China, I mean, well, the other thing, again, this is the problem with forecasting versus describing.

51:37This is where you and I agree, I think, economists are best placed to describe the past or to explain the past and describe the present rather than trying to forecast or whatever. There was, was it, what, seven-ish years ago? Were you still at the Fool? When China was going to run out of foreign currency. Remember that one? There was this massive big thing in the paper. Oh, China's going to run out of foreign currency. The economy's going to crash and therefore, therefore, therefore. And it wasn't even... Was it possible? Yeah. Could there have been circumstances in which it became a problem? Yeah.

52:04But it didn't come to pass. Chinese property was going to bring the Chinese economy down. Evergrande. was going to bring the Chinese economy down. I mean, which is not for me at all say the Chinese economy is bulletproof or perfect or can't be a problem, or maybe they're not even just kicking the can down the road. Those things might all be true. It's just really hard to kind of go, so then what do you do? This is the challenge, right? But you're right. When a country tries to, or does manage its currency, or manipulates its currency, or manages its currency, whichever phrase you prefer, it spends, it has to create those gift cards, as you say, mate, to make that happen.

52:37It is putting a finger on the scale and you have to add weight to do that. It's not just a finger. You've got to add your own weight to the scale. And that comes in those many and varied forms. That's why, you know, honestly, this is the other thing. And, you know, for all of the good and bad stuff in the world and economics, the floating of the dollar, because it became a responsive economic unit, is really, really useful. Now, if you're trying to manage a country and a currency like China is, by the way, again, even if there is some sort of price to pay, it may well still be justified in hindsight.

53:17They might look back and go, have you seen how much we modernized in 30 or 40 years? We got from an agrarian, I'll say backward, I don't mean that in any way disparagingly, to the world's second largest economy in what, 40 years? I mean, if and when they pay a price for that, it will certainly be a big price to pay. I'm not entirely sure it won't be a price worth paying in the context of that history. So it's really, really, really difficult. And it kind of goes back to what we talked before about productivity and competition. We want the least worst set of economic settings possible so that we get the best potential outcomes.

53:55But again, this is where the floating of the dollar and the allowance of that to happen is a really, really good thing, at least for Australia. Yeah. So what China has to do in order to mitigate the consequences of that manipulation is they have to do what they call capital controls, which is you can't take your money out of the country. Hard to say that with a straight face, sorry. because they're clearly workarounds. But in theory, there are capital controls and I believe it's a$10 ,000 limit. Again, I can't say that with a straight face because there are clearly massive exceptions to that rule where people sort of go around that.

54:35Maybe buy Australian property is one potential sort of avenue to get your money out. But if that capital control wasn't there and you've got an artificially suppressed currency, that is the sensible move for holders of the currency. Get it out. That's correct. Get it out. You're limiting my global purchasing power by doing this. I want to get the hell out of here. Oh, no, you can't do that because the very act of you doing that is pushing it. We're both pushing in different directions. So we can't let you do that. Yeah. So you're telling me I'm trapped. I can't. Yes, unless you happen to be very connected within the political apparatus.

55:14but again that historically breaks at some point right it is a really good thing that currencies move around because of all of the things that you said there at the beginning it is a method of communication and you want clear accurate information when you're communicating with your trading partners you know shock horror that turns out to be a really important kind of thing. So, you, China, was that Neil Ferguson who made the observation many years ago now, he called it Chimerica, this mutual interdependence between the US and China that they've sort of woven themselves into here, which is kind of like, we're the world's factory.

55:56We're going to keep things super cheap by partly because of our very cheap labor costs, but increasingly because of our manipulation of the currency. That means we build up huge USD reserves as US pays in US to get all that great stuff from China. They build that up and up and up. I was like, gosh, what do we do with all of this money? I was like, okay, well, I guess we'll buy US bonds with it because what else do you do with a couple hundred billion dollars or trillion dollars as the case may be? There's not enough residential property in Melbourne to pump that into. And again, these distortions have impacts in the real world, very, very, very real impacts.

