AI’s $7 Trillion Bubble, Corporate Travel’s Next Disaster, Work From Home Revolts, and The Man Shake Buy Back

26:06So you've got a CEO layout in between, and then you've got Zuckerberg who's sort of off for the fairies or some of this stuff. who is clearly winding it back now because LAMBA's been such a disaster. And you've got obviously Anthropic and OpenAI, which are just cash incinerators still. Even Anthropic is still – they talk about being profitable, but there's a real question mark over the profitability of this. And that's with ripping off their customers who are now kicking back against these huge token costs. So you've got something that feels like the end use – I call it enterprises. So that consumers have – everybody realizes there's no money made out of consumers.

26:42That's why even OpenAI, who the consumer king, has effectively said, forget consumers. There's no money being made there. They've turned away from that completely. And that's the right call. So the only money you can make out of AI is charging enterprise for essentially coding tools because everything else doesn't really work because the token cost doesn't make sense. So all you've got left is coding tools. And now custom companies saying, I can't pay these token costs. This is ridiculous. Now they're trying to charge what the two true tokens. They still aren't charging the full cost, but they're getting closer to charging market rate.

27:11And now companies say, hold on, I'm not paying this. This is ridiculous. I can't get this productivity. Actually, it's for me to have an old school developer doing the work. So the use case doesn't seem to be there. But all the global markets still believe, again, this circle jerk where these hyperscalers are doing it, so we must be right. The hyperscalers are lying and chucking it off balance sheet. The whole thing is just a complete root. It's worse than the whole crypto fraud. So I'll say two things about this. One is if you go into Reddit into what I would call the nerd threads that I go into, what you'll read about deployment of AI amongst CTOs and other senior people in companies that are responsible for deploying it is everybody is just sharing notes about how to get stuff off paid platforms and onto locally hosting it so that they're not buying, I forget the order of magnitude, but like 8 billion tokens a month type of thing?

28:08I think if you look at the cost, if you just look at that, there's been a bit of publicity on this. So the cost of, I think it's a million tokens. It's relative anyway, but I think a million tokens on Anthropic, which is the most expensive, is call it 30 bucks, whatever that number is. And then you've got a million tokens on OpenAI, let's call it 20. Then you've got a million tokens on Grok is 10, which is the Elon Musk one. and you've got a million tokens on DeepSeek is$0.87. Like it's a fraction of the cost. It's like 95 % less cost. Because they didn't have to train their model from scratch.

28:43That's why. Yeah, they distilled it. Yeah. But it's not just that. I think the ongoing cost as well. It's not just the training cost. It's also the inference cost is cheaper. So I want to just say this slowly because, you know, there are people that listen to this podcast who there are small mercies and they haven't done an accounting degree. And so like neither have I, but I learned it the long and painful way. And so what I want to do is kind of explain what we're talking about because I think that it seems obvious to me one of the triggers for catastrophe potentially in all of this. So what's happening?

29:15So if I have a company, my income statement, which also called profit and loss, what you're trying to do there is you're trying to say, I get this revenue, we could call it sales, I get this revenue,$100. And when I go and put expenses on that income statement, the expenses should match what it cost me to generate that income. So if I sell a pair of shoes for$100, and the shoes cost$50 to buy, so then that definitely goes on there. Maybe the salesperson cost me$20 and the actual store was$10 worth of cost, that's$80. Okay, so I make $20. That's the profit and loss. But then you might say, well, last week I bought$5 ,000 worth of shoes to put into inventory to have stock so I can sell shoes.

30:02So what do I do with that$5 ,000? Does that become an expense on my profit and loss? And the answer is it doesn't become an expense at that point in time because it's not being matched to any sales you're making. When you make the sales for those shoes, that's when the cost of the shoe goes on as an expense onto the profit and loss to match the sales. And so until that happens, while those shoes are sitting in inventory, I had to pay cash for them, but they become an asset and they sit on the balance sheet, which is the place of where you store what you owe and what you own. That's what I call a balance sheet.

30:35So now I've got all these shoes sitting on the balance sheet. And so then you might say that imagine now I was in a business that was a tech business, and so I don't have inventory in the traditional sense. But the thing is this, I go and buy, let's say, I'm going to use the same numbers. They're ridiculous. You can add zeros to it. Let's say I go and I'm trading and I'm selling software and I'm getting the revenue and then I'm paying for my staff, etc. That's my expenses and I make some profit. Now I go and spend$5 ,000 and I go and buy AI chips for$5 ,000. Well, what do I do with those AI chips?

31:14Well, they're not an expense because they're not being matched to any revenue that I'm deriving now. I'm going to use those over the next three years to generate sales. So what about if I just let those become expenses gradually over the next three years? So if it was five years, maybe it would be$1 ,000 a year for the next five years, for example. If it's three years, what's that? I picked a terrible number. $1 ,700 approximately, let's call it$1 ,667 a year if it was linear over three years. And so that is the way this stuff becomes an expense. And that is why a company can spend$100 billion buying AI and data center equipment, but it doesn't become an expense and it doesn't affect their profitability because it sits on the balance sheet and it's an asset and gradually it becomes an expense over time as the company generates sales from it.

32:06And that's what it means when a balance sheet versus an income statement. But here's the problem. Can I just give you a slightly different, can I give you a slightly different analogy? It's just a slight tweak on that, which I think is possibly a better way to look at it. So let's say you're a, let's say I'm Nike and I used to buy my shoes from a factory in Vietnam, to use your inventory example. And instead of buying my shoes, I'm actually going to build a factory now. So instead of buying shoes for another factory, where I have inventory, I'm going to build my own factory. It's going to cost a heap of money, like way more expensive than the inventory used to cost.

32:39But this factory makes really fancy shoes, like super, like incredible carbon shoes. I'm going to sell those carbon shoes for 50 bucks each, but those carbon shoes are going to cost me a hundred bucks each in this factory. But I'm not putting the factory on my P &L, I'm putting my factory on my balance sheet and to your point, depreciating it. That's probably the better example. So they used to buy inventory. Now they're building the inventory is the difference. That's a good way of looking at it. The reason I'm going back to this original way is because I want to tell you what I think the trigger for catastrophe might be.

33:09Let's say as a hypothetical, I buy$5 ,000 worth of AI chips and I put them, I pay for them, pay the cash, and I put them on my balance sheet, not on my income statement. So they're not an expense yet. But I say I think these chips are going to last for five years. So every year, I'm going to take$1 ,000 of that$5 ,000 and make that an expense on my balance sheet. Okay, fine. And my company generates$2 ,000 in sales. And that's my only expense is these chips. So I make$2 ,000 in sales and I record$1 ,000 of expenses, which is one year of those chips. And then I make$1 ,000 of profit. So I'm a profitable business.

33:50But now what happens is this. I get to year two, and what I realize is these chips that I thought they were going to last for five years, actually new chips are coming out. And I'm only going to get one more year of use out of these chips, not four more forward years. And so what the hell do I do with the$5 ,000 of value of those chips? Because I'm going to be buying new chips next year. Well, what has to happen is I have to get the remaining$4 ,000 and expense all of that or write it off or somehow that now becomes an expense. And so my$2 ,000 of revenue, instead of being offset against$1 ,000 of chip expenses depreciating over five years, suddenly the whole$4 ,000 hits my expense line.

34:34And now I've gone from 2 ,000 revenue, 1 ,000 expense, 1 ,000 profit to 2 ,000 revenue, 4 ,000 expense minus$2 ,000 profit. Suddenly I turn into a loss-making business simply because I miscalculated or deliberately misrepresented the amount of time that these chips were going to be useful for. And I think that this is potentially the huge landmine waiting to be stepped on around all of this, that the depreciation schedule and the life expectancy that these hyperscalers and data center providers, neoclouds, the amount of time that they say they can use these chips for is just going to be very different to the realistic, much shorter time frame that they can actually be useful for.

35:29That's the Michael Burry argument that he made. And we've been saying that for like a year, right? Like that was our whole iron argument of like why iron is going nowhere as a business. Well, the kind of argument is because chips are becoming so expensive now and so hard to produce, like no one can make enough chips and memory is so expensive that the company is actually reusing older chips or continuing to use older chips. So that argument has become a bit less worrying. But the more worrying argument is companies simply can't make money out of AI. So they won't need to buy. So it's kind of two sides of the same coin.

