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23:19Yeah. It shows the difference back then. Well, there's a lot of movie people on here. So who do you think number three is? I've given you a clue. Entertainment. Movie star? I can't give you any more clues. And I did say these top five, none of them are really actors. You say Jerry and Larry weren't wealthy because they're acting, they're royalty because of the producing. Oh, wow. Okay. Who would be a producer? Doesn't have to be producers. When did The Matrix come out? That was a big one. The Matrix of that era is - Who was a big - I think Jerry Bruckheimer was a producer earlier. Yeah, Bruckheimer's number 48.

23:50Oh, okay. He's very low on the list. Because I think he - But he was definitely - That's already late for him. Top Gun, it was 86. Top Gun, him and - Don't you always have to say Spielberg? You always have to say Spielberg. Yep, Spielberg number three. Yeah. Oh, wow. He was 175. When was Jurassic Park? Wasn't that Jurassic Park era? Jurassic Park was 93, but Spielberg had that SD with Geffen and Katsenberg. That's right. I can't see. I'm surprised Geffen's not on here, actually, because I would have thought he absolutely would have should have been, but I can't see him here. Number four? We just kept track.

24:18So you got number one, but I got two, three, and seven. I'm going to say seven. Mike said it was top five. That reverts to me. Harvey Weinstein was probably coming up. Who was that? Harvey Weinstein was probably coming up. That's interesting. He was a bit too niche, I reckon. He's not on here. Can I throw in just a curveball? Yep. Elton John he's English so he's not he's not on there he should have been on here I agree I don't see any non-Americans on here Michael Jackson's still alive in 1909 yeah he died in 09 is he on there he should be where is he he died in 09 yeah yeah he died in 2009 I don't see my this somebody's Michael Jackson not here and the list the credibility yeah I don't know why he's not on here lower the flag yeah he's not anyway But the other ones seem pretty legit.

25:05Number four. Can you get number four? Can I have a – is it entertainment still? I already forgot who I said for number three. Spielberg. I'll give you a clue. I said Spielberg. Not an – actually was an actress early in their career. But isn't known for being an actress. Interesting. May have even won an Academy – certainly nominated for an Academy Award. And is unique in two different ways actually for being successful. Okay. It's way too early to be Oprah. Is it? Is it Oprah? Oprah Is it Oprah? In the 80s She was big in 1990 She did the Michael Jackson interview in 1990 Wow Okay So Colour Purple was the movie I think she got nominated for a best supporting actress role So she's number four So then is Dr.

25:48Phil on there? Because he was in the leagues Did we say number five? Who was number five? You haven't got number five Oh no you got number five James Cameron Someone got that Oh so we got the top five Because you know I don't really do entertainment But now I think about this top five list So one and two Definitely I was very exposed to that entertainment. That's comedy. I'm always in for comedy. Three, Spielberg you can't avoid, basically. Also, he was making Michael Crichton books into movies. I'm going to watch those. And then four, I don't think I really had. I probably knew. Everyone knows.

26:19I know, but I didn't consume her. I was a consumer. And then five, James Cameron, I think is another one you can't avoid, right? I feel, yeah, this is unusual because usually. And number seven, Michael Jordan, obviously. So number. So six. Number six. Number six is still active and was recently active, but you wouldn't think of and was big back then. Think of people who were big back then across multiple mediums. Still entertainment? Absolutely entertainment and across TV and movies. Okay. You can't Google. I'm just seeing when someone died. He's not dead. They're still alive. There's very few dead people here and Adia may have mentioned one of the dead people recently.

26:58Really? Yep. Recently as in today? on the podcast recently. This person died about 17 years ago or 16 years ago but he very recently mentioned them as part of this conversation. This number six person. No, this is number eight you just mentioned. Oh. Number six is the one who was very popular back then across TV and movies. There is nothing I remember less than content I've spoken about on this podcast. In the last 10 minutes. 45 seconds ago you've literally forgotten. I'm asking from 28 years ago you can't get 48 45 seconds ago. Come on. My brain has switched off now. you mentioned this person saying 45 seconds ago.

27:31Did I? Who was big in the 90s across – this person was big across – Tom Cruise. Movies. Live. Yeah. TV. Yeah. And books. Who was big across all three? Michael Crichton. Michael Crichton. Oh, you should have given me that. I have to say it twice. What was – and do you know who was big in all three? Do you know – obviously the book is pretty – it was not a number of books, but what was the big books he'd written? He wrote Jurassic Park. Jurassic Park, Disclosure, both movies. Obviously – what was the TV show? By the way, even Andromeda Strand was made into a movie. He was amazing. Yeah. In fact, I don't want to bore people because it's not an entertainment podcast, but you should look at his views on Jurassic Park.

28:08Most authors complain bitterly about what he's done to their movies. He just had this amazing attitude, which is once you buy this to make a movie, that's yours to do what you want with the script. I thought he did a good job with Jurassic Park, actually. Well, Jurassic Park was like this seminal movie because it was the first CGI movie where people's minds were blown, right? so yeah so that was number 8 he was a very good author can you get number 6 number 6 it's a male male across TV he had the number 1 TV show and he had Jerry Springer no Jerry Springer I mean Jerry Springer on the list that would have been I think it was earlier than 98 Jerry Springer no it was around then but Jerry Springer's on the list a male that had the number 1 TV show yes maybe like Lebanon or something oh none of these shows number 1 TV oh Hang on, hang on.

28:59Matt Groening. Simpsons. Simpsons. No, Simpsons never been at one. Oh, okay. I was going to say Friends, but it's too many. Too early as well. Bright, Kaufman and Crane, who produce Friends, they're on there at number 32. But Friends was only four years old then, so they hadn't syndicated yet. Who is this number six? He's big on syndication. I gave you a big clue. He was in a movie. His voice was in a movie in the last month. Tom Hanks. Tom Hanks is on there, but that's not what I'm saying. Tom Hanks is number... His voice was in a movie. Oh, no. Tom Hanks is number 27 at 44 million. Joel, you're a movie guy.

29:33This is all still too early for The Rock. Big TV show. Not The Rock. He's 2010s, right? Yeah, he's a wrestler. He wasn't even wrestling then. Big TV show, big movie, recently in a movie. I can understand why you don't know. He said voice in a movie. So does that mean Toy Story 5? I'll give you another clue. He had a criminal conviction, a low-level criminal conviction. Oh, God, that could be lots of celebrities. Low-level. Okay, I'm going to say one, but it's not Matthew Broderick, right? What was he convicted for? I thought he was convicted. He just smirched one of the great men of Hot Pyrrhus.

30:07No, I'm pretty sure he – someone can Google this. Matthew Broderick's never had a conviction. For Matthew Broderick. We'll put Mike's legal details in the show notes for the lawsuit. If Matthew Broderick's people want to contact us, we'll give him Mike's legal details. Yeah, we'll put it in the show notes. What is it? Come on, spit it out. Tim Allen. Oh. Well, I went Tom Hanks because Toy Story. Yeah, Toy Story. You were so close. You were knocking on the door. Oh, okay. Okay, yes. Can you get number nine? We're going to go through our list, obviously. Number nine. Oh, God. Who is still going?

30:36He's a big-time Hollywood celebrity. Probably he's had – I think this guy's had billion-dollar movies in the 80s, 90s, and noughts, and probably teens. As the star of the movie. As the star. I think possibly the highest-grossing star of all time if you add up all his movies. Probably my favourite actor. Jack Nicholson. Adam Sandler? Adam Sandler. No, but Adam Sandler has made a lot of money. He's loaded. That's true. He has made a lot of money. He wasn't in Appetite. What big money? Have you seen Star Wars? It's not impossible that Adam Sandler's a billionaire. He might not be far off it. I'm pretty sure.