56:34And you kind of get it. This is the downside of being the reserve currency. It's called Trippin's Dilemma, where it's just sort of like that is why the U.S. manufacturing base has been hollowed out. The U.S. must continually supply U.S. dollars to the rest of the world because the rest of the world needs to trade. It had balanced itself out if it was the U.S. that was the center of all trade. But sometimes China trades with Australia. Sometimes Australia trades with Fiji. There are all these other trades that are happening, got nothing to do with all of that kind of stuff. So they must continually print money, continually raise money for that purpose, and then it must continually be recycled back into it as well.

57:20This recognition was much more apparent back in the day with the petrodollar system, right? That was basically the bargain that we had with the Middle East, it's like, here's the deal, right? We want to be the reserve currency. We want you to price oil in USD. In other words, no matter whether it's us or anyone around the world, if someone wants to buy your oil, you have to sell it to them in US dollars. In return, we'll make sure that our massive military will keep you protected. And you must also use those capital reserves that you build up through trade to buy our debt. And it goes around and around and around and around.

57:58And it's got big advantages there for a time. But again, I think some of the big challenges that we're dealing with now are consequences of some of these big, big decisions that were made many, many, many decades ago. And again, these aren't new hot takes that are just like come onto the scene. When these policies were being discussed back in the day, people were like, oh, that could lead to some issues. And it has. it's in it in i think in a somewhat indirect way you can draw a line directly between that decision and trump right because again it hollowed out the u.s manufacturing base that led to a huge amount of discontentment and and social consequences and so on and so forth so it's you know again i guess my only my only real point here is this like play stupid games win stupid prizes and and it's amazing that it gets done at such at the highest levels here when i think anyone without any economic studies would understand that when you start mucking around with these kinds of things and distorting it beyond what signals pure supply and demand between goods and services and manufacturers and consumers would have, then there's going to be consequences, right?

59:14Yeah. Complicated ones, not obvious ones. I don't know what my solution is. They play it over years and exactly. Yeah, just stop helping, I guess, is my point. Yeah. I think, well, again, I'm a little bit as ideological as you are. It's possible that the helping actually does help and the price is actually less than the reward at some point when you pay it. There will be a U.N. revaluation at some point when they kind of go, okay, we've been pushed to the wall. We have to let the currency float or simply just re-peg it at a lower level. And there will be massive dislocation at that point. Will that have been larger than what they've managed to achieve over 20, 30, 40 years?

59:48I don't know, honestly. You may have a view on that. I'm not going to say it won't be. I'm just saying I don't know that it will be. There may well be some element of, you know, I'll take a little bit of pain then because by being able to peg it for that period of time, I've been able to create a society that, you know, delivers. This is where, you know, we'll get to government debt actually. My EFO was out during the week. And, you know, you're talking about good debt and bad debt, you know, and does it have to be paid back? Yes, eventually. Is it going to be paid back in the future? Yes, eventually.

1:00:17By someone else? Yes, probably. Was it worth it? Well, it depends what you leave behind with it. If you built a society, if you built an economy, if you dragged literally hundreds of millions of people out of poverty, will they decide in 10 years' time, five years, one year, when they have to kind of revalue the currency and kind of cop that medicine, that it was all worth it? I don't know. I don't know. So I'm not disagreeing with you. I just do think that the jury is out as to how much it will cost and whether or not it will be in hindsight have been worth it or whether they should have spent longer and grown more slowly but got there without that subsequent dislocation.

1:00:50I agree with you. It's very, very lucky to come. We just don't know how big and when. Well, we can play it forward from our context. So let's say I get made emperor of Australia. Everyone's happy with that. That's a great move. And I say - So you're probably going to take dictation by force, I would suggest at that point. Yes, absolutely. Absolutely. And I will rule with an iron fist. But in my first decree, for the sake of this example, I'm not saying I would do this, but let's say I do. I say, you know what? I think it would be really good for Australia if we sold a lot more stuff. I really want to boost our export industry, right?

1:01:26So I'm going to artificially suppress the dollar. So it's gone to$0.62. Why not$0.40? $0.40? My God, we are so cheap. The world is going to do it. So, okay. So it means I've got to sell a lot of Australian dollars to make that go down. Now, I've only got so many Australian dollars. Actually, no, I can make more of them. So I'm going to make more of them. I'm going to make more. Poof, there's my wand. I've made more of them, and I'm going to flood the currency market with all of that kind of stuff. Now our dollar is really, really, really low, and now all our exporters are super happy, and I could do that.

