The market takes a wobble. August 9, 2024

28:34It's these big mega debt cycles. And again, I'm not trying to be doom and gloomy. I'm certainly not trying to predict because these cans can be kicked down the road for decades. But what we have so loaded ourselves up on debt and debt that we have put largely into a lot of unproductive assets, housing, housing.

28:56And there are no good moves here. And you know that we have been saying on this podcast for as long as I can remember that, well, I certainly have. The RBA will blink just as the Bank of Japan blinked. They will talk a good talk and Bullock was out there on Tuesday saying, we're going to write. Don't expect a rate cut. We're thinking about it. BS. BS. And that will take a backseat because your choice is financial calamity or hot inflation. and they will choose the latter every single time. How can I say that? Because when you look at history, that's always the choice that is made. And I think this is the thing that I think too many of the mainstream economists miss.

29:45And they sit there and they go, our theory tells us that this should happen and the RBA's mandate is in fight inflation. Therefore, they're going to make the hard decisions. And I just call BS on it. It's not going to happen. And it's not going to happen because the alternative is far worse. at least perceived to be worse. They're both terrible, terrible outcomes. And so what happened after, so Japan did this, the yen collapsed, the carry trade collapsed, and they went, ooh. And then they came out and said, now's not the right time. Right? And they've done this before. They did it earlier on in the year.

30:21They did it a little while ago. Every single time they go to do it, they go, oh, yeah, we can't really do that can we and they're painted into a corner and and there's there's no good outcomes here right so what do you think about that well i mean i don't disagree with anything you said with the actually the exception of i disagree the entire premise of your point uh which is no no which is which is i think there's two things happening right i think there is the as always there is the there are the facts and the how we respond to the facts oh you kind of said You guys said this is why this happened.

30:58And you're not wrong, but the panic wasn't that all of a sudden people realized those things were true. The panic was that someone was going to change all of a sudden we went, oh, bugger. And so I kind of want to, it's both at the same time, which is weird, right? There's some really deeply challenging structural issues in the world economy. We know that. We've talked about that before. I actually don't think this week was anything to do with any of those things, despite that. Because it was kind of like just, people just freaked out because things were going to change. and it was that idea of like what were our assumptions previously you shocked our assumptions so dramatically that we felt like we just you know that the the earth the earth fell out for under our feet we're like well now what do we do and i don't think i don't honestly think it was a rational factor factual response based on cool-headed calm thinking that asset prices were therefore that much different in that short a period of time i honestly don't i don't think there were that many cool calm smart people going if i put that in the calculator i get this number I'm going to pay$97 to$100 for those shares, right?

31:56Honestly, it was like a, we thought everything was great and we felt everything was wonderful. And we had, as I said, shares went up on the Fed announcement on the Wednesday, right? So I was like, we have this worldview. And we woke up and the next morning we went, but what if we were too optimistic? And I think it's one of those things where, and we actually had a questioner who's, we may have a question on Sunday, but basically kind of said, you know, I've said before, sometimes economics, you know, bad news is still good news. Other times, good news is still bad news, depending on what the market's already expecting.

32:25And every now and again, when everything's feeling so good, and probably, again, that's why I don't disagree with your core point, which is maybe we don't have a sufficient understanding as a group of market participants, actors, buyers, and sellers, that it was those on the margins who's bought and sold. 99 % of people didn't sell any shares over the last five days, right? It was the 1 % who set the price. I'd love to believe we lived in a world where people just rationally responded proportionately to the actual change in the underlying economics. I don't believe it. So I don't think you're wrong about the concerns.

33:00I have very little faith. People buying and selling over the past five days were doing it for anything like the reasons you've identified. It was more just the whole, but what if there's a recession? But what if the carry trade's over? None of this, well, actually, there might be a structural problem and that structural problem might be just in a certain way. We might have to do something about that structural problem. I just don't think it's like it's that smart. No, I actually don't disagree with that. No, no, no. I think you're right. But the point I was trying to make is just like when we're all sitting here looking in a crystal ball because the process of investing is predicting the future, really.

33:31Or trying to sort of probabilistically wait. The future is maybe a smarter way of saying it. We're licking our finger and we're putting it in the air. What is going to happen in the future? And so my point was more along the lines of, you're right, most people aren't thinking at a too deep a level. But what you can be sure of, well, never be sure of anything in this game. What I think you can be reasonably confident of is that we're going to see lower rates. We're going to see continuing easing conditions because we have to. That's more my main point. Here's a couple of other interesting things.

34:09So over last night on this, yes, Wednesday night, the U.S. tried to auction some bonds because they have to because they're bankrupt. So they have to borrow money and they couldn't get the bids. So that was interesting. They got sold at much higher yields than what they were expecting. So you're now getting to a stage where it's sort of like the market, the U.S. is rocking up and saying, hey, buy some more of our pieces of paper. And for decades, the world's gone, yes, please. Strongest, safest economy, strong property rights, good rule of law, stable democracy, good economy. Yes, please. I will take your paper over Zimbabwe's paper.