31:07Because he's a producer as well, but he's not. His movies are good. Why is he not on your list? I love the wedding. Don't find him on your list. Why is he not on your list? I love wedding. When grown-ups came around, the big money. I don't want to make the anti-state. How is Dern's on the ocean? Funny, I'll speak to you. Where is he on your list? He's not on the air because he wasn't that good. It doesn't matter how good you think he is. No, I like him, but he wasn't that big is more my point. I think he was big. Can you get – I said Jack Nicholson. Is that the wrong guy? Is that on here? No, he's not on here.

31:34Maybe he doesn't get paid that much. This is a massive actor who was in top movies in all three. He's massive. Like he's probably the biggest movie star of our generations. James Earl Jones? I love James Earl Jones, but no, he's not on here. That is a ridiculous guy. What was his fortune from being the voice of CNN? Don't say that. Oh, come on. That's not much money. And he was also coming to America. That was great. I know, but he's not getting paid a billion dollars for that. You're not talking about like a Marlon Brando. That was amazing. It's not Brando. No, Brando was screwed by then. Harrison Ford.

32:10There's people here who are just still day-to-day names. Yeah, Harrison Ford? Harrison Ford. Well, how come I said it? I just said it. You know what? This is the problem with these quizzes. Even when I get it right, he doesn't even listen to me. I just like deaf in my left ears. Can't hear what I did. All right. But no, that was the biggest movie. And there was a bunch of – there's a few bands on here. Can you name the bands? Nirvana were big around then. He was dead by – Kurt Cobain was dead by then. Given that Michael Jackson's not on this list, I've got no confidence in these bands. There's one guy who's had a few issues lately.

32:45Can you think the guy's had a few issues of late? Donald Trump? Much worse than that. Donald Trump's president. He's not all right. Is he on the list? He wasn't a sater back then. I suspect he was. A musician? Musician has had a few issues of late. A musician that's had a few issues. Yeah. Pink Floyd has a lot of issues. Not with Jewish people. He generally has issues. He's currently in jail. They all have issues. Are they in jail? Solo artist? Periodically. Pretty much. Producer originally. He was in here as a producer. I'm shocked he was this high back then because he was really young at this point.

33:20I have no idea. No, no idea. Puff Daddy. Oh. Why is he so rich? He was a producer back then. You've got Garth Brooks, number 15. Garth Brooks, he's been around for a while. There's a guy who did cartoons. You said Matt Groening, well, not right, but there's another guy. Who did cartoons? Okay, a cartoonist. No, everything I say I feel like I'm going to sound stupid. You're not from the door. You're not from the door, Groening. You said Jerry Seinfeld. That was the call of the scene. Who did Family Guy and all that? Seth MacFarlane? No, it wouldn't be him if Matt Grayson was. You're very close.

33:53You're really close. South Park wasn't big back then. It wasn't South Park. It can't be like the Peanuts guy. I don't know. Charles Schultz. Charles Schultz was on here. He was 30 years too late on that one. My judge. He did King of the Hill and stuff. King of the Hill, was that big? Spice Girls were on here. 49 million um paul reiner was and helen hunt were both on here for mad about you um john travolta drew carey um ted turner wow uh so no that's not right it's bonnie turner bonnie and terry turner whoever that is um brad pitt's on here kevin costan's on here um nicholas cage is on here michael schumacher on here uh second sportsman um tiger woods way back down in 44 so he's just getting going the biggest surprise the two biggest surprises i've got from this list Number one, how long we've spent on it.

34:47Number two, that it's heavily – I thought athletes would be much more – Yeah, but I just keep remembering like 98 was before athletes became kind of the centrepiece of society. It's pretty social media. They didn't own their own IP. Yes, you're right. And I tell you what doesn't surprise me. It's all men. Grant Hill was on there as well. There's Oprah Winfrey. Yeah. But apart from that, it's all men. Yeah, always a few actresses, but yeah, it was very – I think now you see much more balanced as well. Partly because of social media. Absolutely. If you look at all the Kendall Jenners, they've been incredibly adept at using social media to build brands and build IP.

35:25And this just wasn't – you weren't able to then. So social media for all its fault has been the great democratisation of celebrity wealth has come from social media. Maybe what you'd say is that people now that have a personal brand are able to monetize it themselves as the owner versus renting it to someone else to monetize. That's the big difference. Yeah. So I'm going to cut back to AI. We haven't spoken about that a bit and something very interesting. The Kimmy K moment or something different? No. Well, that's kind of – Last week. Yeah, and a bit boring in my view. Like, you know, this is just one of these moments where there's an announcement that gets made.

36:07Typically something comes out of China. and people don't really understand it but they panic um do you see there were two that so there was a whole like festival in china that's where that announcement came out of and the end i think with that um xi jinping was out and the end of the festival was chinese robots fighting did you see that no i get bored with that they always like fall over at some point yeah so what's interesting about it is that um that mostly the way they go down is falling over themselves yes like they basically managed to invent this round flying roundhouse and they try it pretty frequently and mostly miss.

36:44It's pretty cool. What's interesting is when they punch each other or kick each other, they're too stable to go down. Like they won't go down from a kick. They'll mostly fall over themselves. But the scariest thing is, and I tell you if you're going to watch something on this video, don't worry about what they do when they knock each other down. Look at how they get back up again. That is terrifying. They basically just spring back up. Yeah. They can never stay down. That's the terrifying part. So there's a company that raised$300 million last week in the US. It's called Etched, E-T-C-H-E-D. Ever heard of it?

37:18No. Probably Val might be three bill. Just came out of stealth mode. Yep. I'm going to tell you what they do because it is a very amazing insight. Oh, these guys who etch onto the GPUs or something like that? No. Oh, okay. But the insight in this is how different AI is going to be in five years' time from a commercial point of view compared to where it is today and how hard it is to predict how it's going to play out. So I'll just tell you, this is a company where I'm just going to say what – you'll never have heard of the people involved in it. I'm just going to tell you one or two things that each of them has done or a few of them have done.

37:52So one of the founders, he was – a few of them are Harvard Teal fellows, which means Peter Till paid them to leave Harvard. Or leave any university. It doesn't have to be Harvard. Yep, correct. A few of them were Maths 55 alumni, which is like the hardest maths course at Harvard where everyone basically drops out. MIT or Harvard? You could be right. It could be MIT. I thought it was Harvard. But like, and so like world maths champions, et cetera, et cetera. So there's a lot of that stuff going on. Smart guys. Yeah, very smart. Okay, this is more interesting. One of them was the co-founder of a business that went to$100 billion.

38:28and another business that was bought by Crimson Education. Oh, really? Bit of a dodgy. I wonder how they're going, those guys. Well, they're not dodgy. We just question the valuation. Yeah. One of them was the ex-CTO of another business that was acquired for$10 billion and has shipped five systems generating greater than a billion dollars in revenue. Now, see if you know what this means. All on A0 silicon. Do you know what A0 silicon means? You know what A0 silicon? So this is something to look out for. So when you make silicon chips, The first one you make is called A0 and then it's called A1, A2, maybe B1.