1:02:01Well, the government of today could do that. They don't do it. They do not do that. Well, actually, I've got to be careful. They do. The RBI actually does play a role in FX market, not to this anywhere near the degree of the Chinese central bank, But there are points in time where they do for, quote unquote, stability and all of this kind of stuff. The intention makes perfect sense. But hopefully you can see with an example like that, it's like, chickens are going to come home to roost on that. Like, I hear what you're saying. There was a cost. Yeah. We always on this podcast talk about second and third order thinking, right?

1:02:32Yes. First order thinking, this is great for all of the exporters. True. Problem solved. No argument. Second. Third order is like, yeah, but prices of everything we import, which is most things go through the roof. you know, there are exporters, but there are also importers, and the importers absolutely sort of take a bath on this kind of stuff. Our standard of living goes through the floor. People probably desperately try to get their money out of the country. We can't allow that, so now we're putting capital controls on. Now we've got people taping rolls of$100 bills to their legs, a la, you know, the Wolf of Wall Street and all of this kind of stuff.

1:03:01And again, these aren't like, I imagine that's what happens. Like, no, it's exactly what played out time and time and time and time again. There are 170 sovereign individual nations out there, A lot of them do this kind of stuff. It never works out well. And now it's happening with the biggest economy in the world on a purchasing power parity basis. It is – I hear what you're saying in the sense that so far it's been okay, you know, depending on your context. But I would say that those distortions are real, and the more you do it, the bigger they will be. So maybe we can – Absolutely true. 10 years time when we take our medicine, we go, oh, it was still all worthwhile.

1:03:42Maybe. I just, I guess I always, I always struggle with the argument with some of these sort of heavy handed economic measures where they, where people say, no, no, no, no. It's, it's, it's, it's for the good because it helps stimulate growth. And they're right. Right. Like, you know, that's, there, there is, there is truth in that, but I think you need to ask, you need to first question the narrative of, so growth is forever and for always good. It's like, well, what do you, dig into that a little bit? What do you mean by growth? And isn't there a distinction between unbridled, stimulated growth and more sustainable growth?

1:04:21But the more sustainable growth is slower, but it's more sustainable and it's introducing less distortions and risk into the system. So we don't know. So this is all hypothetical, but just to, I guess my counterpoint to yours is that, and I know you weren't saying this is definitely what I think, but I wonder if that could happen. I suspect that yes, China has grown much faster than it otherwise would have, but it has also grown in a way which is much more unsustainable and that there will be a reckoning of it. So in a parallel universe where there wasn't any of this funny bugger business, they still had a huge comparative advantage with low cost labor, but that would have resolved itself over time and that would have, you know, their competitive edge on that front would have eroded slowly over time and that would have consequentially slowed down their growth, but they would still be growing and they would still be growing in a far more robust fashion.

1:05:17I guess a good analogy here would be sort of say, you and I have decided we're going to beef up for our beach bodies, right? And you just like have a sensible diet, do a little bit of exercise. me, I just start shooting up on steroids. You're on steroids. I'm just right into the muscle. Boom. Just give it to me. Human growth hormone, you name it. Just pump me full of it, right? Performance enhance me. Now, fast forward six weeks, I'm as buff as you can imagine. You're nothing on me. So I have grown faster. I look better. But any doctor would look at us too and go, Scott is far healthier. Stop doing that.

1:05:55back no no no but look how much i've grown look how buff i am it's the perfect analogy right yeah yeah hey um let's let's finish off with my if i mentioned that before and um my if i have god the pollies love an acronym the bureaucrats mid-year economic and fiscal outlook uh it's basically a budget update i came out during the week and how wrong is our budget well this is This is the thing. This is exactly what it was, right? And MAIFO rarely has much new. It incorporates any new announcements governments make between budget and the updates. They're like, okay, well, there's been childcare announcements.

1:06:31The government's going to spend some more money on veterans' entitlements. So that gets rolled in. But largely, we're just updating the assumptions. It's kind of what it is, right? And that's – as much as we give grief justifiably to forecasters across the board, if you're a government, if you're an individual household, you put a budget together, right? You say, well, okay, here's what we're going to spend. What can we afford to spend? What are you going to make? You know, you've got to have some guiding principles. I don't have an issue with the budget itself. But you're right, my info is exactly that.