36:01Either these old chips sort of deprecate, which is your argument and the Barry argument, or if they don't deprecate, then we don't need new chips. So spending is going to drop. So either way, this bubble pops one way or the other. There's probably no great outcome here. So either they have this massive expense coming up or companies are going to start. I think what's more likely is the hyperscalers realise this and the market's telling Microsoft. The market's dropped Microsoft's price 30%, Oracle's price is down similar. The market's now telling these hyperscalers, hold on, stop this ridiculous CapEx.

36:35They're going to have massively pullback on spending. That starts hitting NVIDIA finally. So NVIDIA has been this incredible story, but it's on a pretty low PE multiple because I think most investors are onto this. They realize this boom's going to have to end at some point. This bubble is going to pop at some point. The spending is going to stop. Companies are going to stop spending, stop using debt because their cash flows can't fund this. And as a result of that, we're going to see the situation where I think the bubble pops on the other side, to be honest. Well, I think what you've said, firstly, I want to do a bit, you've used a very good word in that explanation, by the way.

37:05So I want to, it sounds like another interesting word. So I just want to do a bit of a glossary. So you said deprecate. Deprecate effectively means something that has been superseded and is no longer being used. So often you talk about software being deprecated, which means support is not being provided for that software anymore. And there's another word called depreciate, which sounds very similar, but depreciate is the reduction of value in value of a physical asset, like a tangible asset, something you can touch over time. So they sound similar, but actually they kind of have different meanings.

37:37So I used a very good word deprecate. And so let me say the follow through of what you said is if what you're saying is right and because the profit side of things, this is what I was saying at the beginning, which is, is there any real economic value that's been created by AI? And your argument and mine as well would be, no, I think there's largely been value destruction that's been created by AI. But if really on your first argument that comes to be true, that is to say, people make do with older chips for longer, you know that's good night Nvidia. I mean, their whole business is selling you increasingly expensive, powerful chips that you can't really afford to replace the previously very expensive chips that you couldn't afford.

38:21And the technological leap with each generation of chip has been pretty impressive. And so one way or another, either people have to keep buying chips, they have to change their depreciation schedule, and they're going to record real losses, and that's going to be bad news because they've taken a lot of debt to fund this, or they're not going to keep replacing the chips, and NVIDIA is going to have big problems. And by the way, so is SK Hynix and Samsung because you don't need to keep buying more memory for these more powerful chips. So one way or another, it's hard to see how that bright light you see ahead of you is not the freight train coming towards you, right?

38:57We've got to get Ed Zichron on the pod. Ed's probably the number one AI bear globally. And I think he's actually way more bearish than us. But his perspective is super interesting. One of the few people actually looks at the P &Ls and balance sheets of all these businesses, including OpenAI and Anthropik, not just the big public listed ones. And it's incredibly scary. As we know, everything reverts to the mean. Every bubble eventually pops. It's inconceivable this bubble won't. And this is not to say that AI doesn't have its uses. Like, clearly, it's been a huge benefit for coders. And we use it day to day a lot.

39:31And it's a great, in terms of Google search, when you're not shopping, but when you're looking for information, it's amazing. It's great for lawyers. It's great for bankers. It's great for a lot of people. But being a great product, as you talk about, aircraft is one of the, airlines are one of the best products, most life-changing product almost we've ever used. And airlines as a collective have made zero money in their existence. They've made losses. So I think people are too readily confused great product with profitable product here. And so what do we mean when we talk about economic value?

40:05Because it looks like everyone's getting rich. Stock markets are going up. It feels amazing. But the thing is this. We don't know yet like how this game has been played out because we're still in the middle of the game. And so, for example, if all of this falls down, it might not be the shareholders in the companies that are the only ones that take pain. There's been a lot of money being lent to these companies to buy all this stuff. and if this all falls to pieces, those lenders are not getting paid back. We really see that with the private credit because a lot of the AI data center build-out has been funded by private credit in addition to obviously there's cash flow.

40:40So the Hyperscales have used all that cash flow and then they've started tapping heaps of private credit like the likes of Blue Owl, Blackstone. These are very big, impressive businesses and Blackstone can handle it and Ares and Apollo will be fine. But someone like Blue Owl, who so much of their business is this garbage, is in all sorts of trouble. The best businesses or the best cycles in capitalism are ones where money has to go in to make the machine work, but the machine actually creates more money for society on the other side. That's how capitalism works. When people say we've got a productivity crisis, I hear people say things like that, what they mean is that we want to be able to do the same amount of work, because there are only a certain number of hours in the day, We want to do the same amount of work and get more value from it.

41:32Now, AI should enable you to do that because AI enables you to do things much more efficiently than they could be done previously. The question is, what's the cost of that efficiency? And if the cost of the efficiency exceeds the gains from the efficiency, then that is a net destroyer of productivity in an economy. And it's very hard to know today whether the wash up of all of this in this cycle is going to be a productivity gain. I do feel confident, though, that once this cycle is finished and AI becomes just part of the day-to-day life of doing, AI will be the tool of business. I'm pretty sure it's going to deliver productivity increases then.

42:12I'm just not sure when that's actually going to be. Well, it's just being overinvested. That's the problem. If you look at every cycle, it's because there's too much debt. Like always happens with these amazing new technology revolutions, right? Railroads, fiber cable, it's all the same. Yeah, the nifty 50 in the 60s. Like every bubble is the same. You see that you have this great idea and I've written an article about this recently, the SpaceX article I wrote last week. This great idea and AI is a great idea and it's really good and everybody gets benefits from it. A lot of people get benefits from it, but then too much capital comes into a market and they start using debt because you run out of capital, which is what's happened here.

42:48and debt eventually just gets blown up. And that happens every cycle and people fall for it every time because it happens every 20 years and people just forget or they're too young. And ultimately the people who are the naysayers, the contrarians and naysayers get laughed at. Warren Buffett was laughed at. I'm not saying we're Buffett, but Warren Buffett was laughed at in 1999 because he said this whole dot-com thing was a fraud and everybody laughed at him. All the cool kids laughed at him and, of course, he was right. And Berkshire, whilst Buffett doesn't technically run Berkshire anymore, Well, Berkshire has gone heavily into cash, which is the ultimate sell signal.

43:21When Berkshire starts going into cash, like there's a thing called a Cape Shiller Index, which effectively uses the historical last 10-year inflation-adjusted PE multiples to give you a PE multiple of the market, basically, which is, and it's got this near perfect record of predicting bubbles and predicting crashes. And the highest it ever was was 1999. And then the second highest it ever was, I think maybe 2021, that mini bubble. And I think it was pretty high in 2006. And the second highest it's actually ever been is right now. So you've got the only$19.99 was more of a price. So either we've got AI really is game changing and we're all wrong, even though they're all losing, all these companies are losing money and they're hiding it off balance sheet, or what's going to happen is what happens every time.

44:02And there's too much debt, it's pushed up asset prices too much, and there's a massive overcorrection. But, you know, like people now increasingly talk about the fact that it's a bubble. But the thing is that you can make a ton of money at the end of a cycle, a bubble cycle. and so I think like this is the ultimate greed versus fear moment for markets like you know that you might get caught any day or it might be two years out and you'll miss two years of incredible gains you know you've got businesses like sandisk that have gone up whatever 17x or something in the last year and like 17 times your money like what like so you go and put in ten thousand dollars and And then a year later, you got$170 ,000.

44:45Like, no one wants to miss that. So I want to say this one thing before we start talking about individual companies. I suspect that's where you're going to take us. Is since we're talking about capitalism, I had this thought. I want to share it with you. You know, in all this discussion about the CGT and all of the different angles, it seems to me that it's kind of turned into this fight between – this fight about fairness between people who have investments and therefore pay capital gains tax and people that don't have investments. And it's turned into an argument, which is, why should rich people that have investments pay less tax than we do?

45:27Everybody should pay the same tax on the money that they earn. That's what it's turned into. And it's turned into a game of value judgments, i.e. why are they special that they get to pay a lower tax rate? We're also special, or we're no less special. It's unfair. They're not better than me. And I thought about the way that the government has very cleverly steered this into a battle, like, oh, it looks like another class war and a battle of, like, judgmentalism, I guess is the word I'd use. And so I wanted to say this, and tell me if you agree with this. Basically, the idea of capital gains tax in no way is a value judgment on who should pay less tax.

46:11Because you see a lot of things where people don't help themselves with these arguments. They say, well, I've taken all the risk and I've invested the money and the government's a parasite for taking any of it. So that's a value judgment because that means that the person who's just working hard, doing an employee job and earning a wage, that they don't deserve that. And so that is not the situation at all. Those are terrible arguments. I don't think the risk argument is a terrible argument because people can just allocate their capital in other ways that is less risky and that has the same or lower tax rate.

