Wages finally inch ahead of inflation. February 23, 2024

27:36one yeah the only i have a single question for you which would try and i'll actually do quickly only because we want to move on but i am curious as to given that given that let the market sort itself out when you look at venezuela or zimbabwe or frankly weimar germany um there are there are reasons why some of that high inflation became a problem but the hyperinflation that feeds on itself where high prices should have already resolved high prices and don't haven't won't whatever. Great question. Yeah. Sort of Bitcoin. But that idea, I think my concern... Why did that happen there and what could have they done to avoid it?

28:13All the converse... Yes. My perspective is the reverse, the same question, which is if you're the RBA, you're thinking, I'd really like to make sure we don't end up there. Maybe I should do something about that before... Because once it gets to a certain point, it becomes the snowball, right? And yes, eventually it'll have the same supply response eventually, because eventually the whole thing breaks and you have to start again. That is the extremist version of it'll find its own level. And you're not wrong about that. But if you're a central bank and you're saying, I'd kind of like to make sure we don't end up being Venezuela.

28:41And I kind of think that maybe some action might be useful just to make sure we don't. I don't have a strong perspective on that, but I do see that and kind of go, I can see why people might say, let's just, if inflation is a bit higher, let's kind of stamp it down before it gets to the point of unintended consequences or feedback loops and other things that can make it massively, you know, orders of magnitude worse before it gets better. Oh, such firm views on it. And in sympathy to your keep it short, I'll try. There's a very good, there's a great book, if anyone's interested, called Broken Money by Lynn Alden, which is a fairly recent one, which a big history of monetary misadventure and what went wrong.

29:20So you mentioned Weimar, you know, Lebanon, Argentina, all these places. So the characteristics that they always have in common is just rampant and uncontrolled and very poor monetary policy. They printed a bunch of money. I'll say it. They printed a bunch of money. Now, literally, there's a lot of money printing. You see those pictures from Weimar, Germany, with people with wheelbarrows. Literally money printing in some cases. It's about adding just zeros to banknotes. Yeah. It just added zeros to banknotes. The more I think a lot of people gloss over this, the more nuanced mechanism there is that when you lower the cost of capital as a central bank, you make it easier for banks to lend out more money.

30:01So there's a fractional reserve creation of a monetary base. I believe that's the M2 if you want to look at various monetary layers. But in all cases, the monetary base was expanded massively. It wasn't that people were spending recklessly. it was because that we had the same amount of stuff, but the shells and the pebbles that we were using to sort of price and transact in it were just vastly, vastly increased. And what makes it particularly pernicious and dangerous is that there's, you know, not to put too fine a point on it, there's a lot of rampant corruption in these countries. You've got a lot of money flowing.

30:42If you're close to the spigot, You tend to have an unfair advantage over other people. The closest to the – and this isn't an anti-government thing. It's just like the closest to the spigot is the government. And it gets very large. It invests with good intention a lot of the time or sometimes just overt corruption. But you have all this – not only all this overt money creation, but it is all this malinvestment because the head of some local province decides to build a 400-foot statute to himself. It doesn't create anything for the economy. And so that's how I'd answer your question. So I think the RBA in the framework that we operate in has got to do the best that it can.

31:22And yes, it needs to try and avoid that scenario. But the better way to avoid that scenario is by we're too quick to solve problems. Like, oh, the economy's hurting. Quick RBA, fix it. And this is like a harsh truth that I know never goes down well. But the reality is, is that it's good to have a level of failure in the economy. We need that because without that, we get more and more zombie companies, which leads to bigger and bigger, more and more recklessness and misallocation. And frankly, we all just get poorer at the end of the day. So in the modern era, we've transitioned more towards trying that we've solved the economic cycle.

32:00And we're going to do this and policymakers and people who have levers to pull should fix that for us. And guess what? It doesn't work. It just makes it kicks the can down the road and we have an almighty calamity like a la 2008 when it finally breaks, right? And we sticky tape it back up and we fix it by again, printing all this money. Whereas a more reasonable background of small, but containable, and in fact, overall healthy failure of business is a much better thing. Either way, you've got misery, right? But do you want misery inflicted on the entire society? Or do you want a bit of targeted misery in areas where there was, it turned out to be reckless investment and reckless spending?

32:37And it's a brutal viewpoint, but it's a brutal world. is I guess how I'd put it. And we can have a separate conversation about how we as society sort of support that. And I think we should have a lot of like creating business and forgiving bankruptcy. We should be like the US, it's one thing they do incredibly well. And here we do much better than the US. We have much greater social security nets and the rest of it. But when we're trying to solve the problem just to come full circle with these big central bank decrees, I just don't think it works that well. i'm gonna leave it there with uh with an anecdote from charlie munger i've been i've been listening to the um poor charlie's almanac book i don't know if i mentioned last week i probably yes yes yeah he uh he talks he gives the example so do you talk about fairness is a really interesting one mate he kind of says there's a thing in the u.s navy he says if the navy captain's up for 24 hours straight and is tired hands over control to his his subordinate goes to bed and the ship runs aground the captain loses his commission it doesn't get caught mushled but and it doesn't matter it wasn't his fault the captain loses commission yeah and she says is that fair well no it's not fair to the navy captain because he didn't do anything wrong and he was tired and the other guy was in charge yeah but what it means is you've got skin in the game you know as a captain power of incentives right if the ship runs aground no matter what happens you lose your job and his point wasn't actually about the captain itself being fair or not fair or doing the right or wrong thing it was the idea that sometimes a little bit of unfairness means all the rest of the ships won't run aground because all the captains know exactly what's on the line if they screw up and he says look the captain was fine this is your point about safety nets he doesn't get court-martialed he's still got his pension he's going to get employment somewhere else he's not going to be happy about it but he'll be he'll be totally fine and yes it's horribly unfair for him because it wasn't his fault but what it means is overall at a fleet level they're much less likely to have a ship run aground yeah and i just thought was it you know it's an interesting idea i'm not even sure i completely agree with it nor i completely agree with you but i have a lot of sympathy for for that that view in the context of yeah a little bit of a little bit of unfairness is at a societal level, horribly unfair for the person.