1:06:55It's just simply, was the iron ore price as good as we thought? Is the economy really growing? What do the unemployment numbers look like? So you kind of update those. You say, okay, well, let's put the new assumptions into the calculator. And by the way, the six months of actuals you've had since then. And every company does this all the time too, by the way. You go, right now, where are we at? What is it going to look like? And this is where companies come out with their ASX announcements saying, trading update, outlook update, this is what's going to happen. This is exactly that. It's the government's trading update.

1:07:19It's kind of, you know, the new outlook statement for what is going on here. And I thought, so a couple of things for me, and I'll get you to jump in. It was a lot, I call it a nothing update because there's been bugger all changes to policy. So it's kind of what changed only really the assumptions. And so for all the headlines of, oh, this, that, treasurer, this, treasurer, that, government, this, government, that, largely it was kind of like, yeah, it's just we're updating it for the new circumstance. And you should, right? You should say, okay, where are we at now? did we do what we thought we would do?

1:07:49Where are the ups and downs? What's going on? So it was a bit of a nothing in terms of the content. What was remarkable to the point of driving me a little bit nuts, and I've been banging on about it on Twitter for a while, the last couple of days, is we now have 10 years, 10 straight years of forecast budget deficits. Now, let's say that forecasts are wrong because we've just spent a bit of time earlier in the podcast talking about exactly that. Even allowing for that, you're still, even though you know it's probably wrong, there is no margin for error here because they're all there. It's not like, oh, your purples might be a little bit higher or lower.

1:08:22Your deficit might be a little bit higher or lower, but overall, they'll probably wash out on average because you'll be wrong by the same sorts of margins in both directions. And over 10 years, you'll probably end up roughly where you started, knowing that there'll be puts and takes all over the place. This one is literally 10 a decade of, yep, still spending more than we earned. Yep, still spending more than we earned. Maybe we'll spend a little bit more or a little bit less than we thought, but still more than we earned. Maybe the earnings will go up a little bit or down a little bit, but we're still spending more than that because that's what we're planning to do.

1:08:48The idea that we're planning to run up, and by the way, I think it's three years' time, gross budget debt gets to 1.16, sit down for this, trillion dollars of government debt. And I just – so the headline of my AFL was everything's getting worse. All of the forecasts, effectively, at least for the short-term, medium-term, are lower commodity prices, lower tax revenues, probably some higher expenditures on welfare and other things because the economy is not going to be as strong as we previously thought. And that's kind of – to your point and our regular point about forecasts, I don't really care whether they forecast 1 % or 0.9 % or 1.1 % for economic growth.

1:09:30It's not particularly meaningful, right? Because they're going to be wrong either way. They're going to be wrong. But if they're kind of sensible with their forecast, the errors will probably cancel each other out over time. Unless you've got a systemic problem with your forecast, you'd be a bit wrong here, a bit over here, a bit under there. Next year, you'd be the reverse or something, or a couple of years' time would be the reverse. When you're literally planning, based on your best guesses, to run endless deficits and almost$1.2 trillion in debt and kind of go, yeah, that's okay. We're not going to change anything.

1:10:00I don't know, mate. I don't want to get too ranty, but I just... And by the way, the opposition said, And yeah, we're not going to position any alternatives either. So what is going on in Canberra when they think they can do that? Well, to your point, we get the politicians we deserve, which is what you said. But I don't know, mate. It drives me nuts. The lack of care, the happiness to trade, political expediency for the Australian economic circumstance and outcome, just drives me bananas. I listened to a podcast a little while ago. I was interviewing a conservative politician over in the UK. and he was a little bit of a renegade and a firebrand.

1:10:40Anyway, he was sort of ranting and raving about exactly that. Right. And he was new to politics. He wasn't a career politician. He sort of came into it like, get his name now. I'm just not across the UK politics, but it was a fascinating interview. And he said, remember, one of the first in Richie Sunak's government, they were all there. What's it called? The exchequer? The chancellor of the exchequer? Chancellor, thank you. The Chancellor of the Exchequer were there. It was the UK Treasurer, basically. The UK Treasurer is basically saying, wait a second, none of this is sustainable. And everyone ran in and said, well, yeah, no, but we're doing it anyway.