39:03A0 is the first one you ship and generally people will expect that it will have some flaws in the architecture and you'll have to make an A1. And so if you say I shipped A0 silicon, that means you're so good at chip architecture, you didn't have to make an A1. You could ship the A0. This guy says I've shipped five systems generating more than a bill revenue all on A0 silicon. That's impressive. Another guy led platform engineering teams across NVIDIA. How many fans does this thing have? This is the VP of platform. I'm just reading you some of the background of these guys. Built the HDX and DGX systems from scratch at NVIDIA.

39:38Just know, it's like core platforms. Another guy led zero to one production and supply chain ramps. So that's the first stage for 24 products, including the original iPhone, MacBook Air, Pixel and Chromebook. That's impressive. Another one was on the architecture team at NVIDIA of the H100, A100, V100 and won a Qualcomm Research Award. They're pretty good, these guys. Yeah. One built the TPU software team version 1 to 5 at Google. So that's the TPU chips at Google. And led research for Project Astra at DeepMind. So this is the kind of nature of these people. What they are building and the reason they got so much money is this.

40:19And that's why I say God knows where this is going to all go. And they have built – so the way that AI works is it uses a software architecture called Transformers. And when NVIDIA builds one of their chips, the chip is a multi-purpose chip. It can do stuff that uses Transformers, but it can do other stuff as well, like make images, which a lot of that is not Transformer-based, or do computer vision. And as you know, it has this software called CUDA, which basically helps the chip know how it should be used. But because the chip is trying to work out what it should be doing at all times, there's some latency, some time that it takes to figure that out.

40:58And then you've got Google is releasing chips like the TPU, which are much better for inference. So that is like answering questions, not training. Using AI. But even that can do lots of different things. So there is some latency. And Amazon's doing that as well. And Amazon has an inference chip and a Tranium for training. And I forget what the inference chip called. That's probably a similar kind of name. Yeah. But what these guys have done is something, a next step. Yeah. Which is pretty crazy. They've basically said it's possible to encode the transformer logic onto the chip itself. Yeah, so I was talking about etching it onto the chips.

41:33Is that what you were meaning? Yeah, exactly. Okay, all right. So, yes, basically that. But what they're doing is, what it means is, all this chip can do is transformer-based calculations, which is a lot of, maybe what we'd call it is, anything where you have one token at a time following, which is mostly text-based stuff, this thing can maybe be 200 times faster than an NVIDIA chip. It can only do that one thing. And one of the challenges is that you have to rewrite the code. Like the main code base that it's in. Well, CUDA is just NVIDIA. Well, it's not CUDA. It's called TensorRT. It's something that sits alongside that, but it's what you program in.

42:14Yeah, it's what you program TPU chips in, so you can't use that. you have to rewrite so they've just come out of stealth i think they've raised hundreds of millions of dollars they have a one billion dollar order book already done yeah what's interesting about them and you'll remember this from our ai discussion is obviously who are they going to use to make their chips there's only one company you can use to make chips really not invidia well invidia uses them as well tsmc but what's interesting is you know all of the so you have to think about where's the backlog in ai so the backlog is in two places you know one of the yeah memory so it's hard to get memory and another backlog is getting access to tsmc it's especially hard to get access to their three nanometer um production lines two nanos now uh well most of the nvidia chips and advanced chips are three nanometer which of course are not three nanometers yeah it's just a marketing name um so this is actually made on four nanometers yeah so less less uh bottleneck yeah guess who two of the investors in this etched company are if you wanted to get access that's one of them asml uh no because that's upstream they don't need them what's the other bottleneck oh sk hinex yeah so they've got a memory investor and they've got so they're going to be able to get access to chips and the thing is this if they start they become they always become like a subsidiary of those two businesses in some ways yeah i think that that guarantees them supply chain right and so you have to think about it no one knows how this is going to play out but what you now have so i don't know if you have seen this but nvidia's current share of inference that means their chips are being used in data centers to actually run ai yeah do you know what their current share is estimated to be not really much in china because they got blocked recently that's still amazingly high 85 90 yeah and so do you know what the forecast is where they'll drop in the next 10 years.

44:07Have they got 80? So I think it's down to kind of 30. Oh, is that all over again? Yeah, that's what they think. That's because Amazon and Google and all that stuff. And so all of these NeoClouds and all of these data centres that are being filled with NVIDIA chips, and so the way you should think about this is the entire industry is basically sitting on the shoulders of a few hyperscalers. All of the money is coming from these hyperscalers who are under pressure to get returns. And so the hyperscalers pay, and then NVIDIA gives them some money that these DC data centers or NeoClouds, and then they use that money to buy NVIDIA stuff and Dell stuff.

44:41It's all built on this kind of view that this is what the ecosystem is going to look like and the hyperscalers are going to keep spending. No one knows what the world would look like if all of a sudden these chips became 200 times more efficient for doing the bulk of the workload and how that filters through the system. on the plus side we speak about Jurassic Park we talked about Jurassic Park a few minutes ago and my favourite line from Jurassic Park I've talked about it on the pod before but Jeff Goldblum who was only like 35 or something at the time I thought he was really old he had this immortal line where he goes we're talking about how could these dinosaurs come back to how could they do what they did and he goes life finds a way and I was like technology finds a way when something is so high and Jeff Bezos talks about your margins my opportunity same thing Nvidia is making so much money that ultimately which is why the share price is under control and the PA is 30, not 100, is because tech finds a way.

45:36That margin is everybody else's opportunity. And interestingly, TSMC, who has a bigger monopoly and more robust monopoly, you know they don't price to the marginal customer. They basically say we're going to have a fixed margin. Their gross margin is 50%, not NVIDIA 70-something. And that is one of the ways they keep competitors out of the market. They just don't provide enough margin. They're long-term greedy, not short-term greedy, those guys. And so you have to think about, you know, if let's say these chips rolled out like an etched chip and it became so much more efficient, number one, everyone who's stacked their data centres with NVIDIA chips, they got problems, right?

46:10Number two, it might actually be really good for the models because all of a sudden, you know, effectively Anthropic is struggling to make money because nobody wants to pay the cost of tokens. But all of a sudden, if this was like so much more efficient, suddenly tokens can get a lot cheaper to run. That's the bet on these things is that, unless something like that happens, like OpenAI and Anthropic are dead. So even Anthropic, which is a much better finder position than OpenAI, almost certainly dies. OpenAI is 100 % dead unless something like that happens. So it feels like all the bets on these, called the two foundational models, basically, of those two frontier models, are based on something like that, like the cost, input cost dropping.

46:53I listen to Ed Zichron a lot and he's fantastic and he's constantly saying how these guys are basically insolvent. The whole AI boom was rested on OpenAI. Without OpenAI, there would have been no AI boom because this, remember OpenAI started really cranking in, well, GPT was 2023, but even before that, and that's what drove NVIDIA. So everything really hinged on this one company that essentially has no business being in business based on current financials. But then all the hyperscalers, I think the first GPT-Mail was 2020, and then the hyperscalers jumped on. The thing is this, that people don't think about.

47:26So there's now a – I don't know if you know this. You might know this. Like there's something like – it's not very big. There's$40 billion or something. It's still small. There's syndicated asset-based finance on chips. But it's going to grow dramatically, right? And I suspect – When you say on chips in data centres? Yeah. I thought it would be a lot more than that. Yeah, it's still pretty small. That doesn't sound right. What about all the private credit? I think it's just starting to grow now. Hundreds of billions of dollars in private credit paying for these data centres. So this is specifically, maybe this is specifically NVIDIA's lending.