34:37At a societal level, is it a better outcome? Yes. Okay, so where do you draw that line? And that's your point about targeted unfairness or targeted misery. There is some really mature conversation we need to have as a society. This is not to go too far down the rabbit hole or too far on a tangent, but that's why we let people drive at 100 k's an hour on the freeway. We could solve the road toll tomorrow by speed limit your cars to 30 k's an hour. You could do it tomorrow. so so what is the what we we implicitly place a value on those lives and i'm sorry for anyone listening who's had a a death or an injury in a car accident but we we we literally you know implicitly put a value on those lives and say we are prepared to tolerate this number of lives lost per year because we want to people to be able to travel 100 k's an hour on the freeway yeah now economics economics is really the study of trade-offs in a lot of ways absolutely is that's exactly what it is.

35:28Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

35:37Some profit announcements from this week. And a CEO, in fact, two CEOs deciding to depart the scene. The big one was probably Woolworths. CEO Brad Banducci stepping down. Famously was on Four Corners the other in the week, walked out of an interview and said, I didn't mean to say that. Can we start again? The reporter said, well, sorry, Brad, this is on the record. That made the socials, as these things tend to. It wasn't anything horrible, by the way. He just misspoke. I wanted to change it. And, of course, then that became the talking point. You're on the record. Yeah. I almost felt sorry for him, to be honest.

36:12Yeah, I was going to say it's a little bit gotchery for me. But anyway, subsequently, he then decides to resign or announces his resignation two days later. The Woolworths board says, no, no, we've been looking for a replacement since September last year. We can only take them on their word. it's convenient but but maybe just one of those things maybe coincidences happen also announced a 780 million dollar loss thanks to some big write downs their normalized profit or operating profit was up two and a half percent on a 4.4 percent increase in revenue at the same time let's roll them all together we can kind of break them all apart again nab profit down 17 percent and a 200 million dollar increase in provisions for bad and doubtful debts in other words those of us with mortgages or car loans or credit cards that won't end up paying that back based on weakening economic circumstances.

37:01We saw Jane Hudlicker, the CEO of Virgin, step aside. She is going to be, was going to be the person that in theory is going to take this business back onto the public markets when Bain Capital, the private equity mob, decided to relist it. She will no longer be that person. A lot going on. Last one probably, mate, ANZ buying Suncorp's banking business. So many, so many bits of corporate news and big corporate news this week um do you want to kick it off with do you have any particular thoughts yeah just to finish the first one oh sorry yeah the way i said i feel a bit sorry for him um yes at the same time you're you're on seven million a year and you run a very powerful company i i feel as though it's part of the job i think we we are right as shareholders or investors to demand that you know you'd be the kind of person that can answer questions yeah um look we we do a lot of strong um interviews with ceos on straw man right and every now and again we're trying to line something up and they'll say listen i don't want to talk about this or i only want to talk about that and it it irks me because i kind of feel as though i'm not gonna i'm not out to attack you but if i ask a question that you're not comfortable with i feel as though you're a you're a you're an adult and you can just say well listen i prefer not to answer it because of this this this and this and it's if it's not an unreasonable question it's not unreasonable to ask and so yeah it was a bit of gotcha journalism i get all of that and and it wasn't really the biggest misstep he had other than deciding to walk out like if he just said that and moved on it would have been far far less totally right it would have been a side note of anything a footnote of anything to the interview yeah exactly but he made it well look and that's just we're human and and to be human is to err is to be human as they kind of say but you know suck it up sweetheart you're the you're the you're the ceo of a billion dollar company and you know you you will get asked tough questions and and that's just part of the job so i'll say that much um with woolies i thought there's a lot to sort of say here it comes it dovetails into the inflation thing so we won't try and cover the cover the same ground again but obviously it was all about this cost of living everyone's angry and i think all of us know that we go to the supermarket our prices have gone up.

39:12And so it's sort of like, and this is not something that we can, you know, you talk about the RBA increasing prices, increasing interest rates. It's not going to mean I'm going to consume less food, right? I might change the mix of my food, but I'm - Yeah, and you might buy this for something else, but you're still going to buy food, right? I got to eat. I got to eat, right? So they saw a 5.5 % increase in - Here's the other thing I need to say. So when you look at it overall, the group, we saw that EBIT, so this is the pre-tax, pre-interest profit. Operating profit. It was up 3.3%. And that's over 4.4 % lift in sales.