34:49Thank you very much. I will take that. And for the first time in a long time, probably ever, really, in the US context, where they've gone, I don't know if I want that anymore. Now, that's telling. That is really, no, I don't want to over exaggerate that because it wasn't like a disaster. But we're seeing that. We're seeing the big powers of the world. Japan, China, Russia. Like they're going, they're selling down the US Treasury, getting rid of it. I don't want it. Now there's one, there's the economic lens that you're looking through, but there's the geopolitical lens as well. It's like, hey, wait a second.

35:29Russia, we put all our money in your bonds and you took it away. hey, you stole it from us. Yeah, well, you did all that nasty stuff in Ukraine. Yeah, but, and the unintended consequence of that is China's just gone, oh yeah. Do we want to hold all of our wealth in the paper of another country that can at any point decide just to renege on that? Now, you can try and probabilistically weight the outcome, the likelihood of all of that, but I tell you what, what do you do? And you do exactly what China has done. You let those things mature. And you put it, in fact, they're putting it into gold. They're putting it into commodities.

36:07They're putting it into hard assets. They're putting it into a lot. In fact, the Belt and Road Initiative, they're actually putting it into a lot of development and stuff, a lot of strategic kind of assets. And they're putting it into a lot of warships, right? And it's kind of like, that's the bigger picture, I think, that's playing out here. And that is why this coming decade is just going to be wild. Because again, there are no good outcomes here at the big picture. But whether or not people realize that or not, the reality of these chickens will come home to roost at a particular point. And anyway, my call has consistently been, and here's the other data point from this week, from last night, in fact, sorry, from Tuesday.

36:48Michelle Bullock gets out there and says, we're keeping interest rates steady and don't expect anything. We're not going to do anything. And what did the Australian bond market do? The bond market is basically, You can work out the odds by a bit of fancy maths. And the TLDR, as the kids say, is that the bond market – and this is why polls aren't as good as prediction markets. If you want to know who's the favorite to win the U.S. presidential election, go look at the prediction markets. People are putting real money on that as opposed to doing a telephone interview. They're just more accurate.

37:21And that's why I think bond markets are far more accurate than what some naval-gazing bank economist is going to come up with. The market has said at large there's a near 100 % certainty that we'll see a cut before the end of the year. And there's something like a 50 % likelihood that we'll see one in November on Melbourne Cup Day. Now, that's completely at odds. So the central bank governor is saying one thing. And we're getting to a point where the people who control the money are going, not control the money. The people who are - Set the price of the money. Yeah, certainly controlling big sums of money.

37:56and betting billions on it are going, I don't believe you. Now, they might be wrong. I don't want to say the market's always right. That's right. But we know that the RBA is often wrong. And we know that they often have to jawbone this kind of stuff because the last thing they're going to say is, oh, yeah, we're definitely going to cut because then there's all those unintended consequences. But look at what I think it's always – the old saying is, look at what people are doing, not what they're saying. And when you look at what people are doing, people are backing away from these trades. And I don't – so it might be the minority.

38:29It might be the people on the – that aren't being discussed as much. They're certainly not being quoted in the paper. But the people who control the big bucks, they're going, no. Not at that interest rate. Not at that interest rate. It's not going to happen. And I just think – I think it's telling. Yeah. I – yes, which gets a decent distance from the market ructions of the week, but they're all intertwined and this is the challenge of everything, right? Buying, selling. It's also, I will say, bring it back to investing for a second. It's why you couldn't make me be a macro strategist or a macro investor for anything, right?

39:06Like it just, it's just hard. The very small variations too make massive differences to circumstances for all the reasons we just talked about, right? We are bumping on the bottom GDP wise. If we tip in a recession, the market will respond probably in a particular way. if we don't we'll probably respond differently um but are we going to is it gonna be plus point one minus like it's just and and such you know large amorphous short-term things for all of the things we're talking about about share prices if you find a company that's going to be worth more double in five years time it's just such a better game to play and yes i'm talking my own book but i'm talking about why i do what i do or why you you do what you do which is just like you know what i mean it's rather rather than will you know will interest increase or decrease will uh will happen in november or february um you know is japan happy or not about you know the cost of its debt it's like actually i own shares in this company i think it's a really good business it seems to be growing pre-report yes it requires a degree of predicting or probabilistic thinking or whatever you want to think about it but if you get the particularly growing businesses where you can kind of look at a business that's going to be in theory hopefully meaningfully larger in three four five seven ten years time it's just a better game to play because you just don't have to take into account such specificity on such small movements in big numbers you know it's just a whole different game i'm absolutely talking about book but it's why i look at this stuff i'm like and you know we spend a lot of time talking about this stuff because it does matter on policy level um but as investors if you if you're if you're a bond investor or if you're investing on the basis of moving rates, I mean, good luck to you.

