How Did We Get Here? Australia’s Economic Reality Explained by Chris Joye

00:00:00
Speaker 1: Chris Joy was straight to it. Mate, thanks for coming in. Thank you, Like this is a public holiday, you know, it's a big a couple of weeks coming up. It's been big days every day since March third or whatever the date was, whenever the Iran war started. People could be excused for having conniptions right now because no one knows what the fuck is going on. It's like brain damage. Shit. So what would be great to talk to you about? And last time we spoke to you and you did exceedingly well in our show. I'd like to talk to you about things like Iran, US equities, Australian equities, interest rates, of course, any recession going on here? What's going on in the world? Mate, Well, where do you want to start? Let's talk with Let's start with America. Let's start with Trump America, Iran. What's your prognosis on what's going to happen there and how will it spill back here to Australia.
00:00:48
Speaker 2: So I think the Iranian conflict, we had an unconventional view on that that was it would be cauterized quite quickly. So we're of the view the guts of the campaign would be done by the end of March, and we obviously got a seats far in the first week of August, and we positioned accordingly, so we bought hundreds of millions of dollars of assets.
00:01:11
Speaker 1: Late March, he joined about bonds now government bonds, YEP.
00:01:15
Speaker 2: Government bonds, bank bonds, corporate bonds. And Trump has had great success in Venezuela. I think he's going to roll the same playbook with Cuba. They had great success in Iran last year with their strikes, which were very surgical. The campaign itself has been I think astonishingly successful. They haven't lost a single person inside Iran, and they've basically achieved most of their objectives in terms of destroying most of the air Force, Navy, Army, they've killed most of the existing regime. I think Kameni and his son are both dead, and if his son's not dead, he's well incapacitated. I don't know if they will be raised. Change doesn't really look like they'll necessarily be Ragiam Change. There is this five hundred kilos of sixty percent and rich uranium sitting under the rubble in Isfahan that he needs to resolve, which is why I think he's still negotiating with him, he doesn't need the straight of hormones open necessarily. I think once they exit, which is a key waterway where roughly twenty percent of the world's oil passes through, the US is actually making out like an absolute bandit. From this. They've massively increased their crude oil exports and their a net energy exporter. But the minute he exits, the Iranians that's their life. They have to open up austrade. So once he's gone, I think that gets resolved and he doesn't need a cease far agreement. I think the midterm elections are a key binding constraint, which is why we were confident the guts of the campaign would be done in March, and he's not expected to do particularly well, but more generally, has had some interesting results. If you look at illegal border crossings in the US down ninety five percent, so he has shut those borders. He as a consequence, US population growth is the lowest in history, which is interesting for inflation. He's slash taxes. He's paid for the four trillion of tax cuts in this one big beautiful Bill act with the tariffs, which has been a bit of a genius move. He has coalesced the mother of all cap X booms, about a trillion dollars the US a year via AI and the tech oligarchy, the tech leadership in the US, which used to be disposed to the Democrats, has really galvanized behind him. He is reasserting US I think, geostrategic promise. There's this no doubt about that. They are now the dominant global hedgemon and having their way with the world, you know, whether you like it or not. And I think he's re asserting US economic exceptionalism because the US is unambiguously by far the biggest beneficiary of all the AI innovation research and development, all the AI spending. I mean, they're just killing it in AI. So having said that, you know, he's super polarizing, obviously, but we are seeing a secular global swing in the political pendulum to the right, and you've see it everywhere here in Australia with one nation is the UK with the reform Europe in Europe yep, and you know South America and Argentina. So it's fascinating, mate, and what that means for Australia as well, Like if we were to ever get Prime Minister Pauline Hanson which is an interesting conception. I mean, obviously she'd have to go.
00:04:45
Speaker 1: Lower house here.
00:04:46
Speaker 2: Yeah, but yeah, it's fascinating the.
00:04:50
Speaker 1: US stock market, it's sort of traveling at all time highs are close to there is an inflation. There is inflation in the US. Yeah. The the USAID has not responded to that either with interest rates. In fact, Trump's sort of trying to tell them to push them put the rates down or continue to put the rates down. How is how is the US traveling so well if they don't have new people coming into the town and starting to spend money. Yes, as an experiment in relation to.
00:05:18
Speaker 2: The US equity market, and this is the great conundrum of our time because you've got equities, as you say, at all time highs, and paradoxically, you've got the FED price for interest rate cuts despite the fact that core inflation in the US is running more than fifty percent above the fed's target. And for markets guys like US, this is just like I think, a not many people are actually talking about it would be it's kind of astonishing for me. So US core inflation. The FED has a particular measure called PCEE that they focus on slightly technical but that's been running at three point four percent anualized last six months, and that's way above what number, the two percent target? Yeah, they target two percent. In the last twelve months, it's been running at three percent. So US core inflation not only was a way above target, but it was accelerating. All those numbers mark pre March, pre this huge order pre now wow yeap that's before the inflation shot wow, accelerating, And so it makes no sense. Our modeling suggests the Fed needs to hike rates by fifty to sixty basis points. Trump's been very successful in Drawburny the Fed to cut rates last year. He has this beef with the current boss of the FAED, J Powell. He appointed him in his first term. He feels that Power was lobbying for the Democrats, which he was pre election, and so Trump's gone, iye for an eye Mode, wants to take him out, which he's He's definitely had his way with Power, and he's appointed this new guy called Wosh, who's been ostensibly much more dubbish fish means supportive of the notion of interest rate cuts. So markets are thinking, well, Power's getting replaced by Walsh. This is Trump's proxy Trump's Trump warts cuts, but there's no way they can cut rates in my view, because I've got this huge inflation shock and they are running more than fifty percent above target before the shock. And so what that means for listeners is that it's very difficult to rationalize the US equity evaluations. It makes no sense at all.
00:07:11
Speaker 1: Are we talking about a new style though, Are we talking about a new approach to this stuff? Or as?
00:07:15
Speaker 2: I don't think so, I mean, that would be one explanation. So, you know, one explanation would be that the Fed's going to shift the target. We've talked about this before, but there's no chance of that happening. The FED is these are very big data dependent organizations, you know, the politicians. One thing people need to understand is that whilst Trump has been criticized for attacking the FED and politicizing the FED, the reality is that every political leader appoints every central bank boss. So Charmers here sacked fille Low as he's entitled to do, and he appointed the governor of a deputy governor and seven of the nine voting Interest.
00:07:45
Speaker 1: Rate Committee members the whole on your board now, and what we get.
00:07:50
Speaker 2: We got a WHIBA, which means the IBA cut rates before the election, the cut rates three times last year and charmers. All power to him. I would have done more less the same thing, like everyone wants the two the probabilities in their favor. Trump is doing the same thing as well in the US. But you know what happens in Australia. We wake up, the RBA wakes up. Last year, they forecus two point six percent coinflation. Michelle Bullock, the boss of the RBA, the governor said we're going to hit our target. The targets two and a half percent. We said no, no, no, you're going to be running it through.
00:08:19
Speaker 1: You were cooler bar cool ol bar.
00:08:20
Speaker 2: Yeah, my guy said, that's not a snowballs chance of hell. Are hitting two point six? You'ren't run a three point three for core inflation. They printed three point four for the year, way above target. Disaster. So but to the RBA's credit, what do they do? Data dependence doy. They're like, okay, we got it wrong. Guess what We're hiking rates and they've hyped rates twice. The market's pricing in another two to three hikes. They're pricing in a four point seven percent cash rate. Now remember at the peak of the hiking cycle after the pandemic, we peaked at four point three five percent, so we're going this is absolute capitulation and humiliation. The RBA is the first central bank in the world to have cut rates in the pandemic, hiked cut again, and they had to turn around one hundred eight degrees and say we've got it totally wrong. We're hiking again. First in the world to do that, right, And now interesting series, first in the world, first in the world. Yeah, yeah, the Japanese were always hiking, so they don't count. But yeah, first in the world. The most embarrassing, you know. But in the Harber's defense, first point is when inflation smacked them in the face, they said, hey, we're going to lift rates. They didn't hesitate, so you know, all power to them. And they may lift rates again in May. They've got a meeting before the budget. But we're talking about monster short term rate hikes. We're talking about a totality of four to five hikes, a totality of more than one hundred basis points of hikes.
00:09:38
Speaker 1: One hundred basis points.