39:46So their margin actually shrunk. Yes. But, you know what? As again, glass half empty. Just frame it up. They also own Big W. They also own supermarkets in the NZ, both of which had a pretty horror half. It was awful, yeah. If you look at just Australian food, the supermarket segment. Now, this accounts for 70 % of their revenue. In this, we saw a near 1 % lift in their gross margins. So this is the other thing you've got to do. There's a lot of teasing apart, and I'm sorry for all the nuance, but you kind of need it here. So there's a fixed cost to run the business, right? That's just going to be what it's going to be.

40:24The gross margin is just like, well, I buy the carrots from the farmer at$1, and I sell them for$1.20. So I've got a 20-cent margin on that. So why has your trolley of groceries gone up? Well, two things. Wholesale prices have gone up. Yes. So that's the first one. And is that Willie's fault? No, that's not Willie's fault. The amount that they sold it to you, though, had a bigger margin. In fact, the gross margin increased by a percent. Now, what is that gross? Well, let's go back to the EBIT margin. Overall, when you look at – I mentioned this on the pod before, so sorry to repeat myself. Overall, when you look at Aussie super, well, sorry, back up, back up.

41:04Finish one point at a time, Andrew. The first point being is, yes, food prices went up. Yes, a big part of that is wholesale. Yes, Woolies added extra to it. They got more, if they had kept margins steady, your groceries wouldn't have been as expensive. Now, I know you're going to say, and you're going to be right in this. You're going to say, yeah, but it's not like, you know, your$200 worth of groceries, whether you spent, they made$7 off that or$5 off that, is not going to solve the inflation crisis. So that is a point. There's also one more I'm going to make just quickly while you do it, just to kind of put this in so you can come back to it, is gross margin is not the only additional cost that a supermarket will incur during the year.

41:42So if it's got higher staff costs, it has to make that up with higher gross margins or find other ways to offset those. Excellent point. I don't want to get away from that, but they put the price up, right? And so it's hard for them to say we've – well, you can almost say this is a good thing. Ethics aside, right? What do I want? I want a business with pricing power. Does Willis have pricing power? Oh, my God, they have pricing power. Exhibit A, B, C, D, and E is all in that thing there. They did it because they can. And so I'm just making the point that you can't tell me that you copped it on the chin here.

42:19You passed it on and then some and then some. Now, your point, EBIT or profit, I'm paying more for staff. There are other costs within the business, and that is very true. So let's look at that operating profit again. Now, with the Australian food segment, that went from a margin of 5.8 to 6.1. So it went up as well. I think it was 0.24%, I think, when you take it to the second decimal place, was the increase in the profit margins from the food business. Yep. So is it egregious? Not necessarily, but, you know, you did better than – in a very tough, supposedly, environment, you did better, right?

43:00So let's just call a spade a spade. Is it material to overall and everything? Okay, that's a separate question. The other thing, and this is the point we've made before, was that when – I looked it up, actually. I found this really good report from 2022 from McKinsey. Not that I'm a big fan of McKinsey necessarily, But, you know, for whatever it's worth, they had a report on average margins across U.S. supermarkets. Interesting. And the report was sort of how that's changed between 2018 and 2022. Anyway, the EBIT margins for 2022 in the U.S., if you look at Costco's and Safeway's and all the various brands that they have over there, is 4%.

43:40And I believe from memory, Europe's about the same. So you have a scenario here where, well, this is a separate conversation, but what is an appropriate margin? Do we have to decide that publicly or is it more laissez-faire or whatever the company can get away with doing? But again, just statements of facts. And then I'm sorry, Matt, I'm hogging the microphone here. No, go for it. I'm laying out the landscape here. But the statement of fact is not only have gross margins gone up, they've passed on the increases and then some. Not only are they operating profits in supermarkets, yes, there have been higher costs, but they've more than passed that on as well.

44:18And they're running at a higher level of operating profit than their peers. 6%, 4 % doesn't sound like a lot, but it's a 50 % increase. So why is it that Australia gets to charge so much extra? The commentary that's out there is so mind-bogglingly bizarre. It's like, oh, but we've got more distance. Well, doesn't that make it more expensive? Makes your costs higher, doesn't make your margins higher. Exactly. Shouldn't that make it a less – if I'm in a highly concentrated, dense environment where I have far less shipping and logistics costs and the rest of it, shouldn't that make it cheaper? That's not an argument to make prices more.

44:54So the answer for my money is, well, why? Because they can. Why can they? Because they've got extraordinary scale and market power. Is that a bad thing? Yeah, probably at a point. I don't know where that point is. Should the government do something about it? Yes. but not regulatory response. What they should do is foster competition. And then I'll finish my, I'll shut up. My final point being is that it's a very natural response. And I get people listening to this, we'll be going, yes, the government needs to do something. Let's play the thinking through. Okay, we're going to do it. Now to operate a supermarket, you need to meet all of these regulatory conditions.

45:30And all of these regulatory conditions will be well conceived or at least intentioned, I should say. Yeah. But what the practical bottom line is, is that to operate in the supermarket space, you now need a much bigger resourcing to manage all of that regulatory and burden and compliance burden, which means what have you just done? You've just added to the incumbents barriers to entry. It is now hard. The exhibit A here is the banks, right? There's so much regulation around banking and people go, well, yeah, of course that's appropriate. Yeah, it is. but the perverse unintended consequence of that is is that it's just virtually impossible for anyone else to get in there and compete with the banks so what it's economists have a name for it it's called regulatory capture and uh and and quietly if if woolies was found at the at the end of a hostile senate who said we're going to do all this stuff on you secretly they'll be they'll be clinking the champagne glasses because while it will have an immediate and always you a short-term impact, longer term, it just entrenches their incumbency.