40:42But you can kind of, you can't ignore it. Companies have got to be around. It does cost them debt. If consumers aren't shopping, then it hurts. If businesses aren't buying from other businesses, there are circumstances. If you've got a company that's going to be growing in a secular fashion that is above and beyond whatever the cycles do, it's just such a better way to think about investing. Now, those companies should be priced accordingly. So it doesn't matter it's an easy thing to find undervalued companies in that space. But that combination of the right price for the right company. I just reckon, and again, and add compounding to that, the opportunities are massive, I reckon.

41:16Oh, I'm so glad you mentioned the valuation parks. I wanted to mention that again. Japan has so much to teach us. There's a reason why people have written huge amounts of books and stuff on this. So you'll have heard of the term the lost decade for Japan, right? So they had this, oh, it's fascinating. It all goes back to the World War II, right? And then even before that. Transferred now again, exactly. It does, right? And before that, it did one damn thing after another. Yes. And so Japan and the Axis lost the war. Yep. And, you know, the victors came in and said, right, we're going to sort things out.

41:54And they basically pointed a wartime economy towards consumer goods production. Yep. And Japan went from that to the second biggest economy in the world. I mean, anyone who's watched Back to the Future knows the lesson here. in 1950 you know japan made all the cheap crappy stuff you know and by the 80s they were the the best electronics were made in japan was a slur it was just like oh it's crap even when we grew up i remember the 80s were kind of that was still that i don't know what point it actually changed in people's minds but i don't know when i was a kid made japan on the bottom of something was like you know you'd buy something made in the usa but you would buy made in japan yeah yeah Like China, right?

42:34Oh, I've made it in China. It's not very good quality. Well, it turns out that they went way up the quality curve there, right? And they just minted it. They did incredibly well. They ran this massive trade surplus. They just flooded with US dollars. So what do you do when you've got a pile of US dollars? Well, you park it in US treasuries for one because you might as well get a yield on it. You know what else you do? You go and buy golf courses in California. You go and buy land in New York. And that was the slightly xenophobic but not entirely rational fear of the 90s and 80s was Japan's going to own the world.

43:13And it didn't, right? Because what also happened was they took all of this credit and they inflated the world's biggest property bubble. And there was a point in time where the land around the Imperial Palace was worth more than California. Right, okay. California, right? Right. That's how insane things got. So we had this lost. It's a long arc, mate. So bear with me. But the point is, you would think that from that point that the economy was just in tatters. Yet, if you've been to Japan, it's one of the top places I want to visit. I haven't been there yet. But I think you don't need to go there to understand.

43:51It's like it's a first world country. Standards of living are very high. Now, they've got demographic issues. They've got other – they don't want to make light of it. But it's like if you had to pick a country to live in and, you know, you pulled a tile out of a black bag and it was like, what's it going to be, what's it going to be? And you've got Japan. Like, it could have been worse. It was actually a pretty good economy to live in. And yet the stock market did nothing for 10 years in a period. And Google it, GDP growth in Japan. It wasn't knocking the lights out. But it wasn't shrinking. It was growing.

44:27Corporate profits were growing. Like Nintendo did really well. Fuji did really well. There's a whole bunch of companies out there that did really well. And yet investors did really, really badly. And this is a long way of saying, to your point, is like valuation matters. Right? So let's look at the Australian market here today. And this is what I've said to you earlier on the pod. I think the next decade will be less than average. in terms of growth. Is it because I'm hyper bearish on the economy? No, not particularly. But I'm looking at things like, let's get onto this too, Ordinate, which we'll have to come back.

45:06Zero, WiseTech. Everyone talks about the Magnificent Seven in the US, the big tech companies. And they're like 30 times earnings, something like that. These guys, our tech companies are 100 times earnings. you know and it's like ordinate i'll come back to this but ordinate um it was trading prior to this the 30 drawdown it had this week on 12 times sales sales this is what was a one and a half billion dollar now am i negative on ordinate no i actually think it's one of the best companies on the as i think it's great they have they are absolutely disrupting the av industry they've they've got a wonderful advantage there and there's a massive market to capture.

45:52And I think that they'll, at least in their core operations, they will dominate that market for years to come. It's just much better tech. It turns out that analog isn't as good as digital, in case anyone didn't get that memo. And things are changing. And yet the share price dropped 30%. People go, oh, well, why? It's a good company. Yeah, because you pay too much for it, right? everything has a price and japan tells us that and and like example after example after example after example sort of tell us that so this is just another thing to complicate everything as well on top of all the economic monetary kind of stuff it's sort of like even if you do want to take the and it's a reasonable view to take that actually within all of this there will be opportunities for investors and that it's be very careful with excessively valued stocks because they the bar for them to jump over for you to get any outsized return it's just it's it's kind of not i wouldn't say impossible yeah but bordering on impossible yeah and and that that's what's going to make it so you've got banks in australia right you know as i've long said they've not done anything for the last five ten years but in the most case for these things even with dividends but they're trading on price to book ratios like relative to the the net assets of these things at historical kind of highs at a point when the economy as we've often mentioned is actually not looking that great exactly you know and people oh the banks are as safe as house like oh my gosh and again i'm not trying to forecast doom and gloom tomorrow but all i know is is the price is is on an objective basis are these securities you know even if you want to assume they're good quality and they'll be around for a long time and i think they will are they good investments at these prices only if only if things go extraordinarily well from here and that that so so heads you win a little bit tails you lose a lot or 50 like it's it's a terrible asymmetry the only addition i'll add mate is i'm not as pessimistic as you about the next 10 years not because i don't think anything you've said is wrong but because the same could have been said at the end of the industrial age of the US stock market as the tech companies kind of came up and took over.