00:09:39
Speaker 2: Yeah, we've already had two and we're talking about marcuts pricing number two to three. So this and you're seeing in your business already and you were just telling me before that you know you're seeing an instantaneous radioaction to rate hikes in mortgage approval flows and mortgage settlements. So this is a game change of Frustralia. We're going to see house prices are going to fall. They're already starting to fall in Sydney and Melbourne. You saw the minute that they started talking about hike slate last year, Sydney, Melbourne got ko Wushka market rolled over. Brisbane and Perth. House prices are still as strong as ten men, but that's going to cool unambiguously. National house prices are going to fall for sure. At the start of last year everyone was like house buses were falling in and saying, oh, Hausprus are going to be weak. We thought the RBA would cut two to three times. We didn't agree with what they were doing, but I argued that house pruces would rise five to ten percent. National house bruses rose nine percent, and within that you had like killer growth in Perth twenty plus percent, Brisbane fifteen percent, Sydney and Melbourne weaker. So the RBA, I think has done the right thing. And we can talk about this later, but just come back to the original question on equities. The essential challenge here is you've got all time stock market evaluations, which is reflected in our super portfolios, and you've got the FAED price for rate cuts which makes no freaking sense. And again our models, which are very accurate, at saying the FED has to raise rates. And what does that mean for Australia in the world, Well, that means a hiking cycle. And what we're starting to see the portense of mark is a globally synchronized hiking cycle. Now, last year this serious. Yeah, So last year, no one in the world, I think, aside from US, was talking about the risk of a double hiking cycle. I told some of my class, prepare your portfolios for the specter of a second hiking cycle. Everyone thought I was crazy. The US bond market, the most powerful mark in the world, right, trillions and trillions at all. The bonds was pricing in as zero percent, zero percent chance of a rate hike in the US in twenty twenty six, twenty twenty seven, twenty twenty eight.
00:11:32
Speaker 1: At what point, what point was this.
00:11:33
Speaker 2: Mid to late last year? Right? Yeah, but think about the US economy right now. Unemployment's falling. Yep, four point three percent. Growth is strong. You asked me, why is the economy doing well despite population growth being non existent. It's a great question. US productivity growth is amongst the strongest in the world. So what that means is again jargon. Productivity growth just means that you're producing more for a given set of human and money inputs hours. Yeah, so more output per our works. So they've just been more efficient.
00:12:04
Speaker 1: That's all about. What was driving that now?
00:12:05
Speaker 2: Yeah, so you're getting a massive manufacturing boom in the US. There's another thing that we kind of been talking about for a long time because Trump's bring brought all the supply chains or a lot of the strategically important supply chains that come home. With automation, robotics and digitization, you can now make a lot of stuff cost effectively in the US. Look at SpaceX, number one producer of rockets and satellites in the world. So the US economy and I've traveled a lot many states through the US in the last six months, and the zeitgaist there mate is super positive amongst businesses. If you're a business person in the US. You feel you have the most business friendly government in the history of the US behind you. Well, remove red tape, remove reregulation, whatever you want to get done, you call Washington. They've got your back to you. An anecdote A guy I know was speaking to the CEO of Welds FAGA, one of the biggest US banks, and he said under Biden, he couldn't get a single meeting. Under Trump, He's had meetings with Trump, and Trump will randomly call them and say, hey, what do you think about this? Trump just wants to do deals. I mean, you know Trump as well as anyone, He just wants to get shit done right. And the US right now is in massive entrepreneurial innovation mode and the zeitgeist in atmospherics are super positive. I was actually on the way here, I speaking to a dude whose father was one of the most powerful unionists, like union officials in the United States right and literally on the way here, I was spinning this dude and he said, Mate, the unions are booming because there's so much frickin building in the US right now because of all the data centers and that they're constructing. So we're talking about it at trillion dollars of spending just through AI and also because they're doing a lot of infrastructure investment in the US right now. So the US is doing great, which warrants, which basically meant so strong productivity growth. You've got strong economic growth, you've got strong inflation, which is a huge problem. You've got no illegal immigrants coming in. What that means is with no population growth, no migration, there's no workers. And so what that's going to do is push up wages. So rates inevitably need to go high in the US in our of you. But the market thinks I'm totally wrong. Market's pricing and cut still because they think Trump is whipped the FED and power and they think that basically his butt boy Wash is going to rock in there and cut rates. But I think it's zero. I mean, okay, maybe there's a perfunctory cut, but I think right now he's got the perfect cover to say, hey, Trumpy, this is Wash, the new Fed boss. He's going to say, listen, you just set off this mother of or prush shocks. I've got this huge inflation crisis. I can't cut rates. But there's a real dichotomy or cognitive dissonance between market pricing for equities and what's actually happening in the economy. And I see the economy just getting stronger and strong. And we've been arguing this for a year.
00:14:40
Speaker 1: Because often I think to himself, particularly with the equities, I wonder to myself whether or not Trump has a team of people that go out to all the big Wall Street guys and just say, listen, this will be over soon. Don't worry. I'm going to sort this out. I think he does like media style pitching, and also to your markets, to the interest rate markets, to go and say, look, don't worry, we're going to control this. We're going to control inflation. Number two. So you know, somehow we're going to control inflation, and somehow we're going to and we're not going to have to put rates up.
00:15:08
Speaker 2: Yeah. So the only resolution to that challenge where you've got a combination of super strong growth and a labor market that's tightening up and no fresh labor supply, and you've got inflation that's running like more than fifty percent above target, the only way to resolve that it's through productivity, and that means again just being more efficient, more innovative, and producing a whole bunch of stuff with less inputs.
00:15:32
Speaker 1: So let's just talk about the US, because it's important that this piece is really important because our fed, our reserving sort of talks about this every now and then. But maybe just put in a simple context the idea that wage price pressure can be neutralized with more productivity. Just like, just open it up a little bit, because it's not something we're going to achieve here. Yeah, but certainly in the US you could believe that argument if that Trump's guys are out there talking about this.
00:15:58
Speaker 2: Yeah, it's pretty simple. Work harder. If the same team is working harder and producing more for the same wage bill, then you can grow faster.
00:16:08
Speaker 1: And if I pay you more, but youse, I'll work even harder or I'll produce more.
00:16:12
Speaker 2: Yeah, that's okay.
00:16:13
Speaker 1: That's okay because that's non inflationary, correct, because the vendor of the product doesn't need to sell for a higher price because he can just sell more of the product.
00:16:22
Speaker 2: Conversely, if you keep on having to hire extra people to produce the same products, the same goods and services, then that's going to drive it be cost base and that's going to be inflationaty which.
00:16:33
Speaker 1: Means the vendor will put have to put his price up to maintain his margin. It becomes inflationary. Do you think people are buying that argument in America that look, we will open the doors to productivity, will open the doors to let's call it AI. We'll just get rid of red tape. And if you need to produce more widgets because you got to pay more wages, if you help us with the inflationary is.
00:16:56
Speaker 2: Having I mean, he has absolutely destroyed red tape, is mass deregulating. So it's happening as because you just gave us an example of you and you know I'll give you another example. He's shrunk the federal workforce by three hundred and fifty five people. He has shrunk government by twelve percent? Does that by definition in a short period of time? Mate?
00:17:16
Speaker 1: Does that by definition? To shrink red tape or get rid of red tape by getting.
00:17:19
Speaker 2: Is that part of a lot of business people would say, if you slim down these government institutions that we're trying to suffocate us, it might make decision making a little easier, particularly if Washington's telling those same government institutions, hey, approved stuff, hurry out, Yeah, hurry up. So it's just unambiguous that, like the US economy has got a lot of momentum.
00:17:37
Speaker 1: How does this spill back to us? Does that help us?