46:32Okay, I'm out. I'll shut up. No, mate, that is a great tool to force. I'm going to throw a couple of thoughts, just random thoughts to add to what you've said. First thing I want to actually point out, this is not, well, I'm on a bit of a run on this one, but I'll keep going. If you look at the, so you talked about the food business for Woolies. If you look at the performance by business, Woolworths supermarkets, the actual supermarket in a physical supermarket, but the usual things we know are supermarkets. Sales were up by 3.2%. Woolworths Metro, so the little kind of in the place food stores, the little ones, lower footprint, probably higher rent per square meter, but also probably higher prices.

47:12Sales up 9.1%. The e-commerce business. Oh, yes. Up by 21%. Now, I don't really know what the gross margins or net margins are for that e-commerce business. in part they're actually including e-commerce sales from the stores so you kind of can't separate them out because they're saying well you know the click and collect or the online ordering we're tracking the sales going through the website but they've fulfilled at store level so how do you you can't ever really break that apart but it's fascinating mate because that is now close enough to 15 percent of the store originated woolworth's sales and you start to do those maths now that again grew up 21 percent store originated sales up by three percent so grew seven times or six a bit times as fast or faster than the supermarket physical supermarkets business this is a business that is changing radically if you fast forward this it'll plateau at some point but if you fast forward this far enough that e-commerce sales growth is going to be phenomenal and it's worth just it's worth just calling that out so yeah it really is they do do some ebit numbers by stores and e-commerce separately, I don't know they've allocated all those costs accordingly.

48:22So that's probably, I won't say misleading because that suggests intentional. It's just harder to do. So I would ignore the EBIT numbers for the sake of it. But yeah, just actually, that was really interesting. Next thing for me is I, so I used to work at Woolies way back in the day. I also worked at Woolworths Suppliers. I've seen both sides of this. So I just want to throw a couple of thoughts about that competition piece. I have a very, very strong conviction, but I can't prove it because it's impossible. There's no way to do the counterfactual. that Australian consumers are far, far, far, far better off having an oligopoly at the moment, at least.

48:53Could get worse, could get bad, than if we had lots and lots of little guys. Why? Two things. One, Woolies and Coles have an absolute stranglehold on suppliers in Australia. They can pretty much call the tune. I think I've said this before. I don't know if I have. I used to work at a supplier who, unless Coles and Woolworths would both take the product, there wasn't enough volume to make the product worth making. So what does that mean? It means you've got to get both of them through the door. If you get both of them through the door and they know that and trust me they know that they can set the conditions including the prices now what are they going to do with those prices some would say they're going to try and make more margin in some part yes they're also going to set the retail price so they can try and get money off they you know they still want to win market share from the competition yeah i have a very strong suspicion that if we said now the thing you didn't cover in your response was what if we broke them up they said right you can't you can't be this big you got to arbitrarily take every second store and call it a, you know, a Colesworth store.

49:45And there's now three or four retailers. We'll make you do it or sell them off or do whatever. We'll make this happen, you know, just because we want to. I would suspect suppliers go, beauty, thank God. I'm going to now charge 10 % more for all my stuff because I now can't afford to because the big guys can't dominate me that much. Now, if that happens, they can't absorb that sort of increase. So what happens? Shelf prices actually may go up, not down. And on top of that too, you've now got a third logistics network that you need to support that. That was my next point. And in a country the size of Australia, the argument that does ring true for me on distribution is not we make more margins because the distribution is longer and further and worse, but it acts as a natural barrier to competition, which allows that.

50:26Because if I had to all of a sudden supply Adelaide and Darwin and Newtown and New Farm, and I can't think of a new that starts in Melbourne, but you get the idea, Newcastle and whatever, have I to supply all those and duplicate the head office, duplicate the freight network. And by the way, the freight guys are going to give you a worse price because you're no longer sending as much stuff in as many trucks. I'm not saying it's terrible. I'm not saying it shouldn't be done. I'm not here to defend the supermarket. I don't own any shares. I think I've said before, my own bloke owns a fraction of a single Woolworths share through his account.

50:56Trust me when I say that doesn't motivate my thoughts. I'm not saying it would happen at all. It may not. You make such a great point. It's just worth bearing in mind when we say how terrible the Australian supermarket industry is. By the way, if I... Again, this will anger people. If I can do anything with supermarkets, I'd actually put prices up because I think what they should do is pay the suppliers more, frankly. If there was... The people who are suffering from lack of competition is not the consumer, can I tell you. It's absolutely the supplier. And I'm not crying poor on behalf of the people I worked for.

51:27I worked for multinationals mostly, not entirely, but mostly. It's the farmers and the little suppliers who are just being told exactly what price and exactly what discounts and exactly what margins exactly you know they have no choice they are desperately trying to keep keep going knowing that the sort of damocles is hanging over their head anytime willies and coals get the urates with them that it's game over um so you know i i actually think we'd get we'd have a better supply experience we probably have you know a healthier supplier ecosystem but we'd have to pay more for that and that that is the that is the ugly reality if you looked at this system and said how can we how should we fix it you would say more chains, more suppliers, a better balance between supplier and retailer, and the result would be higher retail prices.