48:02And so it kind of depends for me on... Yeah, we could have an AI boom or something. Right. If the structure of the ASX doesn't change, then I think you're 100 million percent right. Between miners and banks were way heavy. The chance that they have... And this is going to be compounded gains, right? To get a 10-year result, you have to get the same amount per year. So even if banks got up 10 % next year and then 10 % the year after, if they then stop for the next eight years, you're going to have made 22 % over 10 years. you know they've got to keep compounding which is the key so i don't disagree with you but i'm not i guess i'm allowing for a larger range of options in terms of what may or may not happen to the australian market but it will depend in my view which is exactly going to be implied by your comment on the structure of the asx relative to the weightings of banks and mines compared to other companies it might be ai it could be it could be a manufacturing yeah whatever whatever the thing is whatever the next big companies in australia if there are no new big companies if the top 10 now, the top 10 in 10 years time, we are going to do well under the average.

48:59It requires other businesses to grow into and above the current groups we've got now. I'm not a mile away from you there. And guess what? I just said before, look at what people are doing, not what they're saying. What am I doing? I'm fully invested as much as I can be in quote unquote risk assets, right? So I can hold two seemingly opposing views in my head at the same time. And that is that there are macro challenges. There are some segments of our market and economy that run ahead of themselves and that are too hot. But there are 2 ,000 companies out there. And there are a lot of them that are just completely unloved and under the radar.

49:36And it's like, so, you know, opportunities in bull markets, bear markets, there is every day you wake up, there's an opportunity. It's your job to find it as an investor. it might be a bit harder during times of irrational exuberance, but it's still there, but it's still there. And so, yes, yes, I hear what you're saying. But for me, it's more the aggregate index as constituted today. I think it's going to be a challenge just because, like, what do these companies have to do in terms of earnings growth for that to make sense? 100%. 100%. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

50:23Let's go and kick... Should we rant for a bit? I ranted to you with some expletives, which I shall not repeat on the podcast, about some of the economic policies we've seen recently. And I was going to kind of do a one by one. We're not going to have time. I'm just going to list them and then we can kind of see how we go. So if you think about the economy and the challenges that we have, I want to be careful, mate, that we don't end up being a doom and gloom podcast or that we don't just harp on the negatives, right? Why do people harp on negatives? Why do people harp on disagreements? Because they are the points of contention and they're the points of discussion.

50:57If you and I agree on something, we don't talk about that much. If we think governments or companies doing good things, we don't tend to do the whole, you know, I think they've got the taxation on vegetables roughly right. it's telling that you have well i was trying i was trying to i was trying to i was going to go everything's controversial but no matter what i said it would probably you know i i think i think i think this this payment is roughly right or i think our relations policy is roughly right you don't spend time talking about it right because it's not there's nothing to talk about um we talk about the things that we think are wrong so i want to be i want to be clear with that because we can get a bit negative and a bit we're not that people either as i'm not certainly as australian or as a market person i think you are either um and yet and yet last in the last two weeks maybe even a week right i'm just gonna this is what i've got listed the reserve bank michelle bullock says um you guys if you guys keep spending governments you're kind of making our job harder and the chief economist the rb we went further that in a senate testimony basically said you guys are putting up pressure on inflation here like this is this is this is making things worse um we know the government and federal state have got a target of 1.2 million homes in five years which is always ludicrous and yet we have the can't say can't not laugh when you say that sorry and yet we have a decade low in terms of new starts for housing so kind of put that out there um the government this morning thursday morning has announced they're going to spend 3.6 billion dollars funding higher wages for child care workers uh they're going to cap fee increases for 18 months or so and then no wonder what would happen can you want can anyone everyone out there in podcast like can you guess what might happen if you put someone's costs up and everyone gets more money what's gonna happen do you think prices might rise yeah i think prices might rise hey you know the last 12 times we did this i tell you what i'm feeling lucky this time you know 30th time's the charm what's the definition of insanity like doing the same thing over and over and thinking you'll get a different outcome my favorite one this week was the queensland government's announcement they're going to take action on petrol prices of opening 12 government-owned petrol stations in Queensland.

53:06And I've got to say, mate, I just... I don't know. The simulation is broken. Isn't it? Can we reset it? None of these policies, governments... And I'm very, very well aware, frankly, because we live in a hyper-partisan time, that we have... I've just talked about a Queensland Labor Premier and a federal Labor Treasurer and Prime Minister. I promise you this is not a partisan comment, right? I've given them lots of brickbacks and bouquets for different things. I'll do the same with the LNP when they are either having policies in opposition. We've done that plenty of times. Super for housing anybody.