47:57Maybe. NVIDIA's lending. Maybe internal lending. Yeah, it's still quite small, okay? No, this doesn't include - We're at the Blue Owls and all that garbage. Well, this is not including bonds issued by companies. So Oracle issues against themselves. There's always SPVs as well. Asset-based funds. There are. There's balance sheet stuff as well. There are. It's literally Enron again, this stuff. Well, the difference, the main difference is, because I thought about this relative to the subprime crisis, and the difference is the marginal borrower in the subprime crisis was the person least able to pay.

48:28It was like the subprime borrower and then they CDO'd it all up, right? So they basically packaged it and it made it look like it was diverse, diversified, but it wasn't because it was all junk. If you go and get lots of junk and put it together, it doesn't become less junk just because it's diversified, whereas this is a good borrower. This is mostly hyperscalers, ultimately borrowing. And by the way, I'm not sure if you know this, but NVIDIA has contractually backstopped a minimum final sale price of their chips with a lot of these. That means you can lend money to a NeoCloud based on what the final price of the chip is going to be when you sell it on the second-hand market.

49:11And NVIDIA says if it's below X, we will buy it for X. So NVIDIA is effectively using their balance sheet to prop up the whole AI industry, basically. But, you know, if OpenAI goes broke, probably a whole lot of neoclads collapse. That's the chain reaction that happens. And this is what you think about. Then the neoclads collapse. What happens to all of these chips? So they're going to flood onto the market. Now, there might be enough demand to absorb them. It's not just the chips. What happens to the future chips that aren't needed anymore? Because you're all these current chips out there. And so maybe at the moment there's much more demand for chips than supply.

49:45But then you have things like Etched come along and TPUs. I just think five years' time is so unknowable. There's so many – Two years' time is unknowable. Forget five years' time. It's so hard to pick what's going to happen. And I think this little glimpse into – whether they're the winners or not, it just shows – What can happen. How, yeah, the assumptions that people are making about this industry, they're changing every week. We've talked a lot about the Michael Burry notion, the off-balance sheet stuff. Well, he's massively short on this stuff. I love Michael Murray, but if you look at all the off-balance sheet stuff, so all the hyperscale essentially put all their spending, they capitalise their spending essentially, on balance sheet, off P &L.

50:27So all the off-P &L stuff we've talked about. We talk about this all the time. Can I say this in a slightly different way and then you continue? So investors seem to be able to stomach capital expenditure, CapEx on AI that matches the free cash flow of a hyperscaler, but they can't stomach CapEx that's more than the free cash flow. And so the problem is how do you do CapEx but it's not CapEx? And the answer is you go to a NeoCloud and you say, we're going to buy all of this stuff off you on an ongoing basis and upfront a chunk of the money and that is operating expenditure. OpEx, it's really CapEx that you're just shifting to OpEx so that it doesn't look too bad in your own financial statements.

51:12And that's kind of what you're talking about. We talk about the whole CapEx thing, how people say, oh if you look at the overall market the p is only the p multiple is only 22 for the market over not that expensive because like it's a minute 40 and that and we've said well that's not right because a lot of the expense is actually being capitalized so it's it's it's on the balance but on the p and l so we've talked about a lot this is everybody knows this we didn't come up with it whatever but there's actually something i hadn't thought of that is i was reading uh bill bonner who's one of my favorite writers he quoted a guy called charlie billello who basically said not only is that there's something else i didn't even think about but there's also and this charlie guy said in the first quarter just three companies google nvidia and amazon saw massive gains in other income category from their private investments in companies like spacex and anthropic the total of 69 billion in other income was 10 of the s &p's overall net income for the quarter uh i present this boost s &p year on year earning growth would have been 15 well above the 28 so talking about oh we're not expensive because 28 huge earnings growth So 28 % not only has the CapEx stuff, it's also got the investments, the benefit of the CapEx stuff.

52:17So they're marking that up. Yeah, so the investments in Anthropic and SpaceX, and SpaceX essentially was, and that's come back down, but at the time it was up, that's based on XAI, which is the whole frontier model. But I'm surprised they can mark that up because the general accounting standard is, unless you're an investment business. Well, they do in the US. You hold the investment at cost. They're marking it up. Well, that's ridiculous. So we've got double. So there's two reasons why these earnings are just a fraud. It reminds me of two things. One was the Depression when all these earnings were fake.

52:46But we talked about this before, but AOL in 1999, 2000, we did the Time Warner deal. AOL had real revenue, and Time Warner did a deal based on real revenue. Problem is that revenue was all coming from dodgy startups being funded by VCs. So the revenue just in 2001, gone. It feels like this could be the same thing again. This is fake. It's real revenue in inverted commas, but it's really fake revenue. It's not actually real profitability. And it's much more – the capital stack in this boom is much more concentrated than it was in the dot-com boom. It's basically three or four hyperscalers and then like some Saudis and a few others and a few big American banks.

53:22And a lot of debt, which they didn't have in the dot-com crisis either. Yeah, and a few American banks lending debt. And private credit. That feels like another whole subprime mortgage thing. But every time someone comes to the market and says, we need to raise$100 billion from AI, there are not many places that you can get there from. it's much more concentrated than the dot-com boom was because the dollars are so massive yeah i mean i think what you've just described with the markups is like the two of us owning a property and let's say you own 70 and i own 30 and you want to be worth more so you say to me i'll pay three times the value for another five percent from you yeah and you mark up your whole 75 percent now to that three times the value yeah i mean nobody would tolerate that the money i'm to pay you i'm going to take off my pnl i'm going to put the balance i'm not so i'm not going to put anything on the p so nothing's going to run through anybody's pnl so the question is you know i've thought a lot about this like how do you financially position for this moment and the other complication which i won't go into a lot of detail now but at some point we'll talk about this is like quantum computing is coming yeah and probably the hype the hyperscales especially google they'll be a beneficiary of that they're building hard on that and so um and how do you positioned for all of this and i think like you can't short ai because you're going to go broke waiting like it's unknowable when this thing is going to crash and there are so many vested interests determined to keep this up and they're rich and a whole lot of them are the most valuable companies in the world so you probably go we think you can't short ai does that mean you can't short nvidia or because there's plenty of places that oracle shortable uh spacex is shortable there's Lots of stuff that's shortable.

55:00So, NVIDIA is going to survive a crash. It's hard to see how they wouldn't survive. They've survived a few of these. They've had 80 % drawdowns consistently over their lifetime. What's their annual profit and free cash flow? It's like$100 billion or$200 billion. But it's all based on this fraud, though. Eventually, this could very quickly unwind. But even if they started running out of free operating cash pretty quickly, they've got so much cash. I don't think they go bust. It's hard to imagine them going. They could drop 80 % like they have multiple times. It could drop 80%. But – It's taken back to 2024.

55:32They're vulnerable, but there are much more vulnerable things. So, you know, you could try to pick individual disasters. Something like Blue Owl. The call wave, I think. The private credit. Oh, the call waves, the irons. There's lots of obvious stuff. So you think about the stack, right? So you've got the chip. Well, they're probably not going to go broke, okay? That's the last – NVIDIA's the last thing I'll be sure. Even though I think it might go down 80%, I wouldn't touch it. And then you've got data centres. And so the more robust data centres are the ones that actually own something, like access to power and water in a physical premises.

55:59But the neoclads, as you said, that really own nothing. Well, IRON is more the first category. IRON has a data centre in Texas. And so they could still go to zero. It just means that data centre would be an asset they could sell. It doesn't justify their valuation. But CallWeb has no assets and lots of debt, heavily leveraged. And so you could try to pick them off. You could try to pick off the people that lent to them, which is kind of what you're talking about. That to me is the more obvious one. Yeah, and so you say Oracle, but what you really mean is... I think Blue Owl, the private credit, Blue Owl's listed private credit, so that's the really easy one.