46:43So I don't think it is relevant. That's a capital allocation argument. That's not a, the government doesn't deserve the money because I took the risk argument. That's a different argument wearing similar clothing. I agree with your argument, by the way, but the government shouldn't take my money because it's me who took the risk. That is a value judgment argument. And what I'm saying with capital gains tax is it's not about values. If you live in a capitalist society and now the socialists are on the rise, which is really terrible. Like socialism is a great idea. We all want things to be fairer for people.

47:18But every time you try it in a country, it's the worst possible system you can imagine. And so we want to live in capitalism because it sucks. But it is the best way for the largest number of people to live the best possible life. And so that's why we like capitalism. And if you believe in that, then you need to say, we have to play by the rules of capitalism or else it doesn't work. And the main rule of capitalism is, well, I'll say there's a few rules. One rule is that an employee needs to be treated in a particular type of way and not exploited. Because it turns out if you just exploit workers, that's not the best way for capitalism to run.

47:55So it's good for employees to have some rights and to get paid fairly. And in return, they do like a fair day's work. And that is one of the rules of capitalism. And so exploitation of workers is bad for capitalism. But another thing that's bad for capitalism or another rule is that you have to figure out ways for capital to flow and fund businesses that are going to grow and generate wealth and generate jobs. Because if you don't have those things, then capitalism doesn't work. For example, if you stop supporting that and you just give people jobs that require collecting taxes to pay for those jobs, then eventually capitalism will fall apart as a system.

48:34And so the challenge with – and most of the businesses that get started, they fail. These businesses mostly fail. And that's part of capitalism as well. It's just a numbers game. And so if we want this system to work, we need to create a situation that is conducive to people deploying capital. That means extra money I've got that I don't need to live with, to deploying capital in ways that takes the sort of risks that if it succeeds, generates jobs and wealth. And then people have employment and then they pay taxes and they have discretionary income and the machine gets better and better. And then we can have progressive taxes so that the rich don't get too rich and the poor don't get too poor because the natural capitalism machine eventually gives all of the money to a few people.

49:24That's just how it works. And so I think the problem with this capital gains tax argument is it's been turned into an argument of morals and values when really it's an argument of systems. If you don't play by the rules of the system, the system is not going to work. And one rule is if you don't give people good treatment for profits they make for investing capital, then they take that capital and they invest it elsewhere. And if that happens, capitalism is going to stop working for all of us and we'll end up with a much, much worse life. That's my view on all of this. Well, I think your view, so our good friends at What The Flux, which is a great sort of three times a week podcast, has been involved by our other good friends at NetWealth.

50:09so Brett and Justin who run What The Flux, they actually did a community survey. And What The Flux absolutely is a completely apolitical podcast. I'd say if anything, it's got a really young audience you'd expect to skew slightly left-woods, but it's certainly not a political, we're a far more political show than they are. So if you look at that, they did a great community survey. I think it had 1 ,000 plus respondents. So a good broad range of people responded. What percentage of respondents do you think thought they'd be better off as a result of the budget? Oh, like, so I think very low. So even based on, well, I'll just tell you what I found when I've spoken to people.

50:44You tell me if it plays out on a bigger survey. So I would say 10%. Very low. 4%. 4%. This is incredible. What a failure of the Labour government. So everyone I've spoken to in cafes who's young, maybe 40 people. I'm a very annoying person. I just go up to people and talk to them. And so I think basically no one, no one has said to me they think they'll be better off. And in fact, the common phraseology that's been used with me, if that's a word, is it's not going to make any difference for me. I don't think I'm going to be any better off. And then there's a but. And what comes after the but is where there's a bit of variation.

51:2642 % of people said scrapping the CGT discount was their biggest worry. So that's catastrophic for the government. This was meant to be that kind of we'll tax, with the Robin Hood policy, we'll tax the rich and give to the poor, but young people hate it and it's an aspiration killer. 57 % of respondents say the CGT change will force them to change their investment strategy, be it selling assets, holding or redirecting money into super. Of course. How can it not? How can it not force a change to your strategy? Because if you're young, your strategy was either buying shares, starting your own business, or rent vesting.

51:59All of those have been ruined by these tax changes. And whilst Jim Chalmers obviously claimed the budget would repair intergenerational equity, younger people absolutely don't agree. And this is, again, these are not our podcast listeners. This is what Flux's listeners, obviously, you expect more of our listeners to think this. But 50 % of Gen Z respondents claimed that baby boomers would benefit most from the budget. And 60 % of millennials said older people would be the benefit of fishery. So young people hate this budget. This is a budget that pretended that fraudulently claimed it was for young people.

52:28Jim Chalmers went and said, we're going to fix this intergenerational inequity that the coalition have caused over all these years. And let's be fair, the tax system historically has been horrendous to young people. These guys have somehow made it worse. Like, that's a pretty impressive effort to take a hugely unfair tax system and make it even more unfair. I completely agree with you. By the way, I think, I mean, some people will laugh at us saying this, but I think we lean left. The problem is the left has gone at the speed of light further to the left. We can't keep up with it. But I think that generally speaking, we have all of these comments that we make on this podcast that make us sound very much supporters of the liberal, let's say, and right.

53:09But at the same time, we're saying things like you should modify capitalism so there's a progressive tax system and you don't want too much disparity between the rich and the poor. Like this is – our views are very much not right-wing views. Well, I think we prefer whoever is closer to the centre. So that's a good comment. Like you said this great thing, which is we generally support whichever party is closer to the middle. I think that is a perfect – I wish I would have said that. That is a perfect summary of how – I kind of hate you a bit for saying that. Like I wish I would have said that because that is a perfect summary of how we feel.

53:42Yeah, absolutely. On that note, we'll go to a super quick break. Back with some other great stories. Just a moment. Don't turn off.

53:56And we are back. And I'm not sure if you saw this study last month in the journal reported that researchers from the London School of Economics know the amount of hiring devoted to entry level roles across a handful of countries has fallen more than 14 % since 2019. So we obviously talk about the AI boom killing jobs, but really the study was based on 400 million job postings and found that firms that stayed remote after the pandemic were more likely to cut back on junior hiring. Recruiting an entry-level worker, the researchers say, is a bet on the employee's future skills. So a company's return on investment hinges on the rate at which a young employee learns.

54:36Remote work doesn't just dampen young employees' day experience, it also makes it harder for them to find a job in the future. The implication is stark, the researchers wrote. A persistent contraction of this kind hollows out the pipeline of future experienced workers, causing declines in aggregate productivity as well as imposing cohort-specific scarring. Less than a quarter of Gen Z, and this is really interesting, this is something I've been talking about for years because people just misreport this, less than a quarter of Gen Z want a fully remote workplace, according to Gallup, compared to a third of older generations.

55:05So as I've said, older people want to work from home, younger people hate working from home because it just destroys their careers. I agree you said that before. Well, I'll just interject. Like you really did say that before. I don't want to say before anyone because like, you know, I haven't kept a pulse on all 8 billion people on earth. It's got to be pretty close. Like you've been saying that for a long time. When you first said it, I thought that's a really interesting point. I hadn't really thought about it in that way. But you've been absolutely correct about that. And actually people with young kids, they're the number one people that wanted to work from home.

55:37So absolutely, entry-level people want to be out in a social environment at work and they want to be learning. You were right from the start about that. As you know, we love being contrarian and I was obviously super contrarian on the back of the office because nobody wanted that. It was like 80%, 90 % of people of the laptop class wanted to be working from home and now it's really flipped. I think people are – so now we're the reverse contrarians. We're in the mainstream and it's the people who want to bludge from home who are the contrarians justified. It's like the mask. Remember in COVID when you had to wear, obviously I never wore a mask, but people had to wear these ridiculous ineffective masks.

56:10And I remember thinking we've got to go back to the days where people wearing masks are freaks. And now anybody you see with a mask, a very small number have legitimate reasons who are like really sick, but cancer patients. But unless you've got a really serious illness, it's just freaks who wear masks. So that's now everything reverts to the mean and this has reverted to the mean as well. But by the way, those masks are permeable relatively quickly. Of course they are. Every mask people wore in COVID was a complete waste of time. It was absolute theatre and fraud by a bunch of fraudulent politicians.

56:37But the rest of my sentence was, but it doesn't mean it's a total waste of time because it does still, it is still, just because something doesn't work 100 % doesn't mean it works 0%. I don't want to get into that argument with you, but. Well, just on the surgeon issue, A, surgeons know how to apply masks, which is the main problem with everybody else because that's part of their job. And secondly, it's to stop you dropping droplets on an open wound, which is very different to an airborne virus, which is why the whole COVID masking was a fraud. Everybody who knows anything about science knows it was a fraud.