1:11:16It's like, but it's not sustainable. It's like, yeah, but that's not our problem. Our problem is winning the next election, right? Getting elected, yeah. This is a problem that actually may be 10 years before reckoning, maybe longer. Like, it's not an immediate problem. The immediate problem is getting elected, so we're doing this. but we know that this is bad. Yeah, oh yeah, yeah, yeah, we know. And it's just, I don't think it's even that insightful, right? It's like, well, yeah, that's what's happening here. That's what's happening everywhere. And it just, and you do it because you can. Because I like to be popular and nothing beats being popular than cutting people's taxes and giving them extra services.

1:11:55Like, that is fantastic. More of that, please. Thank you very much. But it's just, well, you know, we just, we push it onto our kids is what we do. and they will have to pay the pipe. I really get sick of this argument you hear pushed around saying, yeah, but a government is not a household, so you can't make these comparisons. It's different. They're allowed to have lots of – it doesn't matter if the debt's unsustainable to them. And you push on that a bit and you go, well, why? Why is that? Because they can make their own money. That's not an answer. That's not a good answer. I hear what you're saying in the sense that they will never not pay their debts.

1:12:29Yes, that's right. But that doesn't mean that they're not defaulting. They're just defaulting in a more sly, disingenuous kind of way. And if you don't understand that, I really want to play a game of Monopoly with you, right? I really want to play a game of Monopoly with you if you don't understand that. Because you don't seem to have a problem that every time I pass, I'm going to get$1 ,000, and you're only going to get$200. But it's cool, right? Because it doesn't matter that I can do that. Of course it does, right? Right. So yeah, it's, it's, this is why I've got pretty strong views on all of this kind of stuff.

1:13:04It's not a, people will push back and saying, yeah, but that's, that's not sensible as if that in itself is a reason as to why it won't happen. And it's like, yeah, but never bet against self-interest. Never, ever, ever bet against self-interest. Right. And, and the self-interest here sort of basically says we will keep doing this until we can't do it anymore, until something forces our hand. And chances are, as much as it sounds all doom and gloom, it'll probably be a long way off. It'll cause all kinds of distortions. It'll be really unfair, particularly unfair if you don't happen to be very wealthy.

1:13:37But, you know, it's a problem for someone else, basically. And they say it. They say it. There's all the good, like, you know. And I said to you off air, what was really funny was listening to an economist speak about it and the journalist is sort of going to the economist like, well, that doesn't sound like sustainable. I was like, oh, no, no, no, it's not. But why would they do that? He goes, oh, there's an election coming up. And everyone went, ah, yeah, yeah, yeah. Moved on. As if that's an explanation. As if that's a, what? Like, that's, I mean, you're right. That is the explanation. But the fact that we accept that as the explanation.

1:14:11So someone saying, I'm going to do this really dumb thing. It's really going to be counterproductive over the, you know, on balance in aggregate over time. And I know that it's being done for craven short-term self-interest. how do i know that because that the people are saying the choir part out loud at this point and then i go rather than being angry rather than grabbing the pitchfork and the torch and marching up to the castle with a noose we go yeah what are you gonna do you scallywags and it's just like it's so maddening right it's so maddening you kind of think actually what would i do if i was in that situation yeah probably do the same because i can get away with it right so you know It's funny you say that.

1:14:54Nothing stops this train. There were reports earlier in the week that Treasurer had instructed government departments to actually defer spending to push it out into the next financial year so that the budget balance would look better. And Matt Canavan, I'm pretty sure it was, on Sky, who kind of went, oh, they're just pushing it out to make the numbers look better. I mean, every government does it, but they're doing it. And it was kind of like - I know. Right? It was like, there's other people saying it about the government. It's like the guy who was the - Oh, we would do it too. Yes. Right? And we have done it as effective as what he said.

1:15:24I don't know if he literally said those words, but it was like, oh, yeah, we've done it, but they're doing it. I said they're doing it. It's bad, but we do it. That's okay. And it's all going to happen anyway. So it's almost, he couldn't even bring himself. And look, full credit to Matt Canavan for at least having some integrity about it and not pretending that it's the current government, not the other government. But the flip side of that integrity is like, I'm not going to lie about it, but I'm going to do it. That's no better. It's amazing that it works. I ranted and raved to you when I was going through the mortgage process and the bank was looking at the financial statements of the business.