56:35There's others as well. You could go and try to short Oracle's credits, like their bonds, if you think they're going to collapse. I think Oracle will find a way to survive. They've got some really good businesses, Oracle. Oracle itself is a great business. NetSuite's a great business. They've got some actually really good businesses in that business. But my main issue is this. It's also volatile. The volatility, I was having a look at this on some options. Like the volatility on iron is 30-something percent. Like, I mean, the thing fell 25 % in a month. These are so volatile. And like this might stay – I mean, I thought this was going to fall to pieces pretty soon.

57:10Yeah. But it might last another three years. Yeah. And so it's kind of hard to know what to do about this. It's an interesting problem to try to figure out economically from an investment point of view of what to do about this and how to protect yourself while taking advantage of the upside. I just want to talk quickly on the KPMG saga, which we talked about a few weeks ago. Somehow this got worse over the weekend with a disgraced big four firm sacking recently demoted CEO Eileen Hoggart from the firm's partnership after finding she had stored printed copies of confidential lend-lease board documents in her locker, shared them with her colleagues to win audit contracts, and then repeatedly lied about it.

57:47Apparently, Alan's uncovered an email from Hoggart, who bears an uncanny resemblance to someone from an evil villainess from a Disney movie, where she responded to a request from a colleague to see Lend-Lease documents by asking her EA to get material out of her locker and share it. The scandal has already claimed the scalps of former CEO Andrew Yates, former chairman Martin Shepard, senior auditors Paul Rogers, Kim Laurie and Julie McPherson. Amazingly, and this is probably the worst part of all, Hoggart was able to remain at the firm as a senior audit partner for the past two months, despite being specifically named in parliament as hiding stolen audit documents in her locker and being demoted as COO.

58:19The KPMG board actually overruled their legal and HR bosses in allowing Hoggart to remain. Chairman of the board at the time was Martin Shepard. He has since quit in disgrace. Could it be any worse for these guys? It looks pretty bad. I mean, the thing is this. We look at this and say, how could anybody have ever thought they would get away with this? And I'm going to tell you my view on that. most people that do terrible things to other people super dodgy they get away with it i've personal experience on the receiving end of this right like mostly you can get away with doing terrible stuff and i just think their view of this was no one is ever going to catch us yeah this stuff yeah and i think that is pervasive in the corporate world that's my view on this and every now and again you hook one of these big fish yeah and it looks terrible but what you don't realize is there's tons of this stuff going on below the surface that you'd never even know about.

59:13I'll swallow fish. That's the truth of it. This film especially, I don't think you can tar every auditor with this brush. This seems to be... Yeah, I'm not even... Even within the same firm. I'm not even picking... Most people in KPMG are good people and this is just... These people at the top who you'd expect to be sort of whiter than white were the worst actors of them all. So I am not specifically targeting auditors in these comments at all. I think that increasingly over the last 50 years maybe, let's just even go longer and say the post-war period, what we've seen is that you can get away with more and more.

59:52And regulators or the law, it's a few kicks behind play. And so I think across the business, you know a chunk of what goes on, I know a chunk of what goes on. We mostly don't know what goes on. Yeah. There is a lot of very nefarious stuff that goes on in the corporate world. And how did they get caught? I mean, how were they? They were unlikely. A whistleblower. A whistleblower. That's right. They tried to suppress the whistleblower. Yeah. And so what you see by this pattern of behaviour, in my view, is this terrible stuff happened. There will be some people that didn't know that this was going on.

1:00:29The first instinct is to say, we'll be able to get away with this. That's the general disposition. I think people are – there's a lot of naivety that goes on when you look at business and you look at markets and you think it's largely clean. That's not my view of it at all. So I'm happy that this was exposed and hopefully it will make some people scared to try to do bad things themselves. I want to move on. The FT reported this week that Waymo is reportedly looking for a way out of its deal with Uber. We talked about this a few months ago. Yeah, it was so predictable. Which has been – which has made the Alphabet-owned robo-taxis available on the ride, on the ride, Hattie Ling Giants Network in Austin, Atlanta.

1:01:08You say it's predictable, but remember at the time when we argued about it, one of the things I was worried about with Uber was the fact that it had to rely on Waymo. And you said, oh, Waymo needs Uber for its distribution. Clearly, Waymo doesn't feel that way anymore. I thought they would need them for longer than this. Yeah. But we did both say, it's Google. So one is, they're okay at software. Pretty good customer acquisition as well. And two, yeah, they've got some good customer relationships. It felt like everything that Uber had to offer them was going to be transient. I'm just shocked by hell.

1:01:36I'm not shocked. I'm surprised at how quickly. Well, they haven't done it yet. But it was always obvious they were going to try and get on to it. Well, they have done it because Waymo's already told Uber that it tends to stop its app in January 2028. And they've already split in Phoenix. So Phoenix has happened and these other cities are going to happen. So I have to download a Waymo app in Phoenix if I want to order it. My guess is it's got to be integrated into the Google suite, right? Absolutely. Totally. So I've got single sign-on, so it's going to be pretty easy. This actually is happening in the backdrop.

1:02:09I'm not sure if you saw this in TechCrunch, but Waymo and Uber are having a huge policy fight in DC. I'm not sure if you saw that. Oh, I did. Waymo's backing a bill to allow for the safe deployment of autonomous vehicles, which is the same as what's happening in LA and San Fran and all these places. Uber's arguing that the proposed laws would displace human for hire drivers and hand Waymo a de facto monopoly, which is strange, given there's a bunch of other companies doing it. They're right about the first bit. Yeah. Uber is lobbying for a system that would require robo-taxis to operate on a ride-hailing network that also uses human drivers.

1:02:35I wonder who that would help. This would, of course, make Waymo business unable to operate because they don't have human drivers, and Uber would have a monopoly themselves. So this sounds pretty self-serving. Uber, meanwhile, I thought this was the interesting part. So we talk a lot about Uber because it's such a fascinating business. But Uber, meanwhile, is in its share price slump, down 34 % since September. Its recent valuation is only$134 billion. Interestingly, when Dara Khosrowshahi took over Uber in 2017. What do you reckon it was worth back then? I mean, presumably he's ridden it up pretty heavily because I thought it was like the whole Travis debacle.

1:03:14That was obviously that. Pushed it down aggressively, right? Like has it gone up? Well, his last round was$68 billion when Travis was there and then now it's$134. So in 10 years it's a bit under. That's 7 % a year, which is pretty bad for people. That's a toll road. Yeah, people say, how good's Dahari? He's such a great, incredible CEO. He presents very well, for sure. But you're picking a point after which it's fallen 34%. I have, but we are at this point now. So we have to assume the market's efficient. You have to assume the market's efficient. Well, in a degree, it's efficient. You're still doing that sales pitch.

1:03:49What this kind of does prove is that Travis Kalanick and Emile Michaels claims that Dahari was doing actually a pretty bad job, but kind of improving, right? In hindsight, this really revolves around, I remember what Travis was really critical of was the whole shutting down the self-driving unit. And a lot of Uber's problems hails around this Waymo competition. If I remember our discussion was which side is going to be commoditized, maybe both, the network or the hardware. I was much more bullish on Waymo. And you were more bullish on Uber. Well, I think maybe this is – I mean, I remember we had talked about this, but maybe this is how my viewers kind of evolved with this.