57:03And it was politician theater to cover up their disastrous decisions in the first place. But this is a great anecdote from the journal. There's a guy called Matthew Manning who's already on his third remote job in three years after graduating in 2023. He never shadowed another employee. Manning, like others, enjoys the flexibility of remote work, but realizes he hasn't been in a job long enough to go through a promotion cycle. He was laid off from both his previous roles. I never really got to know my co-workers, he said. I think it's easy to let someone go if you haven't had a physical relationship with them.

57:32Well, that's absolutely true. That's absolutely true. It was just so obvious this work from home thing was going to be a disaster. And in every respect it has been. But why do you say that people that want to work from home now are the pariahs? Because the thing is this, I'm not sure you're right about that. As you know, in the state of Victoria, has it passed the legislation that says you've got a right to work from home three days a week, two days? Great question. Well, they control both houses of parliament. So I presume it has. Well, you've got all these public servants that now can work from home.

58:03You've got anyone who sits behind a desk really can work from home. It just, I mean, that just shows you who Labor's constituents are because like teachers cannot work from home and baristas. So why do you say, why do you think that people that want to work from home are now society's pariahs? I'm not sure you're right about that. I'm talking to people who are productive, productive members of society, as in people who work for companies that are doing well, people who want to progress their careers, that they're, I think in their mind, people work from home and provide. I think certainly in the public service, taxpayers paying for it, who cares?

58:35Like, of course, but these people have no real ambition, motivation. They're happy to get their$100 ,000,$200 ,000 out of the, like squeeze the taxpayer dry, bankrupt our country, but they're not the people I'm really concerned about. They're not creating any value for society. They're a tax on society, a literal tax on society. So when I look at all of the countries in which I've got operations in one business or another. And all of the cities. Tell me if you agree with this, because you've got operations in a few locations as well. Melbourne is the standout city for difficulty getting people to work from the office.

59:10Is that your experience as well or not? Well, we're pretty strict on it. Yeah. But that said, Sydney, we're very tech heavy in Sydney. And we do lunch stuff and some other stuff to get people in and to make sure they have a great experience. But you don't have this vibe in London, right? Like London is not this vibe of work from home, is it? No, London is fair. The challenge with London is transport costs. Like we've got a guy who lives a couple of hours. It costs him 300 bucks to get to the office. So like you can't make someone pay 300 bucks to come to the office every day. But even if you live in a home county, which is where my in-laws are at Harfordshire, that's a half an hour train ride.

59:45That's 60 bucks a day. Like five days a week at 60 bucks a day is pretty hard. So like we've got a guy who lives five minutes away. That's very different. So it is a little bit different in London, but the culture generally, Tuesdays, Wednesdays, Thursdays, London is virtually full and Mondays, Fridays is much emptier. So you definitely do notice that difference. So they've kind of got that 3-2 cadence. But really, I don't know if you saw this article in Rampart. So Joe's been on a recruiting rampage and he's got Amelia McGuire out of the fin who was a really good rider. So it's a huge coup for Rampart.

1:00:17And Amelia in her first article for Rampart wrote that this is a great scoop. that Canberra has started, and Canberra's one of the, it's part of the whole Atlassian universe, because obviously Mike and Scott were big early investors in Canberra. Blackbird obviously were. So they really, you'd say they're highly influenced by Mike and Scott, and certainly Cliff credits Mike and Scott with a lot of great help building Canberra, so it was a great story. But Mike and Scott are the godfathers of work from home. When I was on 60 Minutes saying we were working in the office, Scott was saying they should be working from home.

1:00:51So they are the opposite of us. And Canva, who's part of that ecosystem, is now saying that they are preferencing Sydney-based applicants who are working from the office. So they have done a 180. They are now work from office. This is the Atlassian universe. This is the kings of work from home are now saying, hold on, this isn't working for us. And Canva's probably a bit more cutthroat than Atlassian. Canva's a bit more sort of efficient business. and this is massive that Canva saying this. Yeah, I agree with you. I agree. And the people of Canva are spewing about it. You see all the Canva-nauts and then they call the remoteys.

1:01:27They're going nuts. Clearly Canva, and we know Cliff and Mel and Canva are super impressive founders and entrepreneurs. They sniff the breeze and they clearly realise that the balance of power has shifted away from employees into businesses and they're far more productive and not just from a pure output sense, but just from a workplace sense. People are more productive in the office. And I also think we've got some really productive work-from-home people who for real reasons can't come into the office. But when I mean productive in the sense of how do you teach other employees, how do you teach younger team members, how do you get great collaboration, that doesn't happen from home.

1:02:02Also we can say for businesses, like in particular businesses like Canva and Atlassian, what they have in common is that it's not summer or spring for them anymore. They're going through a bit of an autumn at the moment. And in autumn, you've got to take some precautions, batten down the hatches, get ready for winter if it's coming. Maybe winter won't come for them. I hope it doesn't. But definitely, it's not golden, beautiful summertime for them anymore. I think they've got to get more serious than they are. Winter's clearly come for it last year, and the share price is down like 80%. Canberra, who knows, is not listed.

1:02:38They seem to be going pretty well still, but they're in a pretty tough environment to no fault of their own. We've got obviously AIs eating their lunch. Yeah, it's a really tricky – and you've got Figma and Adobe. Figma's been smashed. Adobe's been smashed. They've done really well being private because we just don't know and we haven't had to report their financials. I'd rather be Canva than Figma. As in unlisted versus listed? No, just as a business. Well, I don't know there's that much difference, to be honest. Why would you prefer? Because Figma's predominant use is corporate world design, UI, wireframing, etc.

1:03:15Exactly. Like their overlap with Claude Design is like 100%. Is that not the same issue with Canva to a degree? No, I think Canva's got way more use cases than that and it's used in a lot of different ways. I think Claude is... Well, my point is, can't Claude Design still cut Canva's different use case lunch? Like why is it just enterprise? No, it can – it's just it can't do everything at the same time. So, like, it's about what it prioritises. Canva's got a huge customer, like a huge audience, like hundreds of millions of people, but only a single-digit percentage actually pay for it. They would more likely skew enterprise.

1:03:50So, people – obviously, if you've got a company, you're much more likely to pay. And they're the people who I think are more disruptible. So, I think their user base is fine. So, all the long tail of free users, fine. They'll keep using Canva for free. They'll use the AI tools, whatever. I think that which we don't like by the way but I think that corporate users who've got I can use Anthropic I'm I'm paying for Claude I'm paying for OpenAI I'm paying for Gemini anyway so it's effectively bundled in why am I paying for this separate camp which I've cancelled my campus description because like why do I need it like it's it's not that good the AI stuff's not good I can you I now use Gemini for my board packs not Canva like why would I use Canva so if I'm uh so we talk a little about Canva getting acquired by Anthropic or OpenAI are one of those um but Figma is much more attractive.

1:04:31Like Figma's valuation is down to 10 bill. Yeah, it's cheap as. I mean, that is not even a number for Anthropic. Like they're worth a trillion dollars or something, aren't they? Some crazy number like it's 1%. I mean, who cares? You know, they could buy it in cash. Like they just go raise 1, 1.5 % of the value of their company and go and buy it in cash. It's like when you walk into the Rolls Royce dealership, you just turn your pocket out and the bills fall out. To get the money out in that dealership, they hang me upside down and it starts shaking. Exactly what happened. $3 comes out. I thought I saw you walk past the Rolls-Royce dealership.

1:05:10That's right. That's where I hang out. I want to talk about a couple of Aussie businesses. One, a PE business and two recent IPOs that we discussed. Let's start with that. So there were not many IPOs on the ASX this year, and two that we spoke about were Skin Candy and Koala. We like both of them. Skin Candy is actually up like, what, 10 % or something since their IPO. So they're in positive territory. Koala down a bit. So Koala is maybe down 10%. I think it just gets cheaper, I think, basically, when you look at that business. So I think that, you know, we're in a time right now. Firstly, I think it's impressive these businesses got away.

1:05:53Secondly, I've said this over and over and over again and put my money where my mouth is. I think the next decade big wave or one of the really big value creation waves in the next decade is vertical retail of which Skin Candy and Koala both play in. That means making and selling their own branded stuff. And I think we'll keep an eye on these two. I mean, they're not very big, right? Koala's$300 million and Skin Candy's half that or something, right? Or whatever it is. Yeah. Koala's, I think, more like$200 million, isn't it? I thought it was dropped off a bit. No, no, I think Koala's$300 million.