53:37I'm an equal opportunity critic, right? So it just so happens that of the last week, these policies and the lack of action on policy, I just, I'm speechless almost, mate, which is hard for me because I'm normally not speechless. When you think about all the things that have been announced, and if you have even the most rudimentary basic understanding of economics, you would do none of these things this way i mean i'll just do really quickly right so i'll run through them you can run through them again inflation we have said for a million years any increase in government spending including tax cuts adds adds aggregate demand and if you increase aggregate demand at a given level of supply what's going to happen you're going to put upward pressure on prices if you don't believe that's true that's fine but then explain to me how the economic system works because i don't know anybody who can give you a better description of basic supply and demand on housing.

54:28We keep bringing in more people than we are building houses. We have more natural births. The prices can only go up. If you're trying to take action on housing, having an imbalance between supply and demand in favor of demand puts pressure on price. It's not going to solve the problem. And anytime that prices go up, your response is to throw more fuel on the fire. We're first home buyers, Grant, so let's do that. Tap your super, do this, do that. 50-year mortgages. oh i know we talked about that last week child care if you spend 3.6 billion dollars that the government's going to pay the workers for the first year and a half then make the child care centers pay the workers under a uh award or enterprise bargaining agreement there's there's not there's not that margin being made by child care providers and if there is there's not enough competition for prices to come down because otherwise they would already if you simply add cost to an existing system what's going to happen the prices are going to go up and the queensland government petrol stations god love them and this is it's beautiful politics what you know what really annoys me is it's actually clever politics but it's awful economics and that is the state of australia it's populism 101 frankly you know we're just we know that petrol so is the price of petrol a problem yes for some people is owning a petrol station where the margins are literal cents on the liter cents like single digit cents on the liter what do they think is going to happen what change do they they expect to make and we know this is it isn't like Like 60 cents of every dollar of petrol tax.

55:54Yeah, totally. And the oil price on top of that, right? So you, and then you just think, well, hang on, the margin being made by the, and we know because Woolies and Coles own them. They've sold them. We know these margins, right? They are literal single digit cents on the dollar. And the Queensland government, they can almost save you two cents a liter. If you're lucky, if they sold it for nothing, for no margin and everyone else matched them, by the way, if everyone else matches them, guess what? You just put the entire petrol retail sector out of business because they can't make any money anymore.

56:19And then what? it is just it is it is honestly mate it's you've either got to be stupid or craven communism has never ever ever worked but let's try it with this like for goodness sakes i have no problem with government participation in some areas um you've mentioned before in passing the rba could accept deposits for example there are there are other ways of of having governments i frankly matt i would just say with child care for example just be done with it you do do early childhood education as part of the school system if you want universal child care that's fine but paying subsidies so private providers could put prices up it doesn't solve anything just make it make a universal be done with it right if you go if you're going to give a 90 rebate you're effectively funding child care anyway that the mirage the stupidity of pretending that somehow if i find 90 of it but those guys operate it that somehow it's better is just it's just dumb right so anyway i i'm just i i have run out of ways to express my entire frustration with the lack of political sorry lack of economic um sensibility on policy and it's not political as i said uh there's enough stupidity from the other parties by the way as well uh but at a time when we desperately need some basic economic principles to be understood and followed even though you don't agree to disagree on the rba for example uh you know the supply and demand is you don't get to disagree on supply and it just is right i mean if there's this is probably the only right fundamental truth of economics yes exactly exactly everything else is debatable but actually the other one is never bet against self-interest probably the two the two big things which is well frankly and that's exactly what you've just described what's going on right never against self-interest if you announce new petrol stations if you announce that you know and i love jim chalmers um the rba said inflation's too high and uh we might uh we're not going to reduce rates for christmas and you know what Jim Chalmers' response was?

58:12Yeah, we're monitoring the situation. And I was on air with Pete Stefanovic from Sky News and he deadpanned out. He did that one and it was throwing to me as he did. And he said, and Jim Chalmers, he's going to be monitoring the situation. That's nice. I would hope he's kind of monitoring the situation. Like, what do you mean? Prior to this, you weren't? It's not even that. It's just the lack of action. Like, I don't want to do anything about it. We're just going to monitor it. Yeah. So, but aren't you... The only other thing he could have done, which is what pollies would love to do, is go, hmm, I'm going to start an inquiry.

58:48Yeah, that's right. I'm going to get someone to look into this. Don't rule it out because, you know, Michelle Bullock, if she wants to treasure it too many times, Phil already knows what that's like. I wouldn't want to be... I keep telling you. I keep telling you, dude, it's not independent. It's not independent. I still disagree. It's not independent. If it wasn't, Phil Lowe would have kept his job because he would have done what Chalmers wanted. Yeah. Look, I think it's a highly political institution. Munger, God rest his soul, famously said, never be thinking about anything else when you should be thinking about incentives.