00:17:39
Speaker 2: Or just staying on AI. The one of the ringles though, is that and this answer to your question about well, what's he saying. Are people buying this argument that you can grow fast without credit inflation? The problem is they do have inflation. The problem is they can't grow their workforce because population growth is the lowest in history in the US. And here's another problem, which we've argued for a year, and that is we believe, contrast to pretty much everybody else, that AI is not going to create deflation. So the traditional meme or narrative is AI is going to eviserate a big part of the workforce. You know, we're going to have drivers cars. Uber's dead, We're going to have Optimist robots produced by Tesla and rather being interviewed by Mark Boris, I could have an optimist here cost twenty thirty grand, about one percent of Marks costs, and it's free cheaply, and optimists can interview Chris Joy and and you know your business can get rid of Mark and hologramd Mark, Yeah, hologramd Mark. But there's a problem, we think with those you So the first issue is that we're not seeing any of that happen. What we're actually seeing, rather than kill jobs, AIS creating jobs. So if you look at new business openings in the US, there's another positive the US economy. They are booming and going through the roof, so new business formation. People are establishing as you'd imagine, as they did during the Internet days. They're establishing startups and companies to service the trillion dollars that's been spent on AI. Every man and their dog wants to do something in al everyone we know is trying to off the AI wave, and so it's actually creating a positive rather than negative employment effect. The second thing is you're not seeing job losses in industries people predicted you see them in for example, everyone said management consultants are completely folds. You know, they're dead as a doorn on. But the consultants have reinvented themselves as AI experts and their industry is booming. People said that radiography won't be wiped out, but radiography employment demand is growing faster than the broader labor market. So I think we are of the view that rather than being deflationary, actually ais inflationary. Why basically got these big companies like Amazon and Google and Meta and others known as hyperscolars that are spending a trillion dollars on data centers and compute to basically monetize AI. So you're spending a trillion dollars a year and these dudes are all competing for the same stuff. They're competing for the same chips, the same memory cards, the same people that work in AI. There's stories of young Ossie has been paid one hundred million bucks to go and leave HI research centers. In these firms, they're competing for the same energy that needs to power the data centers data centers, and they're also obviously the same bricks and mortar to produce.
00:20:09
Speaker 1: This Electricians like you because everyone gets got to some weird think about AI or data centers. For example, data is just bricks and mortar and metal and electricity in power and water like that's all it is.
00:20:22
Speaker 2: It's so basically our hypothesis has been a couple of four one we last year originated this idea that the hyperscolars were lying about the capecks because when we looked at the Googles and the Amazons and what they said they were going to spend each year in aar and then when we studied what they actually spent, they were spending fifty to one hundred percent more than their intention. So we think they're deliberately understanding the size of the capex sperm because they don't want to tip off their rivals because they're competing for the same people, the same resources, the same chips and merry carts. So we think the capex berm is going to be bigger than people think. We think it's going to be a huge spending shock, positive spinning shock that is basically an income demand and wealth shock, which is a inflation and it's going to create bottlenecks, and that we're not seeing the evisceration of the workforce that was predicted by many. Now that may play out in the future, but we've had very contrary views on all this stuff, and all roads lead to higher inflation in the US, which is probably not good for the global economy because eventually, if we do get rate hikes, what does that mean, Well, equity valuations are going to have to contend with a much higher cost of capital, which like if I'll give you another example, the Aussie ten year government bond yield, which is the market's guess of where the RBA cash rate will be for the next ten years. A year or two ago, that was like zero point one five two point three percentage points below the US ten yure. Right now it's zero point seven percentage points or seventy basis points above the US tenure. Austral As pricing and rate hikes, those two to three rate hikes we talked about, our view is that RBA cashroate could go a lot higher. So we think we've been saying high fours. But there is a possibility the RBA pushes the cash rate to five to six. We can talk about this later. There's a possibility this rate hiking hiking cycle we're having in Australia could be protracted, elongated. It will be multi year and we've seen this in the past. You look at the decade before two thousand and seven and we had this stop start hiking cycle. They paused for six to twelve months and they start again because they couldn't get inflation under control. So again we need to kind of think about that. But coming back to equities, the US tenure government bony was quite low. It's only four point three percent. Our ten government bonyard was five percent. Now our ten government bonyiard in twenty twenty one was one percent, So it's gone from one to five. Was that important to Aussie's just a little aside. Between twenty nineteen and today, governments have racked up no less than eight hundred billion dollars of debt to fund the political spending which is completely out of control. Back in two thousand and seven, we were running across all ossie governments a seventeen billion dollar surplus. Today we're running an eighty billion dollar deficit. So our fisk like the amount of they're spending ninety seven billion a year more than they're making in terms of revenues than they were back in two thousand and seven.
00:22:52
Speaker 1: And that doesn't include off balance sheet, off off the ballot sheet.
00:22:56
Speaker 2: Yeah, it doesn't include the NBN and things like that. And the the problem, of course is as that eight hundred billion dollar debt bill, which we all have to repay through our taxes, was racked up, the cost that debt used to be one percent pantum is now five percent produm So that's a big problem. But again the challenge for the US is if that four three percent ten you government bondio in the US, which assumes cuts. If that was to lift, then equities are cactus. I think you can see equity evaluations easily pulled back by more than ten to twenty percent. So this dichotomy that you know, I leave listeners with is think about what the US inflation problem, if it intensifies, which I believe it will means for the valuations of equities and your super portfolios. And think about what a US hiking cycle means for those portfolios. Because I think it's not priced. Markets are not thinking about it. So what we're discussing here is kind of quite novel. It's not a popular debate, like, no one's really talking about an aggressive Well, they're ignoring the inflation, and I think it comes back to your original question. They're saying productivity is a panis. So basically they're saying, we're going to create all this deflation because optimists will rule, the robots will rule. They're going to these massive job losses and it'll all be fine because productivity will go through the roof.
00:24:10
Speaker 1: So see what is the way for Australia and austrain equities because Austrainan equities are also you know, hitting the heights as well.
00:24:17
Speaker 2: Yeah, so there's two thoughts there and full disclaimer. I don't run equities at this point. We run fixed income bonds debt, so that's my wheelhouse. But OSSI and US equities are hyper correlator, so where US equities go, OSSIS equities will follow. But I think Australia has a bigger problem. So in Australia we have even higher inflation than the US. So last I mentioned in the US they're running at three point four last six months, three last twelve months targets too. In Australia the targets two and a half last six months. We've been running at three point nine for core inflation three point nine, two and a half last twelve months, three point four. And the problem in Australia is our inflation is not being driven by all this private sector growth. It's actually the opposite. All of our inflation in Australia has been driven by two things, really only two things. Government spending, the eight hundred billion dollars of debt, almost thirty thousand dollars per person that wracked up since twenty nineteen. The NDAs is a great example. It is meant to be thirtyen to forteen billion sized by the Productivity Commissioner a year, so thirty to forty billion a year, they're now spending over fifty billion a year. All that waste is basically like a python squeezing a balloon, and the balloon is kind of getting bigger and bigger, and it's crushing or asphyxiating the private economy and it's creating price pressure. So government spending is so large that eighty billion deficit paranum is so large that it's pushing out the price of everything. It's pushing up at cost of living, it's pushing up inflation, and ultimately it is pushing up interest rates while we're getting rate hikes. But the other dynamic is immigration. We had record a record number of five hundred thousand people ruving the country in January, so we've got record migration. Well yeah, and if you've done five hundred thousand people half a million people a year on Sydney and Melbourne, we just can't cope because we don't have that much rental accommodation. We don't have that much capacity to transport this population shock efficiently. And so the Aussie economy has been artificially inflated by immigration and by government spending, not by businesses, not by the private sector. In fact, the private sector is in a per capita income recession has been since twenty twenty three. So what's actually happening Mark is relative to government. The private economy is shrinking. The government part of the economy is the biggest since World War II. This is actually stealth socialism right because Australias got austraids, have been addicted to the idea that the Dan Andrews of the world will boil them out. And according to the Center for Independent Studies, one in two Australians now drive more than half their income from government and related sectors. So this means we have an economy built on fake growth, an economy with a lot of.
00:26:50
Speaker 1: Cost breass sure on debt because that money.
00:26:52
Speaker 2: Is and immigration, and we have a huge amount of fake growth. The private sector is actually struggling. So if you speak to mums and dad like I'm working my ass off, and why rates rising and why is my cost living rising? Like how Am I contributing to these problems? You're not. It's got hothing to do with you, mate, It's got everything to do with politicians and population.
00:27:11
Speaker 1: So when the Reserve Bankers says inflation is to some extent being driven by both private and public demand, it's horseshit. Yeah, okay, can you explain that, because because of course our treasurer gets something and goes, well, I've told you it's private demand. Private demand is fantastic, everyone's which is sort of the implications everybody's doing fantastic and we're all out there spending like drunken sailors. Can you just give us a reconciliation of that?