1:06:24But whatever it is, they're very much micro caps on the ASX. But the ASX has had some difficulty attracting IPOs, obviously, and having privatisations drag companies off the boards. I think these are two good public listed companies, and I think we should watch them. Just on the ASX stuff, we're still waiting. We talked about it last year. We talked about it with Joe, who was on the opposite side this argument with us, that ASX was talking about following NASDAQ. You know, NASDAQ has rules where you can have dual listed shares, essentially. So obviously News Corp, famous, or basically all the media companies, New York Times, News Corp, et cetera, have that.

1:07:02And most tech companies like Google, Facebook, Google Meta, Snap, obviously not a great example. But a lot of these Atlassian have dual listed shares, so voting and non-voting. And we're waiting for ASX to do it. And ASX has just done nothing about this, which is a real shame, because part of the reason I think why so few companies are listing is because we don't have this dual list. So one of the reasons Canberra will be listing in, not the only reason, but one of the reasons Canberra will be listing in in New York Stock Exchange or NASDAQ is they can have this dual list class, which for some reason the ASX talked about, but it's just forgotten about by the looks of it.

1:07:34This is the truth about the world for the last 30 years and probably for the next 30 years. Technology is the primary driver of wealth creation and productivity growth in society. and that is why NASDAQ has performed so well. And the ASX would love to get tech companies onto the ASX. Like these vertical retail businesses, I love them. I think you can make lots of money and they pay dividends and dividends are even better than selling shares nowadays. So like in Australia. But ultimately you want tech companies on the ASX and I think that the two requirements to make the ASX very attractive is one, this dual class and you can make it narrower than the US has.

1:08:18And I get Joe's concerns about it. Like you can make it narrower, but that's definitely part of it. And the reason you and I are okay with dual class, which basically means founders get a class of shares that get super voting rights. So even if they don't control the business, they get to control it by votes. You have 20 % of equity and 98 % of votes, essentially. Yeah, and the thing about it is that when you buy the shares that don't have voting rights, you're not being tricked. Yeah, absolutely. Like you're paying for non-voting shares. That's what you're buying. Like you're buying into that.

1:08:48You're basically better. Our point is it's far more honest. If you bought shares in WiseTech, for example, you're effectively buying a company where you have no say, which is what controls that business with a really low stake, but you're being tricked into it versus at least now you go, well, I'm buying a non-voted share. I'm getting a discount because generally non-voted shares traded a discount to voting shares. I get the same economic interest, get the same dividends. I just don't get the same voting rights. It's a much fairer way, a much less opaque way to do it. So it's just a better response, a better result for everyone.

1:09:18People who, if you want to be like an L1, invest in founders, and the L1 have smashed everyone else in the market because they back founders in like you, and they do, and like your co-founders or your actual founders at Catapult, they get great returns because they choose that investing policy method. You don't have to do that. You can not invest in founders and invest in management-run businesses, and they have a great result as well. But at least you know going in what you're going to get. So one of the problems with these class of shares is Australia has this system that's being created for the protest vote.

1:09:52And that system is voting on the remuneration report. And this is a non-binding vote on what the company pays its staff, especially executives. But if 25 % of votes are against the remuneration report, you get a strike. strike and if you get two strikes in a row the whole board gets spilt and you have to re-elect all of the board members and so that's like the protest to vote when if you've got if you're very aggrieved with a company and you have no way to take it out on them which maybe selling shares would be one way but you got no way to take it out on them then you can protest to vote them on the remuneration report mind you i think it's happened twice in the history of australia of the asx and both times all the directors were re-elected straight back onto the board because they got the numbers right if you had super voting shares then you couldn't have that um venting mechanism for the on the remuneration report you could still have the venting that you could still have remuneration report vote you just can't obviously spill the board because you wouldn't have board votes because the super voting shares just re-elect the board essentially so you could actually say you can still have this rem vote still symbolic rem vote and i think they actually should have that still but obviously they can't spill the board because you don't have the power to.

1:11:08So one thing about the ASX, and I'll say the other thing that you need for tech companies is you have to create a system where founders can sell down every day or periodically if they want to without having to do disclosure notices. And at the moment, like founders have got many problems. One is if they sell shares, they have to file a notice. That notice is seen as a negative signal while you're selling shares in your own company. And also if they know information that's going on inside the business, they can't sell any shares. Whereas in the US, you can say over the next five years, I'm going to sell 100 shares a day, no matter what happens.

1:11:38And you can do that and you won't get hit for insider trading. The issue in the ASX that's unique, that, well, I don't want to say it's unique because this might be similar in Canada. I actually don't know, but there are big Canadian pension funds. But in Australia, you've got a situation where there's all this superannuation money sitting in these enormous funds, industry funds, also some non-industry funds and they are heavily invested in the ASX and they want some power and control, frankly. And so, you know, you go and talk to them before an annual general meeting about how they're going to vote and why.

1:12:12And there are proxy advisors. And like, I've got no issue with that setup, just to be crystal clear. But it does create certain dynamics in the market. And it does mean that the ASX is more open to facilitating those large funds, feeling like they're comfortable around governance and have a say, et cetera. And like NASDAQ doesn't care about that at all, you know? Like they don't care about that at all. Yeah, and I'm obviously a big corporate governance guy. I always have been. I wrote a book on this stuff. So I'm not anti-corporate governance at all. But look at these same superannuation funds have more money invested in – the Aussie supers spend much more investments in NASDAQ and New York Stock Exchange than they have in Australia now.

1:12:51So all these superannuation funds do the exact opposite offshore. So they're more than happy to invest in Meta and Google and these great performing investments, which they had no rights at all. So when the returns are there, all they really care about is returns. And ultimately, and look at the Australian market. We talked about it last week or two weeks ago. The Australian market's delivered like 1.5 % annually since 2006. It's been a disastrous market. So clearly this governance stuff, which I'm generally a fan of, hasn't helped investors at all because the returns have been shocking where these alleged bad governance businesses, the court, the Googles, the metas, have done incredibly well for that.

1:13:26So what we've clearly shown is founders who have significant skin in the game are much more aligned in the governance sense than these managers who have no skin in the game. So it's fake governance. It's not real governance here. It's this fraud governance. We're pretending to give you a vote. We're pretending to give you a vote in WiseTech, but WiseTech's down 80 % since we said it was overvalued because it's controlled by somebody with this fake governance layer, which isn't real at all. And all the Aussie supers, all these guys investing in WiseTech thinking they had a say over it, and Richard Weiss just run ramp shot over them and they've lost 80%.

1:13:59Yeah, you're right. So I think ASX is a complicated dynamic in part because of these big super funds. The other company I want to talk about briefly is this. So, Mike, have you heard of a company called Cranky? No, I haven't. Have you heard of the Man Shake, Mike? Yes, I've heard of that. Well, it should be called the Man Shake Down. That's what they should call it because Pet Private Equity, I won't say they got shaken down because it wasn't fraudulent, but basically this is a business that was started by an NRL star. Yeah. So built it up in supermarkets. It was a nice profitable business, him and his wife.

1:14:33It's a great business. And Nick Fordham was a shareholder. Nick's obviously Ben's brother who's a super manager in Sydney and he was the only outside money in this business. I think he managed the rugby player. I forget his name. but Nick did a great job helping out this business as well. So it was just a fantastic story. Well, we should remember his name or look it up because of how this story ends. So they sold it to Pep, which is a big private equity business, and Pep then went and bought – so Man Shake is just basically a protein drink is how I'm going to summarise it. I think the name is Adam McDougall, by the way.

1:15:07That's right, Adam McDougall. That's right. And so this was a protein shake that was acceptable for men to drink, like socially acceptable. Yeah. It was a great market. It was a great market. Great market. I think Adam did an amazing job. Pep went and then they bought, they vertically integrated it and I think they bought the manufacturing facilities, my recollection of this. And basically, I'm going to say something weird now. It's like I've got NDAs but not really. But like I got a bit of an insight into this business for various reasons. And so I didn't get much of an insight into the performance.

1:15:42So I was going to say this. Is this post-PEPS ownership or? Post-PEPS ownership, yeah, yeah, yeah. I can say that they reached out to me and I had a conversation with them. I don't want to say more than that. But this was a few years ago, but I didn't really see much financial information, so whatever. But I will say that this business has not done well. Like, and there's all sorts of reasons for it. So there's one reason they say, which I don't agree is the big reason. You don't think GLP-1s is the big reason? I don't think that is the primary reason. I think that is an exacerbating problem that everyone's on GLP-1s.