1:04:24Uber's big opportunity and why they were so successful is they were a marketplace where both sides were fragmented. I know we had this discussion. And now it feels like it may not remain the case because they're dealing with a hyperscaler on one side of the market, definitely not fragmented and the resources to do it themselves. But this is the big question. Again, I just say, we're still early in this self-driving stuff. You've got, what, five players at the moment. If there are 25 players or 50 players, then that will still be a fragmented market. And yeah, maybe they won't get Waymo, but unless Waymo goes and gets 60 % of the market, it won't really matter.

1:05:06And the big question to me is, what's going to happen with all these Chinese self-driving cars being deployed around the world? Whose networks are they going to use? I think that's going to be a big determinant. So Chinese EVs or Chinese self-driving? Well, Chinese self-driving EVs. Oh, will they use Uber, you mean? Yeah, because presumably, like, you know, there are all these Chinese players. Okay, we know BYD, but there are tons of them. They're all going to be doing self-driving. They're probably EVs. And so they're going to want to deploy into the West. And so how are they going to deploy into the West?

1:05:38They're probably not going to do it all through their own apps. They'll be too fragmented. And so I think that's the unknown for Uber. How fragmented is that side of the market going to be? Waymo is their worst nightmare. But there could be other things that are not nightmares. Well, I thought it shouldn't have been because Uber could have had their own competitor Waymo. Obviously, they poached the guy out of Waymo. That controversial guy went to jail briefly. But do you think that Uber should have ended up being a hardware provider? I think they should have been doing their own stuff. How would they have defeated all of these other much more deeply funded...

1:06:10How did BYD go from battery manufacturer to the world's best EV? You can do it because you can do it. Then what Uber would be saying ultimately is we're only going to connect you to cars. Elon Musk doing it with Tesla. Our cars. I know, but all of those, that seems like a terrible system. That's like a - But Waymo aren't the car manufacturer. Waymo just puts the LiDAR on the Jaguars at the moment and now they're - I know, but just like Tesla used to put their engine, their motor inside a Lotus. And now they're the whole car. I don't think it's the Lotus Tesla. This is much more a Jaguar Waymo analogy, I think.

1:06:46Maybe. But, like, let's even talk about the automated part, okay? The automated part of this is not just software, but a lot of it's software. How many of those providers are there going to be? It could be 100. And so do you want every one of them, like, to have their own app for hailing a car? That would be like waiting at a train station. No, no, no. Unless the train that you're waiting for. I agree. There definitely won't be. You can't get on the train, you know? Uber would have controlled their destiny and wouldn't be beholden to the Waymos or to the Chinese manufacturers. Well, I think Uber should just make deals with Chinese companies because that's just going to dominate the market probably.

1:07:20Just interestingly, if you look at Waymo, talk about Uber's valuation went from$68 billion in 2017 to$134 billion. What do you reckon Waymo is most recently valued at? Is it separate to Alphabet? Alphabet in 2017, 18 or whatever it was. 2020 started raising separate funds for it. so it's Elfair doesn't own 100 % 400 billion its first external funding round was 2020 I should say no it raised earlier this year a 126 billion valuation but Uber's 134 so the thing about all Ubers Uber's 15 years old with this massive network and all these customers Uber eats and so if you look at Waymo but a lot of that Waymo money is people betting on Google yep but if you look at what do you reckon Waymo was in 2020 when it first raised.

1:08:12Well, that's why, I don't know the answer, but 20 billion. Yeah, 30 billion. Waymo's Forex and Uber hasn't even doubled. Waymo is a bit of a false valuation. It was an external valuation. Well, it's a semi, it's kind of me saying I'm going to invest in Waymo and even if it's expensive, it's Alphabet, like I've got all of, they've got all of their resources to make it work. It's a bit of an artificial valuation. I'm not sure it's artificial because this is a genuine, and it's run as a standalone entity, I think, within Alphabet. So I don't think it's a fake value. I think Uber can still succeed as a ride-hailing app for autonomous vehicles, even if they don't have Waymo.

1:08:51And my guess is if they succeed excluding Waymo, Waymo will actually give them the ability to hail Waymos as well. The fight's not over. I think where the positive is, I expect in five years' time, we're all taking these self-driving cars everywhere, certainly in 10 years' time. so the market this is all what happened with Ubers and San Fran when they when they talked about the TAM being one of 100 billion suddenly the TAM in San Fran was a billion because people who weren't taking Ubers who weren't taking ride share who didn't want a taxi preferred Uber I think we get the same situation with self-driving the market becomes just so massive I totally agree but that's why I think again we come back to the same discussion we just had with AI it's very hard to know what this market looks like in five years time not because like we're dumb because there's too many, the way you work out what the likelihood of something succeeding is you take all of the probabilities and you multiply them through and there are just too many nodes that you have to multiply at the moment to work out what the likely outcome is going to be.

1:09:51Yeah. And then we'll go super quick back in no time at all.

1:10:04And we're back. And last week, APRA allowed UK fintech giant Revolut to become an authorised deposit-taking institution in Australia. Customers can now get interest on their funds, which are now backstopped as well by the federal government in the event of a crisis. Did you know how Revolut generates most of its profitability? No. I had no idea. Every bank that I've ever heard of generates most of their profitability by lending out the money to their deposits. Interest rate spread, right? Yeah. Well, that's not how Revolut makes its money. If it was, I wouldn't have asked you the question, obviously.

1:10:33So Revolut, essentially a subscription business. which I had no idea about. So it had subscription revenue of almost$1 billion, up 67%. But hang on, you call it – I feel like everything old is new again. You call this a subscription business. You're going to call it fees, right? Don't you call it bank fees? Yeah, they used to. Banks have spent 25 years getting rid of bank fees, and now you've just gone and given a new name to it and bring it back. Yeah, you're right. And this is what was said in the article. There is a slight nuance on that. So Revolut has four plans,$6,$12,$29,$100 a month. The higher cost plans come up with benefits like fee-free trading, insurance, credit for gym visits, free withdrawals, access to kids' accounts, airport lounges.

1:11:13It's a bit more like Amex. I am completely unconvinced. People used to cry about$2 a month bank fees, and Revolut has said, I can get$100 a month, and people are going to be happy to pay it. It's the Hermes of banks. It's unbelievable. everything that you just said was totally unpersuasive that's a bank fee uh so revolute australia boss matt blacksby said we have a diversified business model that is different to other banks he disagrees with the idea we're not so i agree with him no other bank can charge bank fees you can it is different to other banks we're not solely rely on lending it's pretty leveraged to activity we have diverse income streams and descriptions are an element of that Last year, 16 million customers joined Revolut globally.

1:11:56Then they've got 75 million customers. I'm with NAB, okay? Predominantly. And you know what my fees are? Zero. Yeah. And do you know how many transactions I can do for free in that account? A lot. Infinite. Yeah. And so there you go. Do you get gym memberships? Do I get gym members? No. You know what? They don't pay for my gym membership. And my gym membership does cost more than$100 a month. There you go. But I doubt they'd be paying for that because they probably would be losing money. Getting you in a tank top on their advertising would be incredible. No tank tops permitted in the gym that I go to.

1:12:29Oh, yeah, Keiser, of course, which doesn't allow tank tops. Meanwhile, last week, ANZ scaled back the sign-up perks on its popular frequent flyer cards, while NAB overhauled its white label cards with high interest rates, annual fees, and reducing earn and burn. Other big lenders are rethinking their rewards and card offerings as the appalling RBA prepares to slash merchant fees. So basically we're entering an era where bank fees are coming back because Revolut's called them subscription and every other bank has been forced now to charge bank fees by these unnecessarily RBA changes. And so it's the return of the bank fee era.