00:27:33
Speaker 2: No, No, almost all, Almost all the inflation Australia has been driven by immigration and government spending, and in the absence of that, the overall economy would be very weak, inflation would be much lower, and interest rates would be much lower. That's just the statement of fact. It's an objective fact that interest rates and inflation would be much lower not for the extreme government spending and population growth we're seeing. I think the politicians probably think the ship in million people a year. They probably vote for you, but it's not sustainable. And the broader question is, well, the challenge for the IBA, and in your question is really wasn't the RBA calling this out. The reason the IBA isn't calling this out is because they've been whipped by Charmers. Charmers appointed the governor and deputy government. Charmer's appointed most of the voting members of the insut Act Setting Committee, which is in total to and I would have done the same thing, but the reality is they've been completely muzzled. They are completely unwilling to call out government spending. Other iterations of the Reserve Bank in the past have been quite forthright in saying that governments need to balance their budgets and pull in the purse trainings and kind of contribute to more prosperity because you can't drive living standards up without an increasing productivity. So this is the other problem. So it's all related. The governments sector completely asphixiating the overall economy and private activity is crushing productivity because there's no productivity in the government sector. In the public sector, there's been no productivity growth for twenty five years. So Australia actually has gone from one of the most competitive nations in the world up as kids. The whole world in mind, our sports people and our business leaders. You know the Don Bradman's, the Ruper Murdocks, you know the Shane Warns for their innovation, ingenuity, intensity and at work ethic, and that's more or less disappeared. So our productivity performance is amongst the worst in the world. Whilst the US productivity is soaring, we are worse in Europe, and that's because the government sector is taken over so much of the overall growth pulse, and productivity in the government sector is so poor that it's dragging down our overall productivity statistics. The productivity in the private sector is not amazing, but it's not nearly as bad as it is in the government sector. And low productivity means you just have to pour more money and people into producing goods and services, which is inflationary. So I think all roads lead to entrenched inflation pressures that are going to be hard to resolve unless we do one of two things. The solutions are simple. You've got to spend a lot less, so the government has to spend a lot, and you need to pull back on immigration. Now, the interesting thing is the government saying that they want to tax us more. So they want to take more of our savings so they can spend more to resolve a spending problem, which makes no sense. You can't resolve a pathological spending problem by stealing even more money from taxpayers, right, You've got to resolve your kind of addiction to pork barreling, and.
00:30:19
Speaker 1: It works against that also works against productivity. Why is it going to work harder if they've just got to pay more tax man?
00:30:24
Speaker 2: This is a key point, Like we have a you know, you can as an Australian, you can move to Florida and have a top marginal tax rate of thirty eight percent. Why would you stay in Australia and be if you're a top producer and pay forty seven percent and by.
00:30:37
Speaker 1: The way, kicks in much earlier too. Yeah, I mean in the US you can be only five or grand a year. Do you get in the top rate US dollars? Here you're in the top rate two hundred.
00:30:47
Speaker 2: So you're exactly right. So not only are they raising taxes to crush entrepreneurship and innovation and dis incentivize hard work, but they're trying to say that our spending problem is going to be resolved Mark by giving us more money, which makes absolute no sense. Your spending problem, Mate is resolved by you spending less mo folk. Yeah, it's pretty simple. But also would you suggest that, and can I say, I think when sorry to interrupt it, when main Street connects the dots, which I think, ma'am man out here, Yeah, when mum and dad understand that whilst they're making out like a bandit on the ndias and probably ruling the ndias. The quid pro quo cost of that is a high cost of living, higher inflation and getting whacked by higher interest rates net net against you. Yeah, and then higher taxes. Right. I think people start to realize actually, this is not sustainable, particularly if the government, as they're already doing, starts to self cannibalize and say, well, actually we've got a massive corruption problem with the NDAs. We need to start pulling it back in And it was interesting that they raised that last week. But the other dynamic in Australia is the swinging the political pendulum to the rights here. I think the casualty of that will be immigration, which we do need to pull back on.
00:31:55
Speaker 1: Can we talk about that, Nick, because what's your prognosis on that.
00:31:58
Speaker 2: Yeah, I think our view is if you look at what's happened in the UK and the US, so you've gone from Biden to Trump, and you're going from a very hard left government in the UK to potentially Farage and Reform in the UK, which are hard right, and then you're seeing similar dynamics start to manifest here in Australia. You can clearly see a lot of community discontent with the idea that you've spent almost trillion bucks of our money in our asking us to pay it back through a high taxes. Our interest bill's gone from one percent panum to five percent pranum and the casualty is our cost of living is going through the roof and yeah we're.
00:32:31
Speaker 1: Getting wettern living is going backwards.
00:32:32
Speaker 2: Stand living, Yeah, that's the key point I think. Yeah, our per capita incomes actually declining, so our stand living and our prosperity is shrinking. You know. I think that galvanizes or catalyzes the change in the political cost. Whoever wins government, I think you're going to see big policy change. So this is my prediction. We're going to see Australia for pretty much the first time in history at some point without any population growth. In the US, you've gone from super strong population growth under Biden to none. In Canada, super strong population growth and they've crushed it. And immigration in New Zealand they had super strong population growth and it's fallen dramatically. And I think you'll see the same thing happened in the UK. So I think whether labor judges that, hey, all of this immigration is creating lots of problems, whether it's assimilation issues, are La bondai, whether it's inflation issues, cost of living issues. I mean, I think blind free, you can see the country just can't cope with half a million foreigners coming here every year live. So I think you'll see policy change whoever prevails either party. Yeah, yeah, but I think you'll see big policy change. And what's profoundly important I think for viewers is we have to imagine in Australia and there's a sequencing to this, but we've got to think forward and imagine in Australia with no population growth, which we've never seen before. Mark, that hasn't happened really, We've always run.
00:33:49
Speaker 1: There's no population growth through immigration. Yeah, we don't have that's the family.
00:33:54
Speaker 2: For kundit is you know, we're basically not replacing naturally. Yeah, so immigration is basically all population growth, and Australia has for decades, for like thirty forty years, run the strongest population growth in the OECD. So the wonder down Under is when known has really been built on population growth and also natural resource endowments. But if you take that population leg out from under the chair, which I think you have to to try and resolve the inflation crisis, you're going to see a much much weaker economy. So this is the way I think it plays out. The market's pricing in We're currently at a four point one percent cash rate. We were at three point six markets pricing in a four point seven percent cash rate, so another two to three hikes house prices is already falling. House prices are going to continue to fall. I think they give back the gains that we had last year, so we had nine percent growth, we'd probably pay that back at the same time. Clearly, charmers are starting to see the writing on the world. I think there's a there's a ground swell of animus around the NDI is staying to brew. I think just in terms of the corruption and routing and the inequity of it all. So I think you're going to see some fiscal console relation, which is fancy terminology for just governments spending a little less, not much less, but a little less at the margin.
00:35:06
Speaker 1: You took about the next budget.
00:35:07
Speaker 2: In the next budget, but just looking ahead, I think they're going to coming into the next election at the margin. Government spending one't increase nearly as much as it has in the past. So the idea that government's growing the economy that leg won't really be there now. How much they have to slash spending, I don't think they're going to do that, but they'll pull back a little bit. And the key point is the marginal contribution to growth from government won't be there. Population growth, I think is going to get crushed one way or another, which we've never seen before, and the RBA is just going to keep hiking. I'll tell why they're going to keep piking is because they've got relentlessly wrong right. Their forecast miss last year was the worst sincerely nineteen nineties. They expected two point six corinflation and printed three point in four. They've been humiliated repeatedly for big misses. This is slightly technical, but in late twenty twenty one they dropped their interest rate target called the yield curb target, which was fixing the interest rate yield on the twenty twenty four government bond at zero point one percent. They gave up, and it was the first time a central bank had been pushed out of a so called peg since George Soros, the famous hedge fund manager, bullied the British pound sterling out of the European exchange rate mechanism the early ninety nineties. So that was a disaster of the RBA, like a global humiliation. And then they've got all their inflation forecasts wrong. As the first central bank of the world to cut Hi cut and the hiker again, we've got a second hiking cycle. So they're in full data depending mode. Because their legacies and livelihoods are one hundred percent and the cross this. I don't think they give a rat to ask any more about charmers. They're just laser like focus. They're not going to criticize charmers for all this spending. And the states, by the way, because it's not just charmers, it's for us a state government problem. In fact, probably more of a state government problem than a federal government problem, and so they're going to keep hiking. And I don't think a four point seven percent cash rate or four point six percent cash rate, whatever the number ends up being, is going to deal with the inflation problem. So I think it'll be stop start, and I think the cash rate, my own view is it bleeds into the fibes and then at the same time, now you get the population growth slowing, you get the government spending slowing, and then you get a recession. So I think where we land. And this is also your question on I equities. The flying the ointment for equities is not just higher interest rates. It's an iy recession and possibly the first decent recession we've had since ninety ninety one.