1:16:20So the argument that they put into the media is all these people on GLP-1s for weight loss is negatively affecting the demand for these protein shakes. And my flip side would be GLP-1s are notorious for muscle loss and actually the demand for whey protein has gone completely through the roof is like more than 100 % up in price in the last one. That's a great point, yeah. So I don't buy that. I think it's your comment from before. The founder stopped running the business. He sold out sufficiently to take enough money off the table and ultimately they needed him to run the business. And so there's good news on that front for him, not very good news for Pep, which is he's the new owner of his old business.

1:17:01Oh, he bought it back. Because Pep sold it back to him. My gossip that I hear is it was almost free. Now, I don't know if that's true or not, but certainly the price was nothing like what they paid for it. Pep actually came out and said, you know, nobody ever wants to admit mistakes in this world. Nobody ever wants to say that was a terrible deal. We messed up the due diligence or we thought we could operationally run it. I don't know what the issue was with Pep. What they say is irrespective of that outcome, we'll still generate Pep-like returns from this fund because of our other wins, which might be true, but it's the closest you ever will hear a private equity business in saying we messed up.

1:17:39So clearly they messed up on this one. PEP's been a very successful investor. And to assume like every investor, be it private, like Warren Buffett makes mistakes. Like the best investors, James Simon's Renaissance Fund, they're more of a quant training fund, but they got, they're actually the highest, they have a much higher return than Buffett. They got 50.2 % right. So the notion that PEP or any private equity firm is getting 100 % right is just ridiculous. Because if they get 100 % right, they're actually not taking enough risk. So I'm not critical of PEP generally, but I think in this case, this is a great example of some – and we obviously think about this a lot in our business because we're still obviously founder-led.

1:18:14But some businesses can transition from founder to manager. And Apple was a classic example, like 10X under Tim Cook. You can argue he didn't do a single great product in that time, but the value for shareholders was massive that Tim Cook created versus Steve Jobs, the enigmatic founder. But I think my thinking, I've done a lot of thinking about this is if you've got a transition from founder, and Adam was obviously an unbelievable founder, you need to have competitive advantages in the business. You can't just have product market fit. So you can have a, a founder can work with product market fit and can get a hustle and eke out profitability.

1:18:46But if you chuck a manager in there, they'll probably stuff it up. But if you've got great competitive advantage, if you've already got brand, you've got scale, and you just need to sort of keep doing what you're doing and just extract more value, then you can chuck a really smart manager in. and that's what private equity is so good at. So you just got to know where your business's stage is at in building competitive advantages. If you haven't got competitive advantage and outside when it comes in, gets rid of the founder, almost certainly the business dies or close to dies. And that's obviously what's happening here.

1:19:14Well, maybe we could even say this. I'm on the same page as you and we could even say it like this. When you think about the powers that this business has, it has one brand. That's what it's got. That was a great power. The problem is the brand was inextricably linked to the founder. And once that founder goes, the brand goes. You can't maintain that without him. And so good night. Turn off the lights on your way out. So I think that, yeah, like GLP won. I get it. And demand and lots of competition. There were legitimate issues that this business faced. But I think that there is always a danger in buying a business whose brand is so inextricably connected to the founder, especially when it has no other powers and no potential for other powers.

1:19:54And the founder probably had, I wouldn't call it process power, but clearly a degree of operational grit and excellence that you lose the founder out of that in businesses that don't have the powers yet. And it's really catastrophic. Like you just can't take founders out of some businesses too early. And you see that, and I've seen it so many times. Sometimes, well, sometimes you actually have to take a founder out, by the way. Sometimes a founder jumps the shark and you've got to remove them because that's not adding value. So you see both sides. But ultimately, there's a lot of businesses where you take a founder out and it's catastrophic.

1:20:22And this is an absolute case in point. And to Pep's credit, you know, when we talk about powers, we're talking about the Seven Powers, Hamilton Helmer's book. And so to Pep's credit, they did try to get other powers. Like they did try to get a scale advantage by buying the production facility so they could reduce the marginal cost of manufacturing this stuff. Like these are very intelligent people. My issue with Pep is not performance. I've got more issues on the personal level with something. Basically. but on a performance level, I think they've got a long history of strong and astute performance.

1:20:55Absolutely. One of the best. One of the best ever in Australia. Yeah. Can I talk about one of my favourite topics? I want to get to it last week. We ran out of time because I was going to make time this week, which is the unfolding train wreck at the once mighty corporate travel management continues with the company forced into yet another almighty humiliation a couple of weeks ago. After promising investors and idea was well and truly on this bandwagon, they would refile its financial statements before 30 June, now past 30 June, countless times, the disgraced corporate travel business shocked long-suffering shareholders and now hopes to lodge financial statements in August.

1:21:28This is more than a year late after everyone from my co-host aside said they'll be back trading by 1 July. Was that what I said, they'll be back trading by 1 July? I thought I just said they'll be back trading. Well, there was an end point. Obviously, you can't have unlimited time. I don't think we were – listen, in fairness, I did not think we needed an end point because it was not going to go past the 1st of July. But I'm not sure. I think I might have you on a technicality on this one because we didn't put in an end point because it didn't feel necessary. I will say this. I can't say I have the same level of confidence that they'll be back trading, obviously, because this has gone from the sublime to the ridiculous.

1:22:08I don't even know what that quote means. But basically – but I still do believe they're going to trade again. So let's go through what's happened. So CTM claimed, and this is an announcement to the ASX. They do these really short announcements, which have very little data in it, but there's enough in it that would worry the most ardent CTM fam. So CTM claimed that first it expects to recognize a restatement again to revenue. This is another$10 to$15 million. This is in the ANZ region. Remember, they were really firm on saying this is only the UK. We found this one rotten apple. He's got a poor guy called Michael Healy.

1:22:39It's all Michael's fault, even though Michael wasn't even running the business at the time. I'm like this Laura Ruffles person who was in cahoots with Jamie Ferris. So Jamie Ferris, the founder, Laura Ruffles. You had another person in the UK. Then you had this poor Michael Healy guy, but he was the Lee Harvey Oswald of this business. He was all Michael. He was the single shooter. He was the fraud. No one else was involved. It was just Michael. No, you try this analogy and I say to you, I think it's a bad analogy because I think Lee Harvey Oswald was the single shooter. No, everybody knows Lee Harvey Oswald wasn't, but everybody knows he wasn't because that's the whole Seinfeld episode.

1:23:10Anyway, and the movie, J.F. I forgot. You know what? I actually forgot that the single source of truth is the Seinfeld episode. And by the way, I don't disagree with that. You can continue. Exactly. Magic loogie. So they announced$10 to$15 million in ANZ. So remember they said this is just the UK. Australia's fine. Now Australia, these liars. So CTM claimed point blank it was just the UK. They were asked a specific question. And remember the UK basically stole money from their clients, which is horrific. Second, the company claimed that it's reviewed contract client terms relating to margins on air bookings and may lead to even further revenue impacts.

1:23:48Further to the company's announcement, it expects to also impair European goodwill of£92 million as well as ANZ goodwill of$77 million and North American goodwill of USD 49, which is what, $400 million in write-offs? It's pretty much all about goodwill. But hang on. So we should say about Goodwill because this is another accounting, you know, another bit of accounting treatment, let's call it. Chicanery. Yeah. Well, but the thing is this. So the problem that you have is this. When you buy a beer, people sometimes have these surveys and they say, what's a brand worth? What's Coca-Cola worth? And they come up with a number by the hocus-pocus methodology, let's call it.

1:24:30But that number is meaningless in an accounting sense because that doesn't sit on any balance sheet as an asset anywhere. But when you buy a business, let's say you buy a business for$100 million, you say, what did we actually buy? And you go and look at all the assets you bought, and the assets only add up to$10 million. So you can say we bought$10 million of assets. What the hell do you say you bought with the other$90 million? You have to buy something. And so accounting says what you bought is something called goodwill. And so now you've got this new asset called goodwill. And lots of companies, you look at their balance sheet, they've got lots of assets.

1:25:02They look amazing, but it's all this goodwill stuff, which means we bought the promise that the business would still be good tomorrow. That's what goodwill means. This is accounting goodwill. There's also economic goodwill. Economic goodwill is actually really good. Let's not talk about economic goodwill because that's like generating outsized profits based on assets being sold. Correct, but this is accounting. And so the problem with this goodwill, because I make a bit of fun of it, but the books have to balance. So you've got to do something with that$90 million, you know. Another name for goodwill is overpayment on purchase.