1:13:08So well done. Well done, RBA, for putting bank fees back on everybody. It's just crazy. Revolut is actually one of the world's… And high interest rates. So the RBA change has given us these three benefits. fewer points, higher interest rates and bank fees. And probably higher annual costs as well on top of the fees. Amazing. So Revolut is one of the world's most valuable tech unicorns. It was valued at$115 billion US last week, up from 75 last year. This is on fire, this thing. It's Europe's most valuable startup. Revolut's founder and CEO Nick Stronsky has a 29 % stake in the business, giving him a net worth of US$33 billion, making him Britain's fifth richest person.

1:13:48who knows there are that many rich people in the UK. So the business has had unbelievable metrics. It's just as high level. Number of business customers increased 33 % last year. Revenue was up 46 % and profit was up 57 % to 1.7 billion pounds. What was the pitch deck? We're going to become a$100 billion business by charging bank fees. It's unbelievable. It's actually incredible. As you said, they've taken a model that was hated, made it sexy, and have built a$116 billion business. And obviously there's great UX and great UI and all that kind of thing. They must still lend. I mean, if they're getting deposits, they've got to lend them.

1:14:23Presumably they are a lender as well. I've never used it. But we saw UpBank a much smaller version in Australia. They sold to Bendigo eventually. But that was mostly a tech. Yeah. I think Revolut's just a bigger version of that. I think it's really great UX. Well, but if they're this big, they know how to run a bank. Yeah. Like the Opera. Clearly. Whereas I think Up was just Bendigo and Adelaide partnership, wasn't it? They were running the bank and up was the tech layer, wasn't it? Up was the tech UX layer. Yeah, whereas this is a whole bank. They got a license. Yeah, absolutely. So this is impressive.

1:14:53And what it goes to show is, like, it doesn't matter what exists in the world. Ultimately, there are just some ways to make money. And one of them is banking, retail banking. It's just one of the ways to make money in the world. And they've just figured out it's good to charge bank fees. And I don't know why all these idiot other banks didn't charge bank fees and just call them subscription fees. Well, I think that's what you talk about as well as the best place to make money is get, go near a really big torrent of cash and just stand next to it and just start getting a little bit of it. Take a thimble or a bucket if you're greedy.

1:15:24Yeah. So I think that's a really interesting point. And Revolut, they've often seen that revolutionary. They just, they're charging effectively a different model for offering the same thing. So the flip side would be, so one of the things they provide unlimited is some kind of trading, you said, right? Yeah. For the hundred dollars. I've never used them. So they might be also a part of a Costco model. Yep, absolutely Costco model. We're going to make the transactions really, really cheap. Maybe their spreads on foreign exchange are super tight. In return, you pay the$100. We're not really trying to make money on the spreads.

1:15:58You can get that for free from WISE. WISE don't charge anything for bank fee, for international transfers. No, but the spread of the – no, no, but the foreign exchange spread. No, WISE. WISE has virtually no spread. Well, there's always a price of a foreign currency. There's a little bit, but it's virtually zero. Like, a few bips. So what do they make their money out of? Volume? Volume. Right. Yeah, interesting. And they've got the beauty. And Wise is, you dump a bunch of money in Wise, they've got the float. So they feel like an insurance company. They pay interest or no interest? No interest.

1:16:28You just give them the money. I see. Okay. And I've got like$1 ,000 in there because when I'm travelling, I don't want to keep putting money in there. So it's a great model. So there's always alternative models. Do you think APRA, obviously is the bank regulator, do you think they were happy that there was another bank competitor that came in from the UK and got a licence or not? Well, APRA gave them the licence. Well, you can't not give it. If you tick the boxes, you get a licence. But do you think, because this country is very focused on protecting the oligopoly of the four major banks. Yeah, or every oligopoly we have, oligopolies across the whole.

1:17:00But there is a policy reason that they're trying to protect. You can agree or disagree, but it's these four pillars, which means we're going to have a more stable banking system than other countries. So how do you think they feel? do you think they feel Revolut yeah it's good it looks like competition but they'll actually never be like as big as the big four I'm not sure they have a view really like we've had lots of banks come and go through the years I'm not like which is and the go bit is not good good for customers in any way so I'm not sure Apple were overly joyed by but I don't think they were overly I don't think they have a view yeah I think as a customer having more options is great whether you use this $100 per month or$6 per month do you think there's any chance that Revolut could get to the size of a big four in Australia?

1:17:41The issue I have with the big four, and I've always had with the big four, and I'm actually speaking at CB8 tomorrow, so I probably won't mention it when I'm there, but they've effectively been lending on this massive property Ponzi scheme. It has now been unwound. We hated the Jim Chalmers budget. Unwound rapidly. But I don't think it should have been. I saw a great video I sent you guys that was on Instagram. It was just a really smart real estate agent who said six auctions he had on the weekend. Didn't have a single... Not that he didn't sell any. That's not great, but whatever. Not that he did not sell any.

1:18:13He didn't have a single registered bidder. So he didn't even have a bidder. You could say not only did he not sell any, not only did he get no bids, but he couldn't have gotten any bids because nobody registered to bid. This is crazy. And he made the really good point where the biggest falls have come is the high end of the market and the mid end of the market, which clearly were overpriced, but where the whole Jim Chalmers intergenerational theft budget, where the benefit was meant to come was we're going to make first homes cheaper for people. What's the only place in the housing market that's gone up?

1:18:40First homes. As we said they would at the time. You didn't need to be at rocket science to work this out. So this country, just to deviate to that slightly, I thought that video was great. I know why you liked that video because it was an 11 minute intelligent rant. Yeah. That's right up your alley. Love a rant. But it was a smart rant. The guy was smart. Very smart. I thought one of his, one of the funniest comments I've heard about this budget is he said, um jim chalmers did his phd on paul keady yeah i don't know what mark he got but he's managed to create a housing system where every part of the market's fallen except the one that he was trying to move down which is true right everything is true but we have to say this you know the big four this country now is far more exposed to a rise in unemployment because if there's a rise and unemployment and people can't service their loans, the value of the property, the asset that the bank holds, is now diminished.

1:19:41And so, like, that's a problematic situation. The biggest point this guy made is a point we made on this podcast two months ago, which is 15 % of the country's economy is linked to property transactions, and it's throttled property transactions. But if unemployment rises and people can't service their loans and banks say, well, we need to get our money back, so we're going to flog your property. Number one, it's worth less. Well, there's no buyers, which is the real problem. And yeah, number two, there's no buyers. There's no buyers. And so this country has just massively increased its risk exposure to rising unemployment.

1:20:14It's made matters worse. The worst area is the first home, in terms of the people who are most exposed to the least amount of equity, the most amount of debt, is these first home buyers. And yes, they haven't dropped yet, but they may eventually drop. And when they do start dropping, then you've got this 5 % deposit scheme. so people have very little equity. They're going to be being sued by the government potentially. So these idiots who believe the government, come with us, come roll up, we're up to the first 5%, 5 % or everybody. They've written their own death warrant. So there is a mechanic that exists in Australia that doesn't exist in the US that would be the single greatest mechanic to have a government voted out of power.