00:37:18
Speaker 1: Can I talk about that for soon? I mean you and I Probably he's probably not quite a flavor keating, but one of the things he was that him was very honest, probably to his own device, but he did say, this is a recession. We had to have meaning meaning like in his awkward way of saying things, to deal with inflation that was around eighty eighty nineteen ninety one, we had to have a recession, and he said it was the recession we had to have. He was the king of inner one liners, but he actually meant it. That was the truth. And it's nearly like in order to control inflation today here we probably have to have a recession. You're right, mate, because we've got a part of our economy it loves interest rates going up. You know, one thirty economy over sixty own their own home, have no doubt, have big super because Keating introduced it, feeling pretty comfortable. It just raids go up. There's how good it is, darling. But it's going on holiday to Bali. But one thing those people are very aware of, very cognisant of, is a recession. They get nervous about that shit. Everything's going up and price going up and the economy is in trouble. We read they read the newspaper one way to get into their psyche because all this is psychological. The whole reserve bank game is how do I get inside your head to make you feel like you to stop spending money. And if there's a whole group of people who I don't effectcause on the reserve bank, one way I can do it if I am in reserve bank is put us into recession.
00:38:44
Speaker 2: Yep, one hundred percent. And I think you know, we're leaving them with no choice because of the rampant government spending in the rampant immigration. And I think you're a hundredercent right. It is a recession that it looks like we have to have all the lines of Keating's famous commentary, and there are parallels. They had very strong inflation for years, probably the ninety one recession. Unfortunately, unemployment rose dramatically. I was the unemployments at four point three percent, exactly the same as the US. It's historically low, very super low, and it's been much lower than the RBA expect. But here's the rub. The RBA, and being politically compromised by their government of the day, has overridden So they've overridden the staff analysis of what the natural rate of unemployment is?
00:39:26
Speaker 1: What is it?
00:39:27
Speaker 2: So the staff believes it's four point nine percent.
00:39:30
Speaker 1: Oh wow, it's gone for it's four point five. But when she was deputy she had it at four point five.
00:39:34
Speaker 2: Yeah, so well they actually the board said we think the natural rate might be in the high threes to low force. So the board ran this experiment. So what we.
00:39:44
Speaker 1: Backtracked I call it the experiment too. I'm glad you said that thing.
00:39:47
Speaker 2: The big mistake they made was actually in twenty twenty.
00:39:50
Speaker 1: Three, Yeah, but that was that was a treasures for he introduced this new part of the mandate unemployment and no inflation.
00:39:57
Speaker 2: One hundred percent. Yeah, so they changed the mandate kind of he he kind of rigged the mandate to make the RBA more dubbish.
00:40:06
Speaker 1: It's not her fault, by the way, she's just running to what she's been told to do one hundred percent.
00:40:10
Speaker 2: And although you could argue that she's a statutory into beending institution, so she can actually do whatever she wants. But the kind of key policy mistake that they made amongst a few, but the key one was in late twenty twenty three, the rest of the world went to between five and five and a half percent, and New Zealand, Canada, the US, UK, we stopped at four point three five. And they've been open saying, well, the reason we stopped at only four point three five despite the fact that the RBA's own model said rates needed to go to five right. The Martin model of the macro economy which we run, which is the RBA's model, said they should have hiked much higher, and they stopped because they wanted to run an experiment with the idea that the natural rate of joblessness or the natural rate of unemployment in Australian economy had fallen dramatically, which means you could run the economy a lot hotter, you could have all this government's been, you could have all this immigration, there'd be no inflation problem. Right, And they thought that actually the natural rate might be high threes, all low four. They said this repeatedly, and the staff were like, no, no, no, no, you know the eight hundred analysts the IRBI are like, no, no, no, no, it's mid to high force. The current numbers four point nine, and.
00:41:10
Speaker 1: That's where they believe it should be. The current number.
00:41:12
Speaker 2: Staff. I felt it was the board overrode the staff said it could be high three slow falls, and therefore we can run rates lower and a hotterer economy. We don't need to have all these hikes. And they used talk about this threading the needle, and they thought they were of economic geniuses in delivering low inflation, high growth and much lower unemployment.
00:41:29
Speaker 1: Well, June last year they got there, Yeah, June last year. What if the headline and were two point one or something like that.
00:41:35
Speaker 2: The core got to two point seven in June, so still slightly above target.
00:41:39
Speaker 1: But around the turffy but one quarter. Yeah, I can't understand that. Yeah, but I think they were sort of celebrating.
00:41:44
Speaker 2: They were declaring victory because you know, the core inflation printed two point seven in June last year, and they're like, hey, we're basically at target.
00:41:50
Speaker 1: Yeah, with unemployment as well, because unemployment was four point.
00:41:53
Speaker 2: Two exactly, so they thought they threaded the needle, but they hadn't at all. And so what they should have done is gone to five and really crushed inflation, but they didn't do that, so inflation remained sort of untrammeled. And now they've capitulated on their natural rate view, so they've basically said, we got it wrong. It's not low threes, and it's not it's not high threes and low fours. They're now saying, I think it's a four point six. So the board has a view around four point six. The staff is still at four point nine. But let's get back to the kind of meaty toppy, which is recession and unemployment. Basically the quality of consequence of all this, folks, is the RBA to get inflation under control has to lift unemployment, right, it has to go from four point three to basically five, just to get it back to normal. Now, normally you overshoot with these things. So in New Zealand, where they're much tougher, and they went to five and a half and they did have a recession, the unemployment rate went from threes to five point four. Right, So I think you're going to see unemployment in Australia increase quite meaningfully in order to create the extra room in the economy for all the government spending and all the immigration. Now another choices. Of course, you can crush population growth and that will be deflationary, and you can crush government spending, which will also be deflacering. But whether the politicians have the metal to do that open question. But all roads lead to one way or another a recession.
00:43:12
Speaker 1: I think so on the unemployment number, like you, So let's say we go from just argument in an argumented or a debate way, that's how we go from four point three to four point nine or five, just to make it round. Do you get concerned then in terms of house prices, because that would indicate to me there's going to be a lot of people in default in terms of mortgages because most of the people who are employed who will no longer be employed, quite a big percentage of those are mortgage holders, which means houses will go on the MIC because we haven't seen distress selling in Australia for a long long time. I have been through periods whether it is just stress selling in Australia, but we certainly haven't seen it for the last proven sentences the GFC, to be honest, like it's been pretty good. That could sort of give us just stress selling. I'm not saying that people who have to sell the house all of a sudden we create a mark where prices get deflated. But what happens is real estate agents get a little less you know, hawkish or less bullish, and they start to say to their vendors, look, you might not get the two point one. You might have to sort of sell from one point eight. Every they start to condition the market, and vendors get conditioned, and vendors you know, like unless they're and or purchases get conditioned too, by the way, So everyone starts to pay less and expect less because right now, We've got a problem. I said to you early, I think the problem is right now in Australia is that we have a lot of vendors who are there's a price expectation, so there's a mismatch in the market. Well, there's not a willing by a willing sell it. Vendors are saying, look, I've got a mortgage, but you know I took it out in twenty twenty. I took it at a low rates or I had a mortgage prior to that, and during the twenty twenty period, I just kept paying off my old rate and I've reduced my know, my scheduled repayments quite low. Plus the problem has gone up by seven or eighty percent since then. You know, I've got plenty of equity. I still got a job. I'm in the four I'm not in the four point three percent of unemployed. You know, I've been well walked after. Therefore I don't need to sell. So you buyer who can't borrow as much as you used to about to borrow because there's been a couple of rate rises and there will be more. There's a mismatch, so I'm not going to sell. So we don't don't get even.