1:15:59And as I said, it was just one year I just drew down some money in early July and then I did it again in late June. And it was just a timing issue. It was just like in one financial year, I drew down my salary twice and in the other year I didn't. So it looked like from an accounting period basis, it looked like there was incredible profit and then a crushing loss. Anyone with the intelligence higher than a chicken would look at that and go, it's a timing issue, normalize for that. And that's what you do is I can analyze. And it'd be different if I was going to my local brickie to sort of say, hey, can you analyze these financial statements?

1:16:36No, I'm going to a bank. I'm going to one of the biggest financial institutions in the country. and I'm saying to you very clearly and very obviously, this is what happened. In fact, it makes perfect sense. Look at this. And they said no. They had a real – I won't go into the detail, but they had a real problem with that. And it just goes to show you like how myopic and short-sighted people are with this kind of stuff, right? Yeah. Because anyone else listening would go, so if you're deferring costs just to that date, but then you're just going to spend that and then more to make up for it. Like it still puts us, still gives us all these problems, right?

1:17:12Like, yes. And if you can understand that, you can understand the insanity of it. But we're going to do it anyway. Why? Because it works. And it just, it's just. Can we get away with it? I don't know what the, the only answer is, is really a lot of people really deeply grokking what's going on here, which might be a bridge too far. And probably is too much to ask us again. Are we really at a point where we expect, you know, grandma and Uncle Bill and, you know, a 19-year-old is just getting started in life in the workforce to be deep thinkers with a very nuanced, informed perspective on deep economic principles?

1:17:55Like, no, no. And again, it's just, I don't know. I just despair. I just despair with it all because it's not that there is some utopia that awaits us around the corner if only we did X, Y, and Z, but there is some very, very sensible things that we could do that over time would have a very, very big impact on, a positive impact on all of us in aggregate. And we don't. In fact, we do the opposite. It was like, no, let's do the short-term thing that feels really good. and we're all going to feel really bad later, but I won't be in office then or I'll be dead then. And it doesn't matter. Someone else can deal with it.

1:18:32It's crazy. It's so depressing. It's so depressing. Yeah. Yes, which probably is cool at the end of the podcast because I don't want to go from that to be more enlightened. Other than, well. Well, I've been just calling it out. Calling it out when it happens and ranting and raving and shaking your fist at the goal is what we do. So I'm trying to make it sound like that we're doing a community service here. in my small part. Okay, well, in my own Pollyanna way, I am. Like, you know, I have no delusions of any significant reach or power or influence, but it's one of those, you know, do what you can where you are stuff.

1:19:08And it's like, if we can see this and tell a few people, and if that's as far as it goes, then a few people are a little more aware. If they can tell their friends, then that grows the influence if they think we're kind of roughly right. There'll be people listening who don't agree with us, and that's cool too. Yeah, yeah. I hold on to that delusion that by being aware and helping other people become more aware, we're hopefully providing some sort of public good. I'm not going to say public service, but some sort of public good where we're hopefully improving the debate or discussion even slightly.

1:19:34I didn't step back a bit from that and not even say that we are obviously right. Clearly, this is it. You do yourself a favor and listen to these truth bombs that we're dropping. Is wisdom oozing out of your headset right now? but what i am saying is is that hopefully that just it it's enough to encourage you to look into it yourself right like have a think about it there's people are for hundreds of years have been writing about this kind of stuff right there's there is content out there so it's sort of like the very least if it makes you kind of go that's interesting there is a different perspective because it's just not discussed in the mainstream right it's like when all of this you know, my EFO and, and Reserve Bank and federal, like the, the coverage in the paper will not tell you anything other than some real surface level, short term, you know, myopic kind of BS that, that's sort of out there.

1:20:23So if, if we can encourage you to sort of go, it doesn't have to be that way. There is a more interesting, broader story at play here. Dig into it. Cause you'll find it a fascinating rabbit hole. I think. I like it. I like it. And on that note, mate, we might, well, let's, let's leave the rabbit hole. at least for about 36 or so hours. Will you rejoin me on Sunday for a mile work? You know I will. I do absolutely know you will. Not in small part because we've already pre-recorded it. Until we're talking to you on Sunday, thanks for listening. Enjoy the first half of your weekend and fool on. Cheers.

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