1:25:30Well, no, no, I disagree with that. You get a discount on purchase. Yes, but I disagree. Well, the opposite of goodwill is discount on purchase, where you pay it because you can also buy for under what the assets cost. I understand that, but I don't think it's the opposite. It's not the opposite. Literally, it's the opposite. It's the accounting opposite, though. Okay, all right. I'm going to make you say it's not the opposite by targeting you on a personal level. You know what this show is all about. Let's say you run a travel business making$50 million of profit a year. but you're very asset light because you're predominantly a tech business.

1:26:03And someone comes along and says, because there's this great founder who's going to keep running it, I'll pay 30 times earnings for that business. Amazing. $1.5 billion. Great. But the problem is there's only 10 mil of assets. So what do you do with basically almost all of the$1.5 billion? Well, you say, what I'm paying for is how amazing this business is at making profits, and it's going to make even more profits in future because of this great founder. Have I paid too much for that business, Adam? Well, all of a sudden, now you think I probably have underpaid for that business. In that case, you would have bought economic goodwill.

1:26:37That's the difference. But let me finish the accounting goodwill thought, which is now that you've got this goodwill thing sitting on your balance sheet, auditors, you know, they got to get paid for something. And so one of the things that you pay them for is every year you got to assess based on formulas, which are less hocus-pocus, but still there's some room for wiggling. On these formulas, you try to say, is that, I can't remember my example,$90 million of goodwill, is it still actually worth$90 million, or do we have to write it down? And the thing is this, when you write it down, you say, oh, this business used to make$10 million of earnings, but now we think it's only going to make$7 million, and then the auditor say you've got to write that down from$90 million of goodwill to$70 million of goodwill.

1:27:22You just lost 20 mil. What happens to that? Actually, that becomes an expense on your income statement and it eats your profitability. So people do not like write downs. And if you're going to take them, you should eat it all at once and have one bad year and say, oh, it's all abnormals. Don't look the other way. Look the other way. And so what corporate travel has basically done, presumably, is made a whole heap of acquisitions and they've got all this goodwill sitting on the balance sheet. And some auditors have come along and said, I don't reckon this business is worth what it used to be worth.

1:27:51And then they have to write down all of this goodwill is what's happening. Yeah. And this is a business that really grew through acquisition. Like they acquired businesses every year. And this is the real knock on Jamie Ferris, the disgraced former founder CEO who left him disgraced a few months ago. And he would just keep buying this business. There was dodgy accounting. And this is what Doug Tynan picked up many years ago in 2016, which is why the original short thesis on this business was so on point a decade ago. But let me just carry on because the news actually gets even worse. So let alone the writing down$400 million.

1:28:24Do you think they should be writing down to zero? Forget about the auditor side of things. Do you think the actual goodwill is zero in this business? Yeah, I think this business is worth zero. So I think everything should be written down. I think this business is a dead duck, as you know. So Street Talk reported, and Street Talk's been super well-briefed on this, that people who requested anonymity to speak freely said corporate travel might have to increase payments in the UK customers to more than 150 million pounds. Originally, 80 million. Somewhere from 80 million to 128 million to 150 million.

1:28:56This business only has like 60 million bucks of free cash. They've taken$300 million of cash from the customers. This is outrageous. Well, one of the best returns you could have achieved in the last 12 months is just to be on the refund list of corporate travel. It's gone from 80 to 150. Not really, because you're not going to get any money because I can't afford to pay. No, I know, but like, you know, how do I double my money in a year? I'll just be one of the people corporate travel those money to. Yeah. So whilst impossible to get a read on how much untied cash this has, but my understanding has got well less than a hundred million bucks in cash.

1:29:26They obviously have some debt that you want to tap to, but the problem is it's a bit of a circular issue. So CTM need the British government, who's the biggest credit now, who they owe these refunds to. There's others as well, but really the British government's a big one. They need the British government to agree to this repayment schedule, which is absurd because It's British debt they've been stolen from. They should get the money straight away. CTM doesn't have the money to pay them, which is the problem. So they need to get more bank debt. To get bank debt, they need the order to sign off.

1:29:50So it's this whole circular thing that nobody's – orders won't sign off, so the bank won't give a debt, so the UK won't sign off. So it's just this stalemate. What do you think is going to happen? Well, let me go to – I'll go to a friend of the pod, RBC Capital Market, Wei Weng Chen, who's been all over this. He told clients that the chances of CTM returning to the ASX were rapidly decreasing, noting that the issues continue to rise even at this late stage, we see it a pathway to realistic narrowing. We also view recent media attention on the audit sector, and this is, of course, KPMG, as another unfortunately timed headwind for corporate travel.

1:30:23We fear the bar for Deloitte to sign off on the accounts has now materially risen. So it seems, I've been saying this all along, this was our bet, our famous lunch bet number two, after obviously one lunch bet number one, the Richard Goyta bet, was that they would never come back on the boards and it's looking increasingly unlikely that these frauds are going to come back on the board. They owe$300 million that we know about to clients and being ripped off blind by these guys. Do you think it's a worse look for the UK government to write off the majority of this debt slash delay repayment or to send a business into receivership effectively and have all of these people lose their jobs as a consequence of a subsequent liquidation.

1:31:15Like what's a worse look? Because I think this is my, I'm layering on, doubling down on my contrarian bet, which hasn't gone well to begin with, to be fair. But, like, basically, I think the British government might say it just looks too terrible for us to be responsible for hundreds or more job losses. I think they're going to find a way not to do that. And they're probably going to write this off and try and keep – England's got – Britain's got so many problems politically right now. This is, like, on page 470 of the political news, you know. So that's why I still have some confidence. Politically, it's difficult.

1:31:50Remember, this was a conservative government deal with CTM. So the Labor government, I think, would love to rub that conservative government nose in it, to be honest. So this wasn't – remember, this was the Bibi barge. This was that horrific barge they put asylum seekers on. So this is what CTM did. Like, I just can't – and also, I think the other problem CTM had is even if they do come to agreement with the British government, when you factor in these massive$300 million refund issues, they were losing money for the last four years. So this business couldn't make any money anyway. So even aside from this debacle, like they're an unprofitable business with no cash that shouldn't be allowed to trade.

1:32:26IATA shouldn't be letting these guys trade. It's outrageous they're still able to sell their tickets. I don't know how the airlines are allowing. Do you know how many staff are employed by corporate travel? 3 ,000. Isn't it more than that? Isn't it 3 ,000 in Australia and another 3 ,000 overseas or something? Oh, it could be. I didn't think. There'd be a lot of staff because they're not that big a business. But whatever it is, it's a lot of thousands, okay? And so I think this is getting into the – like this is what I said to you a few, I don't know, months ago when you had your IATA rant, which I thought was very reasonably based in fairness and reality.

1:33:00But the thing is I think corporate travel is viewed by a number of organizations or entities as too big to fail. So IATA, if they fail them, has got all sorts of problems and they'll – it's just a risk that they probably don't want to take, like in terms of the board of IATA. The British government, if they go and sink this thing. Well, Art is the airlines, remember? They're pretty agnostic. They just want airlines to get paid, essentially, is their job. And we saw the Thomas Cook disaster where airlines were massively out of pocket. They don't want another Thomas Cook here. That's right. And so you'll remember that when they let Lehman Brothers fail.

1:33:38Yeah, that's the one that failed. Yeah, Lehman Brothers and Bear Stearns. Yeah, Bear Stearns got rescued in some way. Yeah, but they let that fail. and then there was this enormous crater that swallowed a part of New York and they said, oh, God, let's not do that again. And so that might be the Thomas Cook experience for corporate travel with IATA. And then you've got the British government, which doesn't want the – they're not going to get a headline saying the Labor government wasted 200 million pounds of taxpayer money because it was the conservatives before them that did it. So they won't get that headline.

1:34:11but they might get that headline, Labor government responsible for 4 ,000 firings in travel scandal. Like that might not be a good headline for them. I don't think there's anything in those – I think there's nothing like that kind of number of employees in the UK. I think it's a few hundred or something. I don't think it's thousands. I know, but like it's, you know, the media. Like, you know, you're good at headlines. If I could get you to write a good headline for this, you'd come up with a good one. And then you've got like, you know, these audited challenges. and so this is what I don't know.

1:34:41I really don't know this. How do auditors feel about each other? Because Deloitte is auditing this and so does Deloitte not want to throw PwC under the bus? Do they not care or do they want to? I'm not sure they want to. They did. I think they had no choice. So either don't care slash happy. So one of those two options. Okay. And so I'm not sure they'd be happy. I don't think they want to throw. So I don't think auditors want to throw each other on. Andrew Yates, KPMG did, but he was just a complete flog and he's now sacked and he was an exception. I think auditors have a degree of commonity between them and I don't think that helps the industry for them to be throwing each other on the bus.