59:20Incentives, correct. Lovely line. And again, it's not a conspiracy. Maybe it's a little cynical, but I mean, the incentive for a politician is to get reelected. Yeah. And I've said it a million times, but it's like, I'm going to make really hard decisions and make all your lives really difficult for the next few years, but will come out the other side of it far more robust and stronger, trust me. Or I'm going to take over the petrol stations and make you save money. Or I'm going to give you free money for this. Or I'm going to do – it makes everything worse longer term. I mean, it's a disaster.

59:52What usually happens, speaking of Dalio and Napier and some of these people have a bit more context and understanding of these situations, usually when you get to the end of big debt cycles, you have a massive step up in government's role within the economy because people, again, it comes from a good place. I think a lot of the time we want to fix it and we want to get reelected as well. So we kind of do all of these things, but it just makes it worse. And again, just not to segue off into another tangent, but the biggest honeypot of all is the superannuation system of however many trillions of dollars.

1:00:27And there's another, China's doing it, other places around the world do it. Russia does it. Egypt does it. Every country when they get to a certain point does it. It's called financial repression. It's like, well, we need money. We've got two choices. We can raise taxes. That's not politically palatable. We can print the money. And usually that's a very attractive route for the powers that be. And they'll do that. And they have been doing that. And they will continue to do that. But the other option is they will take it from you. and i'm not i'm not saying this as uh all taxes theft i'm big supporter of the you know we need a public institution i really i mean there's nuance in this so i really don't please don't paint me in a certain way here but they will take they will take the money and and what it'll be very it won't be we're just taking the money out of your super that's that's way too obvious but what they generally do is they'll say we require every super fund to hold 10 government bonds so you force buyers in into the market in that way um it'll happen it will 100 guaranteed happen with with all of this stuff because again like i said last week people go oh the government should do something not recognizing the government is just our representatives and using our our money so when the when the government does everyone should get a pay rise yep great where's that money coming from oh it's coming from that oh you know it just it's it seems as though it's free And in order to maintain that very, very attractive illusion, we'll have various degrees of financial repression.

1:02:06And again, it just happens in history again and again and again and again. Western, it happened in Greece, happened. Like recent history, recent histories for modern liberal Western democracies, this happens. It's going to happen here, I can guarantee. And we're seeing the first signs of it here with government trying to say, well, we're going to control petrol. we're going to uh we're going to get involved in the construction game we're going to do all of this and again maybe for good reasons but but the second third fourth order effects are not being thought through and they're probably going to make the situation far worse and it's again rock in a hard place kind of stuff so i don't i don't know if they have a huge amount of choice but that's the world we're going into i uh have not enough confidence to disagree with you entirely i think it's less likely than you do let me put it that way i'm talking over like a 10 year period It's not going to happen tomorrow.

1:02:56But again... I would bet against financial repression in Australia. Yeah? I'd go so far as to say that. Well, it depends how you define it, I suppose. Yeah, that's the thing. It's a pretty confronting word. Yeah. But we have various degrees of it. I mean, China has capital controls. We've got capital controls. That's what I'm saying. Depends how you want to define. Yeah, is there repression? Yes, already. so therefore any more is still the same as it's degrees it's a sliding scale so yeah i want to be careful it's hard to agree with it it's hard to when you use a single not you personally when anyone uses a single term it's like well what you mean by that kind of really does matter because if you say well there will be so there already is like okay well is there more well how much more and what is and what isn't it's it's tough it's just you know it just it just by degrees it just edges that way and again it's just i guess where if anyone wants to push back it would be well here we are now structural deficit growing debt with everything we're doing not remedying the situation so so it's not it's just pure logic to say well okay so let's let's let's dumb it down here here's bob bob has a credit card he's maxed out on his credit card does he a pay the debt down rein in his expenses or c get a new credit card now i think it's pretty obvious that there's some good options in there but but it's the new credit card that's what we are doing it's what the u.s doing it's what europe is doing it's what japan is doing we're all doing it and so it's it's all i'm saying is is that something has to change yes correct or exactly what i'm saying exactly is is as sure as the sun will rise it has to happen it has to happen so but the if is bigger for me than is for you right i think you that there is there are ranges of outcomes between then and here and there Yes.

1:04:48There are off-ramps we could choose to take. And you may be right in being cynical after belief. We won't take any of them. Just hit the brick wall at the end of that. May well happen. Point to somewhere where they've done – here we are talking about these childcare subsidies, all of these things that actually just exactly what I'm talking about. And it's worse than it was a year ago. And unless something changes, it'll be worse again. So it's not – again, it's not to be doom and gloom. It's just to sort of be, hey, this is what's happening here. we need to we need to face reality as it is not as we would have it and we need to make some hard decisions correct and that's where we are absolutely unique if we if we if we don't take the offer out we hit the brick wall there was to your point there are only so many options supply and demand might be the only truth along with self-interest but the reality is you can't you know you you're you haven't used this one before a while but you know i stretched elastic bands so far yes uh and you know we can we can choose to reduce the tension on the elastic band at any point we want.