52:11Now, you try to say that in parliament is not going to happen, right? It's such a great point. I mean, and this is kind of underlines what we were talking about before. You have to be so careful anytime you change a setting because you kind of think, I change A, that leads to B and then I get C. And then you've just given an excellent case as to why, yeah, but there is this unintended EFG over here that you didn't even think of. And by the way, there's probably a whole other bunch of letters that we're not even – it is so – because it is this bottom-up organic mess of just people cooperating, right, and trying to all get ahead that sort of forms this sort of emergent behavior.

52:53So it is excellent. So, yeah, I think I'm with you there. I'm not saying it would happen at all. I don't know. All I'm saying is be careful what you wish for. I can totally see it. Or something that we're not even contemplating. Yes, exactly. That's right. Option North Jordan 3, yeah. Yeah, it's like, oh, God, none of us saw that. And history is replete with that kind of stuff. So what was I going to say? Oh, where we probably do need more of a policing or regulatory role is just in making sure that there are as few barriers to entry as possible, such that if someone did want to try and do it.

53:39I'm from Europe. I own a$500 billion enterprise over there. I'm broadening into Australia. I've got the capital to do it. I want to do it. Aldi's tried to do it. Costco yeah Costco's tried to do it yep they've done it Ali's got about 10 % of market share of dry grocery it's remarkable I here's my I've got no data for this but here's my data point I reckon it would be far higher except for some of the stuff that you could probably label as anti-competitive land banking is the big one that's been talked about so I'm Wally's I'm playing a long game because I'm smart so is Coles so they know oh there's a new housing development going here the city The urban fringe is growing over here.

54:20They know exactly. And they know that particularly the way cities are planned these days, everything is built around a Westfield or a Westfield kind of equivalent, right? Or one of the one-new marketplace kind of shopping centers. Yep. And I know that, or it's been at least reported, that Aldi and Costco have had a lot of trouble finding suitable floor space to do what they need to do. And Coles and Woolies know that it's like, well, that is a limiting factor. We can't stop the competition. because they're well-funded. They're very good operators. And by the way, without them, without Aldi, I reckon the price of the margins would be even higher than they are.

54:59Yeah. Do you see where I'm going? I totally agree. So let me take that then to competition law, mate, because this takes us beautifully to ANZ and Suncorp. Yes. You're right. Woolworths got to buy Flemings back in the day. I can't remember who bought Franklin's in the end. It might have been Metcash. I can't remember. um woolworth there was jack jack the slasher in tamworth that's right well woolworth bought a uh an ailing warehouse operation in canberra called australian independent wholesalers way back in the day i know because i was the heinz account manager for aiw way back in the day um prove you i'm old um that uh frankly you know woolies bought safeway way back when and then eventually rebranded that business in victoria there's a there's a there's a long list long line of these kind of things happening.

55:43And I would suspect that at our time, again, for everything we've just said, stopping some of that purchased consolidation would have been the easiest way, probably, to put a little bit of the brakes on that kind of outcome. That being said, Flemings and Franklins were going broke. So there's also a reality around well, okay, you don't buy them, they go broke anyway. The big guys take over the space or the sales. They probably do. So again, no perfect solutions. We didn't mention IGA. Yeah, right. So there's another player there as well. But I mean, yeah, because there are players here, right?

56:14There are players here that have overcome those, that sort of initial sort of activation barrier, sort of get it to jump over. So yeah, I would be doing whatever I can to make it, again, not to pick favorites and, you know, or anything like that, but just to make sure that any anti-competitive behavior that is happening, that is where it's an unreasonable flex of market power. And by the way, I think companies should flex whatever market power they legally can. That's your duty, right? To maximize profits. That's the construct in which you operate. But at a society level, we just need to make sure where the bounds sort of lie.

56:49And if someone has just got such incredible power that you veer into the exploitative kind of realm, that's where you've probably recognized that you've gone too far and you need to sort of stimulate some activity elsewhere to help bring it back. So this week, the A - Well, not this week, a couple of years ago, the ACCC said to ANZ, you may not buy Suncorp's banking business. It will reduce in a lessening of competition. This week, the Australian Competition Tribunal, the court effectively, that hears appeals to ACCC decisions, said, yeah, sorry, ACCC, you guys are wrong. You can't block this one.

57:27We're going to let ANZ buy Suncorp's banking business. Now, look, I've just spent a lot of time, not even defending the retailers, but trying to paint a more even picture than perhaps some in the media choose to outline. I did see one, kind of a quick bit of snark. I saw one article where Woolworths had made a couple of percent more in profit. And the article that goes on to say, well, that might seem small, but it's actually this much money. Which was kind of saying the quiet bit out loud in terms of the reporter's own perspective on, I don't see them saying that when margins fall. That seems small, but that's actually, they lost this much money.

57:58You never see that in those articles. You only see it in the articles where the reporter has a predetermined view and they're entitled to that. but let's call a spade a bloody shovel. For all that said, mate, I am also not sure, as I've kind of intimated, that allowing some of these mergers is a good idea. And it's interesting that I don't... So I have a thought on this. So let me set it out. ANZ gets to buy Suncorp's banking business. It cost them$4.9 billion, if you don't mind. Made a whole lot of commitments about keeping staff and keeping the brand for a while. I would put a large amount of money on the fact the brand buys very quickly after that guaranteed period, correct?