00:45:14
Speaker 2: Out passed right now, And I think, well, what will break that? Yeah, so I think asked you a question to false delinquencies and insolvencies. We were seeing some signs of stress creeping into the housing market in late twenty twenty four, so national house prices had actually started falling. This is before the RBA rate cuts. Sydney and Melbourne prices were falling, and there were a lot of stories about in more affluent suburbs owners who had had you know, two, three, four five loans against their property, often funded by private credit, getting into strife. And we were seeing, for example, in the East and subs of Sydney. I remember on Victoria Road one house sold for like ten twenty million, more than EXPE originally expected because the guy had five or six lines against it from private debt. We're also seeing in late twenty four record insolvencies, so just in terms of the absolute number of insolventes, all time high, and we were definitely seeing a big increase and you would have seen it in your book in mortgage defaults. So in late twenty four, all of that was bailed out by the RBA rate cuts. The RBA cut rates three times. What happened, House prices boom nine to ten percent, Bang, commercial property valuation started to turn. The private credit guys, you know, we're given a stay of execution and all these borrowers in distress, we're basically given accommodation. Now we're standing down the barrel of a very different situation whereby not only is the IBA taking those rate cuts away so it's reversing them out embarrassingly, but it's adding probably another one or two on top of the first three hikes. So you got four to five hikes. That means you're going to have a return of all that distress. And so I think you're right. You're going to have high defaults, high delinquencies, You're going to have much higher insolvencies. And in contrast to twenty twenty four and twenty three, we had record population growth and also governments still spending like crazy. I think this time around and you can see less government spending and reduce population growth again, which implies even higher to false delinquencies and insolvencies. So I think we're going to see the worst default cycle and the worst insolvency cycle since either the GFC or since nine ninety one, could it be a perfect storm? Was that could this be a perfect storm? Relations Yeah, the key is, you know the idea that we won't have population growth. It's hugely important to Australia to ship in half million people a year to boost spending, boost demand, keep the economy trucking along. And obviously then you know this addiction to governments spending money to try and buy votes. The Dan Andrews playbook, which he pioneered with, by the way, the impromato of the RBA during the pandemic, because the RBA in the pandemic said to all these state and federal governments in the in the politicians defense, the RBA feel low came out and said, hey, spend as much as you possibly can. We need you to inject cash into the economy to support us during a plague. Right, but once you let that giney out of the bottle, you've never been able to get back in. You know, we wrack up AI and ey billion dollars a debt and we now have this huge inflation problem. So I think I think my prediction is it's going to be difficult at the inflation under control, particularly in the stow with there is no productivity growth, I think you see much higher unemployment. So i'd see unemployment going to the fibes. I think you can see an RBA cash rate into the high force and possibly fivees. I think it could be a multi year hiking cycle and a multi year malaise. And I think it's going to animate a very vigorous political debate because now everyone wants to blame somebody, right, the man on the street, the farmer saying why am I getting smashed by this inflation? Why am I getting smashed by these interest throates because I'm working my tits off, right, Like who is to blame?
00:48:38
Speaker 1: Is all?
00:48:39
Speaker 2: This ndis probably you know NBN, all these the eighty billion, the deaths of the year. Probably is it that half a million foreigners who are landing this rate? Yes, So that's going to really set the seeds of this much more vigorous political debate. And I said last year you watched the crossairs, We'll turn to government spending and fiscal policy, and it's really told territory. I think for one nation, I think I haven't followed the whole one nation shift recently at all closely, but I think one nation are really focusing on the NDIS as people should do, because you know it's choc a block full of extreme corruption.
00:49:14
Speaker 1: Do you feel as though in the upcoming budget that may budget the charmers is going to also hit us on the head again in relation to taxes relative to property and what effects are you guys thinking that's going to have on property prices.
00:49:28
Speaker 2: Yeah, it looks like we're going to get higher capital gains taxes and that's undoubtedly going to whack property prices further. But again, how you can get away with mid term announcing new taxes that you never campaigned on.
00:49:42
Speaker 1: Well, you said the weren't going to happen. Yeah, you said weren't going to happen. You never consulted the community about. And the rational for hoisting all these taxes up is the idea that you've got this huge spending problem that you're responsible for, and you want to take more of our tax payers, our hard earned cash. You want to take more of that to resolve your spending problem. It's like going to a guy that's addicted to Pokey's and saying you've got a Pokey's problem. We're going to give you a bit more cash to make you feel feel better. Well, he's going to sell it, because he's a genius of selling these things. He'll say. It's an intergenerational unfairness issue. You know, people who are young people are being affected by these older people who are you know, wroughting the negative gearing and getting a couple of gains tax discounts on the profits that they make, and that you young people are being denied the opportunity to buy real estate. That's why real estate is so expensive. Bull shit, Just spend less mote.
00:50:34
Speaker 2: It's easy, right, you know, you're you've got a spending problem by the guy at the poking machine, and he just needs to stop playing the pokes and you've got to stop playing with our money. It's very simple, I think, and unfortunately it's been relentless because there's been no cost associated with extreme spending. Rates were low, money was basically free. There wasn't, you know, an inflation crisis to explain, and there were interest rates also incredibly low, and taxes weren't necessarily increasing. But when all those things shift, I think the cross swing back to the essential source of the problem. So when people again my contention is when mum and dad link immigration and the NDIS and government spending and higher taxes and high cost of living, high inflation, high rates. When they link all that together, I think we'll get policy change. Whoever wins the election.
00:51:26
Speaker 1: Do you think what about the younger people though, I mean, like that we're talking twenty to thirty is the big voters.
00:51:33
Speaker 2: I mean most of them have been very It's funny in life, I was talking to someone about this this morning. We all start center left, we all start idealistic. I don't know how you felt, Yeah, I was. You knew me when I was in my twenties, Like I wanted to come up with every government policy under the sun to make the water better place. My entire twenties were spent thinking about radical policy ideas to improve the welfare of the country. So when you're a kid, you have these really idellic aspirations for making positive change. Then you realize that by the time an idea gets completely tortured and corrupted by the political process, there's really balancing probabilities. Most of the political change is actually suboptimal and destructive and often corrupted right, and really very negative, And so you become much more jaundice jaded and skeptical people like us, so like, well, actually, businesses kind of know what they're doing. And if you set the conditions for businesses to flourish and thrive and survive, and you give us great incentives to build world class product because this is what austraining is that we need to build world beating products in a world where we're competing now against not just other global businesses, but now against global AI. Right, so we need to be globally competitive, and that's what the policy should focus should beyond in sending folks to innovate and build world class companies. And if you do that, I think you know, the rest sorts yourself out. It's kind of like as an investor, if you've got strong returns, well, everything sorts it out. And with an economy, if we've got strong intensity, competitive zeal, work ethic and we're building the world's best businesses, we have strong growth, we have strong productivity. We're going to be able to run a high growth economy without having high inflation. We're going to be generating a lot of tax revenue which will help pay back the debt and everyone's happy. But we're not doing that at all. We're actually as you were saying, erecting barriers and disincentives to all those things, like why would you build a world class business in Australia when you can go to Florida or many other countries. You can move to Aarba dhaby, you can move to lots of different destinations Singapore, yeah, Hong Kong, wherever the case may be. But there's many other alternative locations in the world which provide much better platforms to build world class businesses. And I'm actually seeing it. There's definitely a bit of a brain drain right now. You know, the top entrepreneurs are looking around the world. Where do I need to be based to compete against the AIS?
00:53:56
Speaker 1: Well, I'm seeing the same thing and young people going to San Francisco on place like that. Get me out of here.
00:54:02
Speaker 2: But coming back to your twenty to thirty question, I'm not an expert on this, but my sense has been people are starting to say that actually they're some of the most discontented members of the community because they're like, actually, all this waste hasn't worked out well for us. And I don't know if it's right or wrong, But again, we start off center left and then when we see what the outcome of that effort is, and it's disappointing, then we tend to swing to the right.
00:54:28
Speaker 1: I mean, you and I've had this discussions many times over a long, long period of time, and we can go right back to I remember one stage that we went saw Wayne Swan when he was the treasurer, and their sensitivity, the lay Party's sensitivity to lobby is like out of this world. I mean, it's off the Richter scale. Do you think that this government, I'm this sort of a little bit outside of what we should be talking about, but let's go with different moment. Do you think that this government has any possibility, this Labor Party government, and we're talking about st it's a federal too, by the way, has any possibility of rewriting us, in other words, putting us back on the right path.
00:55:05
Speaker 2: Listen, I'm always last hole full, and these guys, as much as most politicians, are pretty underwhelming and disappointing. And you know everyone in that field tens have pretty narcissistic tendencies. If you park all that aside, I'm glass are full. There's a lot of smart folks in that space, and there's also a lot of good folks.
00:55:25
Speaker 1: Like, look at Daniel Murky. Yeah, both the words.
00:55:27
Speaker 2: Out of my mouth. Yeah, Murky's a beast. He's an absolute weapon man.
00:55:31
Speaker 1: But do you think he can get his his influence into the Fed?
00:55:33
Speaker 2: So yeah, if you had Murky in the FEDS, it would just be world class. Like, he is one of the most impressive human beings I've ever met. And very practical too, Incredibly practical, incredibly smart, incredibly hard working, and he just wants to find the right solutions. I mean, Charmin's is absolutely capable of making the right decisions.
00:55:51
Speaker 1: But his ideaological too.