1:05:43Mate, can I put a full stop on this podcast as well as this conversation? No, not to stop you. I don't mean that. There's so much to say with it all, but yes. Only because just because we're talking about policy and everything else, I just literally opened up the AFR website. That's always a shake fist at the sky moment, but yes, go on. Second story. Quote, headline, quote, Labor working arm-in-arm with RBA on inflation albanese exists insists first paragraph quote prime minister anthony albanese has rejected claims the federal government is stoking a federal budget i should say is stoking inflation insisting his government is working arm in arm with the reserve bank to curb price rises end okay well just because you say it i guess it must be true i don't i just i i don't know how they i don't know you don't you say it because it because it works that's why you do it it works Yes.

1:06:41But do you not care about what's actually happening? I don't believe he doesn't care. That's why I find this so incredibly frustrating, because I actually believe, maybe I'm just Pollyanna, I believe Albo actually wants to have things better for people. I have a sense that that's what the guy wants, right? Sure. And yet, given the tools he's got and the objectives he's got, he kind of goes, yeah, nah. I'm just going to make things worse and pretend I'm not. Okay, you're welcome, Australia. I was like, I don't even know where that comes from. I don't know where that comes from. It drives me mad.

1:07:12Do you know, it's like those memes you see with the kids with chocolate all over the face and mum going, did you eat the chocolate cookies? No, I didn't. Are you sure you didn't eat the chocolate cookie? No, I didn't. I really didn't. Albo's got chocolate all over his face and he's saying you didn't eat the cookies. It's basically, and not just him, it's like every politician before. That's exactly what's going on, right? Oh, it's depressing. It's so depressing. Can we do something else? Yeah, look, again, it's not to be negative. I'm very optimistic long-term about the future, right? I really am.

1:07:49I really am. But you've got to rail at the injustices that are out there because you can't fix a problem until you recognize a problem, right? And I think that's a very, very important first step. And we, what do I know? I don't even know what to say. Just the beautiful thing that we do have, I suppose, is that we have a lot of flexibility as individual investors. Yep. And so you can't prevent folly, but you can choose not to participate in folly. And that is easier said than done. Because as I said before, there is nothing more difficult than watching your neighbor get rich. And things don't happen quickly.

1:08:36There have been people calling for all these kinds of conversations have been going on for a long time. And anyone who went into the bunker has done nothing but lose money. And that's the thing that I toss and turn about every night. It's sort of like you kind of think, gosh, directionally this is not good, but it can go on a lot longer. You see what happened in Japan? Like, oh, this is it. Oh, no, they backed down. That's right. You know? Oh, no, no, they got it. No, no. Okay, they pivoted. And that's what's so difficult. But again, let's open the history books. What can we say that is generally a good idea just to put some practicality around all of this?

1:09:15Be careful with your debt. That's a good start. Don't go up to the eyeballs where you want to be one of these US hedge funds where a quarter of a percent interest rate rise blows your entire portfolio up. Look at long-term capital management. Google that if you want a bit of financial history, right? Like the smartest guys in the world blew up nearly the entire financial system. Right, exactly. Because it's only a Six Sigma event that could unwind this trade. Yeah, it's crazy. Yeah, well, you know, it happened, dude. And so just be very careful with that. And I get into a lot of arguments, hopefully good nation funds.

1:09:52You know what, now that I think about it, I'm being invited to a lot less barbecues and stuff these days. So maybe there's a point of self-reflection here. But it's just sort of like, when you've been doing something that has worked insanely well for a very long period of time and someone come and rains all over that parade and say, gosh, I'd be a little bit careful with that. You're not going to make any friends, but I would be extraordinarily nervous personally if I was loaded up on debt where a small interest rate rise is going to blow me out of the water. I'm blown out of the water. My car needs a new engine.

1:10:26I'm blown out of the water. Just don't be that dude. Don't be that person. And that is, you know, it's hard because when the insanity will always go longer than you think. That was the other thing Napier said in his 21 lessons. He's like, bring all your analytical powers to bear and trying to predict what you think is going to happen and then double it. Because things, rationality can last far longer than you think is possible. So it's not a question of trying to time things, but it's a question of trying to structure things in a way where you are resilient. You want, make yourself anti-fragile.

1:11:01The cost of being anti-fragile is you don't make as much money in the good times. But that's not a bad thing because it also means that you don't lose as much money. Let's look at Buffett, right? Buffett, arguably one of the world's, arguably, objectively one of the world's greatest investors, underperforms in every bull market. Yes, that's right. Every single bull market, this dude underperforms. And he's meant to be the greatest. Normally, it's actually even worse. Normally, he ends up with negative returns because people sell Berkshire and go and buy shares in the exciting new AI company,.com.