58:33Yeah. But also, mate, I think it's interesting that I think what I think I'm seeing is an ACCC that has become more interventionist, probably as a result of having a new government, really, honestly. And I don't mean to impugn anyone's reputation or perspectives on these things, but it seems very coincidental. Certainly a very large correlation between a more interventionist ACCC and a new government in Canberra. But the law hasn't changed. so if you have a regulator applying a a a current law the existing law a certain way but then that gets to a court who doesn't have the the liberty of applying laws the way they might like them to be but rather literally to determine on the basis of the black letter law what does this mean you may well have a situation where the acccc says no to a merger that the court says well there's no kind of foundation to say no to it in law Why do I say all that?

59:27I think between that, the changes to, or the issues around supermarkets, the Alan Fells report we talked about a couple of weeks ago, where he actually recommended that mergers have to prove it won't reduce competition, rather than the ACC having to prove it will, in other words, reversing the onus of proof. I would suspect, mate, that we end up seeing tougher competition laws in Australia in the next 12 or 18 months. Now, maybe the government hasn't got the guts for it. Maybe they don't care enough about it. Maybe they do, or maybe they will. I don't know. I'm not making promises either way. I don't know what the politicians will choose to do.

59:59It's one of those forecasts that's not worth making. But it does strike me there is a significant difference between what the ACCC would like to do and what the law allows them to do. And to the extent the government agrees, I guess it's maybe just a comment more than anything about the moves, the mood in Canberra, but I would suspect we see some changes to competition law. Yeah. Yeah, I guess that's where I sort of land philosophically and trying to sort of draw up the battle lines. with all of this stuff. I think that any company, now let's, again, it gets ideological, but you know, in a perfect world, which we don't live in, those that, the billionaires, the mega companies are the billionaires and the mega companies because they created immense value for the world via a new product or service.

1:00:45And we all just were intrinsically richer because of this company existing. You know, if that company didn't exist, we wouldn't have this stuff. and so it's kind of like that's I don't have a problem with that and I don't have a problem with those companies using their scale to deliver more value to to people and I think they deserve good profits in fact I think it's their duty to demand good profit where it gets shady to me is when that scale and and capital um power that they wield is used on things that uh like the one I'm really winding my way around to is is lobbying and yes and that's that's what to me i define because a lot of my mates you know it's sort of like ah capitalism's bad and i think no what what you don't like you're right to be angry by the way yes but what you don't like is crony capitalism yes and i don't know the system yep exactly you you have your people with snouts in the trough that are they're putting their thumb on the scale so they're all playing this quote unquote capitalism game but they're playing it with where everyone else got an arm tied behind in the back and you've got a mate who works at the government and therefore, you know, or you've got the PM's number and you can call them up and have a chat.

1:01:54That to me is not capitalism and that's where it is unfair. So when you get to those kinds of, and you talk about ANZ buying Suncorp, right? A huge transaction. How much money do you think they spent lobbying and with lawyers just getting the deal structure and making sure the ground was laid as best as it came before? It is so out of the realm of anyone who isn't a multi-billion dollar institution to even attempt that, again, it's a solidification of power that has not come through value creation for society. It's a solidification of power that has come by gaining undue and unfair access to the levers of power.

1:02:35And again, just to be ideological and call me naive, I would argue that the government should represent the people, not the corporations. The corporations should also represent us, except we vote with our wallets with companies, and we vote at the ballot box with our politicians. I only want to add one thing, just to add nuance to your point, maybe some specificity. There is no allegation from anybody anywhere that ANZ did anything improper to get the Australian corporation - No, not illegal. Not illegal. But not even appropriate, right? Because there was no executive decision. This was a court decision to get this one through.

1:03:10Sure. what they've probably done as a business community is lobbied in years past to get the competition laws they want. There's no probably about it. They do. My point, though, is it's not about this particular transaction. This wouldn't be envisaged at the point the law was put in place. Business lobbied for the laws they wanted so that these things subsequently could happen at some point in the future. And I know it's the same thing, but it's also a little bit different. I just wanted to make the point you're not suggesting that there was something untoward in this particular case. Sorry, I'm glad you made that clarification.

1:03:37And look, we're not talking about individuals, so there's no legal issue. But just to be fair and clear, it's the laws that get written, and they get written as a result of or influenced by lobbyists who turn up at the office. So what I think I'd like is this. We need this. Can I have one to that, mate? I think this is, I'm not sure it's more insidious. It might be a little bit. We kind of think lobbying is important than it is, right? Because you get to go into the PM's office or the treasurer's office or the trade minister's office and say, here's what I'd like, police minister, and here's why I'd like it.