00:55:52
Speaker 2: Yeah, but whether like, whether you know his propensities lead him that direction. I have absolutely no idea, But I hope because the solutions actually really really freaking simple. Slash the size of government, reduce taxes, put the foundations in place for ossis to build world class businesses. It's about business. It's not about politics, right, it's not about government. It's about the private sector. And let you know, individuals hit the ball out of the park, and if they do that, everything is kind of I think resolved. Inflation disappears, interest rates will be much lower, growth will be much higher, We'll be able to run a high growth economy with much lower unemployment because productivity will be much stronger. So it's actually not complex. It's actually almost surprising, astonishingly so how complex the process is to get to those sorts of solutions. But you do see it around the world, and we talked about this once before. It's fascinating what's playing out in the US. You got an intellectual civil war between California and New York, which are basically looking like failed state. It's running huge budget deficits juxtaposed against Florida and Texas, which are booming. And you've got massive popular shifts out of California into these business friendly states which are running budget surpluses, which have got very high growth, load taxes. Not only load taxes, they're slashing taxes even further, I think in floroughly looking and getting rid of land tax altogether. And the playbook is pretty simple.
00:57:17
Speaker 1: And they can do christ because they can slash the taxes because the amount of turnover is higher, so they're getting the same amount of tax off a higher turnover, so therefore reduced the tax rate.
00:57:28
Speaker 2: So the bottom line is the people, not the politicians, are the solution for prosperity. So just back to people, whereas this idea that government should control everything and we should centrally plan the economy and government should provide all the services. The classic was this New York mayor who decided to make an example of this billionaire in New York who was undertaking a six billion dollar project employing two and a half thousand New Yorkers, and he vilified him, and this guy Ken Griffin said, or at least one of his underlings the sea, We're going to basically think about shelving the project and moving to Florida because we just can't cope with this dude sort of personalizing and vilifying entrepreneurial success in this way, which you think New York could be a standard bearer for a place to build world class businesses, But now tax rates in New York prohibitively punitive, sort of fifty to sixty percent total tax rates. Similarly, you know you've got a comparable tax burden, if not harder, in California. So I think that any country that doesn't put itself in a position to encourage the development of world class businesses is going to have a very very grim future in this intensely competitive AI driven environment.
00:58:44
Speaker 1: So we sort of did have that type of thought process. I wasn't AI driven, but of that type of thought process. We had that in a two thousand and seven terminal, the Innovation Nation, Malcolm.
00:58:54
Speaker 2: We've talked about this for decades and like why did it fail? Though?
00:58:57
Speaker 1: Like what happened?
00:58:59
Speaker 2: Because it was a great was it too early? I think the issue is it was a great idea, it was too early, but there was no impetus for change. You need a good crisis. This is probably why we need to have a recession, because inflation wasn't super high, the cost of living wasn't out of control, interest rates weren't super high, and the budget wasn't in the deleterious crazy position it is right now, and we didn't rack up almost a trillion dollars whether of extra debt. So now that we've passed through all those processes, people are freaking out, understandably, and there's no easy answers now, Mate, we've created all these problems. The problems need to be resolved, and unfortunately that means basically taking these very good people that work in government related sectors. We need to take those jobs away from them, and we need to find them jobs and even better opportunities in the private sector working with world class businesses. I did hear one unbelievably interesting idea from somebody in this space, and I don't know what you think about this. This person said to me, what about creating an alternative tax system? I said, you've got to set up a playing field where we can attract the best and brightest in the world and foster internal talent to be world class, to smash the rest of the world in that global competition. And he said, we can't kind of debate the current tax system because you'll never win that debate. But what happens if we actually create an alternative tax system. For example, what happens if we said that everyone who starts a business and is self employed has a top marginal tax rate of hypothetically twenty five percent. And I thought that was genius, Like, rather than trying to fix the existing problems, just create a new system.
01:00:40
Speaker 1: They run parallel.
01:00:41
Speaker 2: Yeah, they're running parallel, and for those who are self employed, they pay no more than twenty five percent tax. And you give everyone in the world the incentive to go and start businesses, which is what we want to do. Create employment create jobs, innovate, build the world's best products, which is again what we need.
01:01:01
Speaker 1: You might just open that up a little bit because like a lot of people might quite understand the reason why that might work. We've got this alternative taxis and it's encouraging people to sit up their own business. But let's just go through what happens with the employee people they're buy inventory, Like, how does that build the economy?
01:01:15
Speaker 2: Well, it gives people a very strong commercial imperative where you can move from a top marginal tax rate of forty seven percent down to or forty five depending on how you calculate, but down to twenty five. And so if you're working at CBA A and z NAB and Westpac, the four biggest employers in Australia, and you're just an employee and you know almost half your income's getting taken away by the government. If there's an alternative route where if you go out on your own, you're back yourself and you decide to create a new product and service that can compete globally, and you can establish that firm. Employ people, create jobs, generate a new stream of income and new sources of growth and innovation. Because you're encouraged to do it. Because you're encouraged to it, then you might make that leap because I think a lot of people would like if you could kind of move from a forty five to fifty percent tax rate world to one in which you're paying less than or potentially less and close to half that, then I think that's pretty exciting and enticing. And I thought it was a genius idea that rather than trying to re engineer this antiluvering and existing system which is going to be death by a thousand cuts, just create a parallel system.
01:02:26
Speaker 1: It's still had to change. You're right, Yeah, it's okay. How do you think that would work? Yeah, I don't mind. The idea is I think probably people will get a little bit nervous to this in the early period, the start period, like as I'm taking the risk, well, yeah, will I have it? Will? I think that probably what needs to happen is that there needs to be some sort of government encourageable and send if around that a bit like the if you remember when they got the film industry going here in Austray many years ago. Governments, state governments used to contribute to that. There was a contribution by the government to you starting up a new business. It's sort of like beyond investment some other thing. You know, maybe or maybe the money you put into the thing is all goes to your investments, so you'll get that as a rite off straight away or your everything. Every dollar you spend you've got to get I mean, I'm in a game where we try and encourage people to leave banks that come work with my yellow big rowd business. Right, that's the argument we get from them every single time. Yes, I want to do that. I'd like to leave the bank. I'd like to be in control of my own destiny. I know that I can do mortgages. I know I can make money, but right now I'm getting paid one hundred and fifty grand and are plus a fifty thousand dollars bonus or more. I've got a mortgage, I've got a family. It's going to take me six to eight months to start there, build revenue. How do I exist in that period? And that's that's a bit of a that's a that's a tough one. And we find them, we get we know, we know they want to come to us. And it's not just us, but all of us that we know they want to change it. We know they want autonomy. We know that they know that they can earn more money working in it as a broker, for example, than they can work in for the bank. They like the hours, like the ability to stop at three o'clock and go back at six o'clock. They can go home and do things with their kids and all that sort of stuff. But that six to twelve months call it period where they're not earning any money, that's the difficult part. And you know, in our case, we lend them the money, we fund them, and they can pay us back out of the commissions. But generally speaking, and I'd say this would have cut across all all industries. Most people have mortgage. These aspirational people, they're aspiracial people. They've got they've already got a mortgage, they've got two, three kids or a kid, and they're not in a sort of the fortunate position of you know, super stars like yourself. I mean they're not, you know, they can't. They don't have anything saved up. Everything's in the house. So I think I think it would work if the government could somehow create the incident, create the incident in the initial stages.
01:04:50
Speaker 2: We do need to kind of resolve the fact that the economy is in the groups of these big oligopolies. And whether it's the major banks, Cole's, Woolies in Australia.
01:05:00
Speaker 1: It's companies that tells all of.
01:05:02
Speaker 2: Them, Yeah, they're all oligopolies or an oligarchy so to speak. And if we can encourage people to back themselves, start new businesses, encourage small business, then I think that would be very, very positive. But I love the idea of creating an alternative tax system where your top marginal rate for an entrepreneurs twenty five percent. I mean, that's kind of up there with well beating.
01:05:21
Speaker 1: I love being talking for a long time about changing the top rate attacks. I mean across the board. I just say the view that if you if you either change the top rate attack or alternately you change the point at which the top rate tax kicks in, we'll both will have more turnover, more money will be made and therefore to be more tax gathered.
01:05:36
Speaker 2: You're seeing this in the US in Florida, and it's just crazy with lower taxes.
01:05:41
Speaker 1: I mean, I know that you've got to travel, so I just want to finish off. Mate, where do you think will be in the next between here in December. And how long do you think this tough period will last.
01:05:50
Speaker 2: I think it's a multi year. I think getting governments to do what they need to do is going to be very tough.
01:05:56
Speaker 1: But how long will before GP becomes such a shitty number and a recession does kick in? And I'm talking about an unemployment recession, not just you know, like not the typical GDP recession.