1:11:36And you see not only underperforms, but actively. So I think two years, he was down like 28 % and 20%, I might be making this up, over the two years of the.com boom, for example, where the market was flying. Yep. And what did Buffett do this week? Oh, we've got to talk. I know we're over time, but strap in, people. Strap in. But I will say, this is another point that's really important to me. What did Buffett, what did we find out this week with Buffett? Did you see that? Yes. Buffett is sitting on a quarter of a trillion. It's a T. It's a T. That's a thousand billion. It's a million million. He's sitting on$273 billion worth of cash.

1:12:15U.S. dollars. U.S. dollars. It's by far the largest balance he's ever had. He sold down half his Apple stock. He's rapidly selling down Bank of America. Now, what was my point here? There's a couple of points to my, I'll finish my first point and then I'll move on to the next one. The first point here is that don't make the mistake that every other idiot mainstream journalist has. It's like, Buffett sees a collapse coming. No, he doesn't. I'm glad you said that. I was worried you got to get the other way with this. I was like, oh, this could be a long conversation. No, no, no, no, no. He's not.

1:12:43For a hundred years, 50 years, he's been saying, you know, when there's opportunities, I invest. And when there's not that. And he said at the AGM, not that long ago, I don't have any good ideas cheap enough or big enough or dial moving enough so i'm going to cash and so there's no predictive capacity in that but to my first point that a very long-winded way of trying to make is is that this guy is bulletproof let's say the market collapse 60 tomorrow let's say japan was wiped off the face of the earth what happens then is that his phone starts ringing and just like in the gfc bank of america rings and goes can we have some money please uncle warren because we we did some really dumb things and and we need some money and he goes yeah of course you can have some money here's my terms oh you don't like those terms i'm sorry do you have other options and then all of the buffett has lost it and you know he's underperformed and what i'm trying to say is be like buffett be like buffett where you look a little bit silly and not as clever during the good times but when the bad times come you are bulletproof and you've got the pick of you've got the pick of whatever company you want dirt cheap and you can load up and that's the time to load up right blood on the streets you're cashed up your your notional paper value is gonna fall it is you know but who cares you're not gonna you need somewhere to live you know you're really gonna sell your house just because the market's down as long as you can afford to my point of anti-fragility as long as you can continue to make the payment hey who gives us stuff in fact turns out that i can now buy a commonwealth bank from a quarter of the price that i could last year it seems like a pretty good deal you know like i don't know i've i've over egged that pudding i've made the point no you i i've got very little idea honestly i think um you know i've i've used buffett's line before people risking what they have and need for what they don't have and don't need yeah and it just it just the b-ball proof is financially smart it's emotionally smart it's mentally smart you know not putting yourself in a position where circumstances can derail your life is just if you've got nothing and you want you got to flip your last penny on a hundred or one shot i'm not going to criticize you for doing that yeah if you've got a million dollars backing for pretty million dollars on a hundred or one shot is absolute stupidity it just it makes it makes no sense and so there's obviously a lot of distance when you're a penny and a million bucks but at some point it's like why why would you why would you even you know i've talked about leverage before but that's that's exactly my line of leverage like why would you even if there was upside potential even if there was it just i don't you know and and the chance that something happens i'm not i'm not just not playing that game i'm gonna say you know what i want to be bulletproof this is what i this is how i choose to set up my my portfolio so that i don't have to worry about the knock on the door the phone ringing the bank manager calling the you know just just don't but you're leaving money on the table scott you're leaving money on the table and his muggins over here with his eight negatively geared investment properties, you know, smart driving the Ferrari around and it's really hard to watch that kind of stuff.

1:15:49But they're the first people to cry foul. When things go pear-shaped, they're the first, oh, the government needs, oh, it's not my fault. Like, dude, you went into the casino and you recklessly gambled everything on leverage and it's not your fault? Like, where was the upside? You're not even getting, after expenses, you're not even making any money from the rent. In fact, you're designing the thing so you lose money, but it's okay because for some reason, at some point, it's just going to go up. Now, maybe it does, but gosh, that seems like a reckless bet. And that's precisely, precisely my point.

1:16:21Oh, my gosh. I'm just a little bit bitter because I didn't load up on property 15 minutes ago. But that's it. Yeah, yeah, yeah. I'll keep going. It's hard to end. It's a hard one to end, isn't it? It's a very hard one. especially when your co-host won't shut the hell up let's just let's say there was more to talk about but we will happily and or not stop our podcast here and we will come back I'm sure we'll come back on Sunday mate you've got you're fired up you're ready to go I have so much I think I had too many copies this morning I'm like a hummingbird here Andrew Decaf page from next week we'll see how that goes exactly it's been a lot of fun I'm sure our listeners enjoyed hopefully another thing or two and we got a few things off our chest.

1:17:06So that's not a bad list of achievements for this podcast. Until Sunday, enjoy your week. And maybe have a quiet down Saturday because Sunday could be, you know, one of those days. Stop doom scrolling. Go for a walk in nature. Think about the big things. And we'll have more doom for us on Sunday. Exactly. Fool on. 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.

1:17:40The Motley Fool operates under Financial Services Licence 400691.