1:04:05and maybe money changes hands, but it probably doesn't. Maybe they're persuasive. Maybe they're not. Maybe they only get in because they're big and important. Maybe they don't. The one I actually think is also worth thinking about, this is a massive tangent and feel free to ignore it. I'm long and loud on banning political donations in general. Oh, 100%. Easiest. If you could change one thing, that would be the thing to change with our system. But for me, it's not only about access, right? Because here's the thing. You don't have to change the view of the government necessarily. you just have to be able to influence the party that gets elected yep so if you happen to be a business mogul or you happen to be a union leader you don't have to necessarily change their minds you just have to make sure the people who think like you are more likely to be in government like it can literally be that simple you can never ever talk to them but if you can get them to be the party of government in either direction and this is not a partisan view then you're going to more likely get your thing now i have no problem with the people elect 51 of us saying i think the pro business guy or the pro employee guy should get the vote that's fine when when the when money is used in either sphere to overtly or or subvertly is that if that's a word influence um covertly influence the uh the outcome of the election that and again completely legally right legally as in they spend their money on advertising or whatever it is that's i i think it's more insidious in a sense because it's we kind of ignore or forget it this exists you see a lobbyist walking like oh i can stop that happening yeah and and it would help absolutely don't be wrong i'm not i'm absolutely for it to your point i'd have no lobbyists at all frankly um by the way senator david pocock who is one of the best people in parliament right now has been campaigning for a long time to have the lobbyists uh access uh transparently available to the public how is that even a debate how is that both and how both major parties like yeah no we think that's a terrible idea can you just elaborate on that can you now like this occam's razor right the simplest explanation yeah and i explain to me like i'm 12 why that is not a good idea except you know that it's just like well the thing that we can't say is is that we get a lot of funding here and as long as we sort of play ball right continue to get like we don't want to end that we do not want to end that that funding arranger it's money that makes and i think you should The poker's not even saying no lobbyists.

1:06:21He's just saying when you are lobbying, just put your name on something that I can search on the internet. It won't happen. It won't happen. I bet my left arm it won't happen. Mate, let's finish off. Anyway, so I just, I was just finishing on the thought, we always get into politics here, but business and politics is sort of joined at the hip. I just say, just to put a full stop after the discussion with ANZ and Suncorp, I think ACCC was right to reject it, right? I think it is almost definitionally an increasing concentration of power of all those things that we are talking about. Is that worse or better after this transaction?

1:06:55Ask yourself this. Is the consumer better or worse after this? I reckon there's a lot of synergies and I reckon the balance sheet of A &Z is going to look a bit better after all of this.

1:07:09But that's what I mean. And that's the problem with the law, mate. That's why the law will change, because right now, as written, the law says, will there be – can you prove it's the wrong word because it's a legal thing? But is there likely to be, or can you be sure enough there will be a reduction of competition to block this? In other words, the presumption is it should go through unless you can prove it's bad or show clearly to the court that it's bad. And so the burden of proof on that is something about the future, but you've got to say, well, I think it will. Well, why do you think it will?

1:07:37Well, because this sort of stuff might happen. Yeah, but it might not. it's a very very very difficult standard to reach which is why i like fell's approach which is you got to prove this is not going to harm competition if you want to do this deal you got to prove that because if it's if it's a cut up to the regulator to prove that it won't yeah that's a stupidly high burden of proof and to your point mate in the real world with the rest of us i think we're smart enough to look around and go it's probable that if you let a couple of really really really big businesses get bigger by buying some smaller ones that's probably it's i like to improve things it's probably gonna make them worse and so on balance maybe we shouldn't do that unless we can be sure it won't be a problem yep you know that that harm harm minimization of the first instance harm reduction it's like yeah we're not sure let's not do it just in case that's that's not unreasonable point okay and it's not just the angle of uh enabling competition and better outcomes for consumers banks are special banks enjoy an extraordinarily privileged place within our system.

1:08:34And we know that when stuff gets real, you know, the banks are usually at the center of it. And we have this, I would argue that not just for the competition angle, but also for the systemic structural issue that we should have, it's better off to have a lot of banks because if some of them get a bit silly and reckless with their lending, again, back to my earlier point, when they fail, it sucks. I get it. But I'd rather that then it's just like, well, these guys are so big now, they have concentrated themselves and gobbled up so much that we can't let them fail. And they know that. I mean, it's game theory 101.

1:09:10And so you just go, oh, look, let's just keep partying like it's 1999 because A, we're probably going to make a lot of money for a long time. And B, if ever the party does end, we're completely bailed out anyway. So, you know, and then, you know, let any number of like bubbles and misery follow in that wake. Mate, you mentioned bubbles, and I want to finish really quickly with this. It doesn't have to be super quickly, but you know, I don't want to spend too long necessarily as you want to. We are well past the hour, but I'll keep it free. We've ticked over that. NVIDIA, speaking of bubbles, those shares are up threefold in the last 12 months alone.

1:09:45Now, any share price tripling is a hell of a thing, except the business is now worth 1.67 trillion US dollars. In other words, that market cap was increased by a trillion bucks in 12 months. Now, I don't know how you want to slice the maths up. That's an absolutely massive chunk of change,$80 billion a month. Was it$2.5 billion a day? It's a stupidly large increase. Now, sales have been going through the roof. NVIDIA is largely powering the AI boom. A lot of NVIDIA's chips, it's a computer chip maker, by the way. It's the pick and shovel of the AI industry, right? Making a lot of chips, handling a lot of chips.

1:10:26Sales are going through the roof because everyone's on this AI arms race. the question remains though mate when the dust settles is this dot com mania is the AI boom real is NVIDIA going to be able to sustain this level of sales and profitability because there's an PE of 89 times there's an investor if that's going to be a PE of 25 starts to have to triple again sorry earnings have to triple again there's a lot going on here Is it too good to be true or is this the brave new world? Yeah. Look, there's a lot going on. The first thing to say is, and this is just true whenever you're looking at things as an investor, the investment is different from the asset itself.