1:20:51And that is... Full recourse loans. Yes. If you owe a bank money and the bank sells for less than the amount you owe them, you have no asset and you still owe them money. In the US you don't, right? That's where the jingle mail thing comes from. Yeah, and so can you imagine a better way to get someone to vote against the government than we've sold your home out from under you and by the way you still owe$50 ,000 to the bank. Yeah. That is instantly voting against the government. We actually owe$50 ,000 to us. The bank's been paid. The equity's negative, so they owe the government money as well.

1:21:26So the problem is what if the bank – no, but it's worse. Like what if you bought a$1 million house and you had$950 ,000 of debt and you only got$900 ,000 for the property? So, yeah, you incinerated your own equity. Could be – That's gone. $700 ,000 for the property potentially. And so you're going to have to go bankrupt. But where the bank – the government's guaranteeing that is part of this 5 % thing. The whole gap. The 15 % gap. So if it goes down to$600 ,000, then the bank will sue you. Yeah. But let's use your example. Well, you should talk about that more clearly. So you go and buy a million-dollar property.

1:22:00We talked about this in a time. Forget about stamp duty. You go and buy a million-dollar property, and you normally have a 5 % deposit. So you put 50K. So you've had to work for that 50K, and the bank will lend you 950. What does the government guarantee? The government's guaranteed 150, which is the gap between 80 and 95, which is what the mortgage insurers would otherwise do, and usually pay this mortgage insurance. Okay. So if you sell for$800 ,000. Yeah. Well, the bank sells for$800 ,000. Yeah, because the bank will take your property. This is what happens. $800 ,000, the bank gets back their full$950 ,000.

1:22:36Yeah. Because they get the$800 ,000 they sold the property for and the$150 ,000 that the government promised to pay them. I'm going to take Mike and Joel's hard-fought taxpayer dollars that they've made on their CGT. There's now been taxed at 47%. They'll take these young people's CGT at 47 % and I can give it to the bank. Give it to the bank. Give it to the bank. Bank's okay. Bank's got their money. Bank's fine. You lost your 50K deposit. Yep. Good night. Yep. Now let's imagine it sells for seven. No, no. And I owe the government 150 grand now because the government's given me this guarantee.

1:23:09The government still wants cash. Is that right? Yes. So you now, is that right? Apparently. So you think that the homeowner has$150 ,000 debt to the government? That's my understanding of it. Well, that would be ridiculous. So I don't think the government wants to be on the hook for this. Well, they are. Well, I've got news for you. No one can afford to pay back that$150 ,000. So the taxpayer is on the hook for it. And what will happen is either the government has to write that off on behalf of taxpayers or first bankrupt the voter, not popular for votes, and then write it off. Otherwise create this massive moral hazard where the people just get this free money and have just burnt it all.

1:23:47So I think realistically that moral hazard exists. And I think there's a second bigger problem. But I don't think anybody realised this moral hazard exists until we've just pointed it at. What's the chance of a government that needs votes going to a voter and saying you owe us$150 ,000? There aren't that many. It's not going to happen to a million people. It might happen to 10 ,000 people. There's not that many. 10 ,000 young people? There's 10 ,000 people. Whose votes swing seats? They're disparate over Australia. Maybe or maybe not. It's a lot of cost that the government's bearing if they don't go after it.

1:24:18But they can't get that money back. Eventually you get it back. what like over 20 years people have other assets and other staff like this so now you sell a house for 700k so now there's been a 30 percent drop yeah very plausible then you've got the banks okay so now 700k the bank is owed 950 they get 700 the bank gives them the extra 150 now they're up to 850 they're still a hundred thousand dollars owing yeah so now you owe the bank 100k and the $1 ,50. Well, that is a great outcome. Thank you very much, Elbow. Jim Chalmers. Or Jim Chalmers for giving. I mean, this is where we're sitting at the moment with this risk.

1:24:55And then when that happens, all the bank share prices suddenly get smashed because they've got all these – suddenly they've got these bad debts. This is what happened in 1990. All these bad debts started appearing. And what have all these other people got as their biggest investment when you've got an index fund, for example? It's in the four big banks, which are four of the top five largest Australian businesses. So you've got leverage built on – we talk about this in the AI. I think it was leverage built on leverage built on leverage. The government has not simply stood by and allowed. It's actually encouraged.

1:25:20So what's the bank going to do? Because who's first in line? That's the next question. So you owe the government 150 and the bank 100. Who's first in line? That's a great question. So who knows? I'd probably say the bank because the bank has security over the property. I doubt the government does. I think you're right about that. Without seeing the documents, I don't know. I think you're right. And so the government might be a bit lenient on the taxpayer because they want votes. But the bank won't be. You don't care about votes. The bank is sending you into bankruptcy. Yeah. That's what's going to happen.

1:25:48They'll take whatever you've got. They'll take the, you know, knives and forks out of your top drawer, sell those. What banks will probably do with a lot of people, because they don't want to be bankrupting people either because it's costly and they get less money. They'll probably enter a scheme with the person where they say, why don't you give me back$5 ,000 to your next 20? Whatever it is, it's not great either way, but banks don't want to bankrupt people anymore. So I'm going to tell you how this ends, okay? When, if this happens, I don't know if it's going to happen. It's in the movie of Titanic.

1:26:15But we're in a dangerous moment of falling prices and like unemployment's not rising as we just discussed, but it will. In Victoria it is. That's right. We're going to have a recession, right? And so basically you've got this situation where I predict this would happen if such a circumstance arose. The opposition, whoever they were, one of their pitches to get into power would be a hex-like wipeout, like the government wiped out a whole lot of hex debt. They would say anyone that owes money to the government based on this idiotic 5 % scheme, we're going to write off that debt on behalf of the taxpayer.

1:26:52That's what's going to happen. It is absolutely moral hazard. Like, what the government is currently doing – not doing, they've done it. Like, where we sit today is that a young person using the 5 % scheme is potentially setting themselves up. Absolutely. We did this as soon as we heard it. It was so obvious this was going to happen. step on the road. We didn't expect Jim to completely destroy them. The next step on the road to destruction has been taken. Yeah, absolutely. With the property prices falling. One more victim of this is the state government has already laid them with debt. You know what happens when there's no properties transacting?

1:27:27Absolutely. Half of the revenue comes from stamp duty. Absolutely. So Victoria's already basically bankrupt, and basically Jim's just cost them half their revenue. All they've got is a bit of gambling and payroll taxes. So imagine how bad Victoria's going to be in three years' time with no properties transacting. Well, you say Victoria's bankrupt, but we can actually say something slightly different to that in more precise financial terms. Victoria, the only reason Victoria is not insolvent is because lenders are still prepared to give Victoria money. Buy their bonds, essentially. That's right.

1:27:56But Victoria has no ability to raise enough tax to… To repay it. Yeah, to repay it. To work our way out of it, let's call it. Like, we can pay the interest from taxes. Well, barely, because one in every$10 of revenue is going to the interest. Now, this is like 1991 sort of stuff. So, Victoria is very close to insolvent. And you know when people say we exist at the grace of our bankers? Yeah, absolutely. That's Victoria right now, without a doubt. We exist at the grace of the Australian government that bankers know that, as you said, the Australian government will backstop the Australian government.

1:28:32The Australian government won't let Victoria go broke because too much sovereign risk. Absolutely. Yeah, it's crazy stuff going on in this country. Crazy stuff. On that very somber note, we'll end it there. It's been a great episode as always. We're going to do another business episode on Saturday. We had a huge response to last week's business episode where we talked about a bunch of really cool business stories. So we're going to do a couple of really good ones this week as well. So don't miss out. Can't wait to see everybody on Saturday. Absolutely.