01:06:05
Speaker 2: So I'd say in the next one to two years and we should expect to see a recession. I think we should unemployment should increase. I think we are subject to possibly the fact that the election will be in twenty twenty eight, Is that right? Yep, yeah, So you know, depending on the political will and impulses come into the election, you might see some of the things they need to do dissipate an atrophy. So, like my central conviction is it's going to be multi year. It could be very elongated, it could be much longer than what I've just described. But in the central case, let's assume they go to close to five percent in terms of the RBA cash rate from three point six, possibly drift higher. You can see house prices for commercial property prices for much higher defaults, delinquencies, insolvencies. If government spending is constrained at the margin, and crucially, and this is really really important, there's a radical reduction in immigration, which I think there needs to be, then you're very likely going to have a recession and unemployment will increase. So I would say over the next couple of years, if we don't get a big reduction in immigration and we don't get a big or material shift in political spending, then the problem is you can have this ongoing bat one. I don't know if we've or I've expressed this clearly, but really what you have now is a battle between the central bank and the politicians. So politicians want population growth, in immigration and political spinning. The central bank wants lower inflation. The two things are butting heads and it's seat of intractable. So somebody has to give. The central bank ain't going to give because it's data dependence. The races is going to continue climbing high. Now the central bank will get a bit year bitch, because this central bank is a bit whipped by charmers, like they hiked in February and instead of saying, hey, we're sitting up for a hiking cycle, and you were talking about central bank's conditioning expectation expectations. Normally there's this thing known as moral suasion, where they will signal and say, hey, we've hiked rates in February, but guess what, there's another three or forecoming, so you better pull your horns in. And they can, through their words, affect behavior. They can convince people to be more prudent, to spend less, recklessly, reduce activity, reduce inflationary pressures. And if they had any balls and they actually said to charmers and the government, you're to blame for a big part of this problem, and you need to pull in your purse strings, I mean you'd see an immediate political I think immediate political way. No, but they won't. But if they did, and they could have, and they haven't, And what this means is mate that the whole process is stretched out. So instead, what happened was Bullock got up there the government of the RBA and said we're hiking and we might be one and done. Absolutely preposterous. They immediately hiked the next month that they met. And so the suboptimal central bank behaviors because they're politically compromised, means this whole thing could get stretched out. And if Chalmers doesn't change, it's going to get stretched out. And if we don't get a big reduction of immigration or get stretched out, so it could be three to five year plus process, depending on whether we see those changes. Well. But by the way, is anyone that you're talking to talking about recession right now? Or okay? Interesting? I mean it's like no one's walking about ate hugs and.
01:09:11
Speaker 1: I am, but I am, but no one else is.
01:09:13
Speaker 2: Yeah, yeah, I mean like last year, no one was talking about a double hiking cycle. I find really interesting how people like it seems to be steering us. You know, it's like you got core inflation running it almost four percent, record immigration, record government spending, and the only solution is high rates and a recession. Because the very what people need to understand is the RBA has to lift unemployment to that circle five percent levels at four point three right now, which would basically satisfy the test for a recession. It has to get unemployment up just to get back to the maths of being able to run an economy without inflation. Because they viewers and listeners might not understand this, but in the RBA's mathematical models, unless you get unemployment back to its natural rate, you will get unsustainable strong inflation, and again in unemployments so low because the political spending and immigration. So it seems really obvious to me that the idea that we can just thread the needle and push rates up and not reduce house prices and not increase unemployment and get inflation back to target absolutely preposterous.
01:10:17
Speaker 1: Warren Hogan has been a bit very much along your line, and I noticed Lucy ellis recently much more again a much more favorite, more much more predictive around many more hikes and also getting close to recession.
01:10:30
Speaker 2: One's famous economist, and Lucy works Westpac used to work at the RBA.
01:10:33
Speaker 1: And she's chief economists now west Pain. Yeah, yeah, so she's now come around like she actually changed.
01:10:40
Speaker 2: Her view about three weeks ago. But and markets are pricing in two three hikes, so the markets are there. So I think the future for Australia, mate is very very grim. And this idea of thinking about the economy without population growth is super important because it will impact everything. Commercial property, REZI. You know, those two asset classes have been massively boosted by the world's strongest population growth rates.
01:11:02
Speaker 1: We are we are one of the world's strongest population growth.
01:11:04
Speaker 2: So I have been for decades. But literally we've had the strongest population growth in the OECD for decades. Australia has I mean, think about the Aussie that we grew up in Sydney and Melbourne just ethnically looked radically different like we. You know, our two biggest sources of migration are China and India. That's great, you know, and actually immigrants are long term very powerful for productivity, but in the short term it creates a huge demand shock and if you have too much immigration, the economy can really struggle to cope and you get price pressures, which is exactly what's happening.
01:11:35
Speaker 1: The long term immigration of I think was closer to two seventy thousand, yeah. Yeah.
01:11:39
Speaker 2: Historically we ran about I think, you know, two hundred yeah, so we're running double basically double. Yeah.
01:11:45
Speaker 1: And what's interesting is they're all they all come to where the jobs are and then between a city Melbourn, Risbane. And it's interesting that I don't but I just know it's the traffic. Every year, the traffic seed is a double and it's like it's and the intensity, it's an intense environment to live here. Now it's Sydney in terms of density. Density is a big issue for me anyway personally, and it makes who sell cars like the big in the car industry, like the biggest in the currentistry. And they tell me that the number of cars is selling is ridiculous because everybody comes to the country news a carp Yeah.
01:12:17
Speaker 2: Yeah, Australia today it just looks literally looks very very different to what it did thirty to forty years ago. And it is very very different. And that's a good thing because we're the most multicultural country in the OCD and you know, one in three of us wasn't born here, so that brings with lots of positives, but it also brings with it challenges. And one of those challenges is a massive you know but basically amongst the world's highest inflation rates and highest cost of living rates, and now we're actually seeing one of the highest interest rates in the developed world because the ABA is hiking ahead of everyone else because you know, they've got bigger problems than everyone else.
01:12:50
Speaker 1: So and you're always doing those road shows around the world. I mean, you know, doing and raising money for your funds. You're very various successful funds here in Australia, What do they say? What are all the roads of people say? The people you're presenting to, they're.
01:13:04
Speaker 2: Not really focused on Australia. I think Australia feels like he's in a bit of time. One thing I noticed coming back here is we're very disconnected from I think leading analysis on what's happening in the world, like our views and attitudes towards, for example, Trump, dated and stale. Whereas if you go to the UK, where they don't love Trump, but they would nonetheless consider him a formidable sort of policy and intellectual adversary for what they may believe in, and they take him very seriously, whereas in Australia there tends to be a reflex to consider he's just this cartoonish characature, which is not like the guy has completely single handedly re engineered defense policy in Europe, foreign policy in Europe, policy in the Middle East, the the organizational and political administrations in the Middle East. He's re engineering all of the the balance of power and the leadership regimes in South America, the Caribbean. So this guy's had a profound impact on our world. He's probably been the most influential political leader since World War Two, possibly, And so I would say things I noticed are just that disconnect between the rest of the world and us. We're in a bit of a time walk where you know, in a bit of a bubble.
01:14:16
Speaker 1: Is it too easy for us?
01:14:17
Speaker 2: You know, they're wonder down under the lucky tea. It's interesting. I was in New Zealand last week and they kept on referring to Australia as the Lucky country. Right. You know, you've got all these resource endowments, you've had this great population growth, you've got all this government spending, but the Lucky Country has become the Lazy Land. And I've said this before. You know, we're basically on a track, on a path to becoming asias at Betha where we just sell our physical amenities, you know, our beaches, our budgies, our bikinis, and our natural resource endowments. And so we both know that when you get lucky, you tend to get complacent and you tend to suffer from hubris. And we've all kind of suffered from it at various points in time because we all get lucky by birth, whatever the case may be. And so yeah, Australia's lost its mojo. There's just absolutely no doubt about it. And it's sad because we were like the world's most competitive country at one point, the world's one of the world's richest countries, and we were world beaters. Like you know, my recollection grandup as a kid was Ossie's in every domain where the you know, it was the cricket, the rugby, the Olympics, Rupert Murdoch. We were just winners. Yeah we're not. We're losers right now.
01:15:27
Speaker 1: Well that's where I'm going to stop right there, and I hope you have a say flight mate, and I'll see when you get back.
01:15:31
Speaker 2: Thanks.
01:15:32
Speaker 1: Thanks mate,