1:35:20So I think the biggest risk to all of this, because I'm trying to go through the various risks of what could sink this bottomless ship, let's call it. But like what the biggest risk is the last one I think that you said, which is getting the auditors to sign off on this in this environment, like what auditor is going to want to take that risk? They would have to feel very, very confident that standing up in front of a parliamentary inquiry and on the front page of the financial review, their actions were watertight. And I think that's probably the single biggest risk they face. This is my main question though, because this is your industry.

1:35:57We should say, you're not direct competitors with this company. So there's not personal vendetta. It's just your usual, you know, you get, you're very aggrieved by people doing the wrong things and especially fraudulently. You get very worked up. Yeah. And there's been question marks over Jamie Ferris. Jamie Ferris has been an alleged crook for a lot of years. And this is just the 10 years of him lying has come to roost. Like every financial statement they released appeared to have been a lie now. Like it's, this is fraud on fraud. I don't, how ASIC hasn't charged yet. By the way, how has ASIC not charged anyone here?

1:36:26What are they doing? Like this is so obvious. They, like the orders have actually given them their rule book. What are they waiting for? The worst thing they can do is start proceedings and then have new evidence come in that all of a sudden completely changes things. Well, isn't it their job to find? Isn't this their job to find evidence? Well, that's a whole separate conversation, right? I take your point. But the question is how and why are they still generating what must be material revenue as a business today? Like what do you think is happening there? And they claim churns low. I think the real fortunate thing they have is businesses tend to sign up for like three to five years with their corporate travel manager.

1:37:08And it's quite hard to change. You're in scone. It's a bit like - So as long as they're not insolvent or being liquidated, their businesses are under contract. Well, what I hear happening is as businesses roll off, like Flight Centre, the main competitor is Flight Centre. Flight Centre is the dominant corporate travel business in Australia, one of the biggest in the world. As people roll off Flight Centre's and their other competitors are feasting on them. So it's a slow burn. You're not going to lose all your revenue straight away. But again, this is a business that before this wasn't profitable.

1:37:36After this is going to be less profitable. So you've got – if you're a bank, so the banks are waiting on the auditor. To me, the banks are the bigger issue because to pay the refund in any form, they need to tap this bank down because they really have zero free cash. So you need to maintain a flow of cash. So to pay the$300 million now, they need banks to give the money and they need to trade out of it. I don't think they'll be able to trade out of it. The$300 million is all owed to the British government? Well, now there's some Australian stuff coming out as well, but a big chunk is British government, if not the vast majority.

1:38:04But it's like I can understand why the British government would give them time to pay because, as you say, your point is I'd rather get$50 million than nothing, which maybe they get nothing if it goes under, but who knows? Well, actually, that's not what I said. The number one thing that a government wants is I just want no words written about this issue. That's actually what the government cares about. But please never have anybody ask me anything or talk about this because it can't be good for me. I disagree, but I think the Labor government's happy to throw the Conservatives under the bus here.

1:38:37I disagree with that specific point. If it's a previous government stuffed up, it's like a robo-debt in the Labor government. I'm happy to blame the previous government. Look how dumb it is. If you vote these guys, this is going to happen again if you vote for the Conservatives next year. I think this helps Labor, not hurts them in the UK. So if I was advising you at number 10 for your six-month stint as Prime Minister, which seems to be the going rate at the moment, I would say to you, this is how we can throw the Conservatives under the bus. We say the Conservatives has forced us to forgive a$250 million debt by their idiocy because if we enforced it, we would result in thousands of people being fired.

1:39:18This is what the so-called... There isn't thousands of people being fired. There's only hundreds of people in the UK being fired. like maybe say hundreds, but there's not thousands of problems being filed. Globally, right? You could sit in this whole business broke if you're the British government. So my point is... The argument business is already broke. They're just trying to survive with a good favour of their lenders. I don't think they need to send this business into liquidation in order to hit the Conservative government for their stupidity in entering into these deals. I think the reason they haven't done it is because what they think is once we open this can of worms against the Conservative government, who knows where all these worms are going to go and some of them might go down our pants.

1:39:56And so I think that's why they're not keen on opening that can of worms. I think the best solution here is somebody buys his business for a dollar. That sort of saves it. A lot of people keep their jobs. They get the brand thing, but there's obviously no goodwill left anyway. They can get some synergies. If a flight is border, they can synergize all their operations. And obviously some people leave the job, but most people don't. So I think that's the only real way out here. If you're a bank… Synergize their operations. What words are you using now? You say synergize their operations. What you mean is hopefully they can buy it and fire a whole lot of people.

1:40:31Well, you don't need two CFOs. You don't need two CEOs. Well, that's what you mean. Just say what you mean. What they can do is buy it and fire a whole lot of people. Well, you save the job of the people on the call center, the ones who we want to save, and the CFO and whatever they go. Yes, I understand the sales pitch of capitalism, but I'm just telling you that synergize, that's dishonest language. like we should just call it for what it is which i didn't realize we i know this is a communist show we were talking it's not a communist show it's you know you are above this kind of corporate gobbledygook language you know you shouldn't use that language you know that we have to talk about the reality of what i'm not i'm i'm not anti the word synergy i think you know you say this is what it means but i think the word synergy has as a as a place i'm not an anti synergy user the word synergy has a place i can't remember the exact word that you use but the twisting and turning of this word for use in corporate speak because you don't want to say firing a chunk of people because of duplication.

1:41:28When people say we see significant cost synergies in this acquisition, what they're saying is a whole lot of people are going to get fired, but nobody wants to say that so they use dishonest language. I'm obviously not calling you dishonest, but I tell you who might be calling you names, you're still getting the hate mail from corporate travel people or not? I think even the, you said they got like 3 ,000 employees, I can half them message me on LinkedIn to abuse me. They've been very quiet, these guys lately. I think, as always, they've seen the light and probably hunting for jobs at Flight Centre would be my strong suggestion.

1:41:59That's bad news for Mike, all of that hate mail, because it means his hate mail is being drowned out by their hate mail. You might not even get to his hate mail. I'm disappointed not to get the hate mail lately. I think that just shows that even these guys realise this business is basically a corner. So the question is, who won the bet is the question. No, this is what I want to say before who won the bet. The crazy thing is when you say, I'm disappointed not to get the hate mail, you're not telling a joke. You're actually, you know, like, this is your lifeblood. And without this hate mail, you can't be the person you want to be emotionally.

1:42:30So I really encourage, if you are an employee of corporate travel and you listen to this podcast, please send Adam hate mail. He really needs it to function. I'm having a guest. We don't have too many listeners who work at corporate. It'd be better. They should be listening to us and getting new jobs. I suspect we aren't too many. They might learn something about their own company from you. Absolutely. Well, I think they've swallowed the corporate call out of these guys. And they're all guys who have messaged me. They're all like senior BDMs, essentially, who message me saying, I don't know what I'm talking about.

1:42:56But ultimately, if you're a company and you're a travel, a big travel buyer, but you can see who will you renew your corporate travel association. You'd go with someone who you're not worried about losing your money. Because ultimately, you could be buying 100 grand of airfares. You've paid corporate travel management. They go on that. You've potentially lost 100 grand. So I don't understand any business who's giving corporate travel management money. you ever had real questions over that management as well. I can think of a lot of different ways to criticise and abuse you. And if anyone wants hints, they can contact me.

1:43:27But I think that – but saying that you don't know what you're talking about, that's a very weak criticism of you because generally that is going to be the least likely thing, you know. So a better criticism would be you turn a 3 out of 10 into a 10 out of 10, which in this case you're not doing. But you don't know what you're talking about is a very unlikely criticism to be true in my view. On that happy note, I think we'll call it a day. It's been a long episode, a great episode. Lots of stuff covered. Mike, we'll see you on Saturday, of course. I think we'll see you on Saturday. Thank you, listeners.

1:43:56Don't forget to subscribe to the Substack. You get some great articles. I'm sure writing another great article after his Ripper last week. And Will wrote a great article last week, which is definitely worth a read as well on the Karl Stefanovic in Bruglio. So jump on the Substack. It's free at the moment anyway, so you'll get some amazing content for free. Obviously, subscribe through Spotify, Apple Music, whatever you listen to podcasts on so you don't miss an episode. We'll see everybody on Saturday.