1:11:13Yes. Because the difference being is what I pay for it. If you give me Nvidia for a dollar any day of the week, right? Even if I had all the money in the world, you want to offer me, I don't know, 10 trillion for Nvidia? No, no, it's crazy. So logically, there is that point between the two extremes where it's just like it doesn't make sense. I think NVIDIA is an incredible company. It is brilliant. I think its sales are going, well, I don't think, its sales are going through the roof. There's an incredibly strong tailwind there. I think it'll last. So all of the things that people are using to support the price are kind of right.

1:11:49I mean, you see this with any bubble, and I'm old enough to have sort of lived through a few, that there is always a nugget of truth to it. And it's hard to argue that you can look at all the magnificent seven, so they call, which are basically the seven stocks that are holding up the entire US market in terms of where it is because of their dominance and size within the index. They're all trading on eye-watering premiums. So why is that? Well, one, they're actually doing very well. But there's other things at play here. I think, two, there's that more macro sort of Wall Street sort of angle of, well, interest rates are going lower and Tina, there is no alternative.

1:12:23You know, there is only one NVIDIA. There is only one Apple. There is only one Netflix. And they are scarce assets in a world, again, to our full circle, awash with cash at the moment. So money will always seek out scarcity and it will always seek out quality. So it can be true that these are great companies and, in fact, are overpriced but can still end up being a reasonable store of value over the next five to ten years. because is NVIDIA going to be around? That's probably. Are they going to be earning more? Yeah. Can we argue about what the PE might be like on a more normalized basis in 10 years time?

1:13:00Yeah. Does that make the returns not as good as maybe I was expecting? Yes, absolutely. You probably won't do that well out of it. But I can actually see the argument, as crazy as it is, and I'm certainly not going near it. It's the same argument I've made for Woolies in previous episodes, right? Great business. Gosh, it's expensive. But it's expensive to me because I'm hubristic enough to think that I want sort of like a 10 % sort of average return. That's what I'm sort of targeting, right? Which is the long-term market average. So why am I trying to get less than that? It doesn't make sense to me.

1:13:32But then I've learned to put on another hat, which is the hat of the person who goes, yeah, I get all of that, but I just, I've got to park my money somewhere, right? And I feel as though I'd much rather be in something that is super, super high quality, even if I look back in a decade and I go, I averaged 6 % or 7%, it's not necessarily a bad outcome. And if I can rationalize that to myself by saying, well, actually sales are going to stay strong and earnings are going to grow much more than everyone thinks, then it's very easy for these things to persist. But my bottom line is if you're someone who is looking at this, just understand that, again, the trade-off that you're making here.

1:14:15Is it a great company? Yes. Are you, has it like gone up an insane amount in recent times? Yes. Can you extrapolate and reasonably assume that rate of growth to persist over any meaningful period of time? Well, almost mathematically, no. So that's cool. So just lower your expectation, your return expectations if you're getting in at this point would be my two cents. I like it, man. I think that's right. I wrote during the week about Microsoft, which hit$52 in 1999. Great example. For a dot com crash. Yes. Never, didn't get back there for 15 years. Yes. By the way, it's now going to 200, 400, a lot.

1:14:52Oh, it's been a great investment over the period. It was just an incredibly terrible investment for the first half of it. Correct. And so you've got to be a little bit mindful of that. Now, look, you probably, you know, you gained much of that in two years. You bought it three years earlier. You're probably fine if you didn't realize the share price spiked and then fell again. Microsoft, great, great company, done really well. Was it right to buy it in 1999 at 52 bucks a share? Probably not. I don't think that was a smart idea. Am I saying that's Nvidia? No. Am I saying it's not a video? No. But that's such a good point though, right?

1:15:19So let's get in our time machine. We'll go back to 2000. We'll speak to a Microsoft bull. They will say it owns the PC space. It owns the operating system space. It has got massive moats. I mean, there's antitrust lawsuits being filed against it for goodness sakes. Like this thing is a monster and it's only getting bigger. And over the next decade or two, it is going to grow like the clappers. And guess what? Absolutely. That happened. That happened. Like what people said at that time came true or the bulls, what the bulls said at that time came true. The mistake was, is they paid incredible eye watering premiums for that exposure.

1:15:55So even though they were ultimately justified, not just in what the business did, but their returns ultimately justified it. It was a lot of mediocrity. And I feel as though, that's not to say it can't go up 30 % tomorrow, but I feel as if you're buying some of these undoubtedly high quality stocks today. have that have that in the front of your mind as a very live possibility that you may just see and if you've got a 20 year horizon then fill your boots if you if you don't just be prepared for the microsoft phenomenon yeah no that's exactly right mate that'll do it i reckon for today we've got some great questions for sunday i'm going to suspect you'll be back in time for them will i see you on sunday 100 yes i know some of the questions too so i'm definitely going to do you Yeah.

1:16:40Well, you mentioned before two of my favorite topics. Oh, not that one. Okay, fine. I might have that one as well. All right. That'll do us for today. Until Sunday, enjoy the first couple of days of your weekend at 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. The Motley Fool operates under Financial Services Licence 400691.