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

Chris Joye is one of the most influential voices in Australian finance — a fund manager, economist, public policy thinker, and weekly Australian Financial Review columnist. In this conversation, Joye delivers his starkest warnings yet about Australia's economic future. He explains why the Reserve Bank's humiliating policy reversals have set us up for a multi-year recession, how record immigration and government spending have created an inflation crisis , and why we're heading for the worst property downturn since 1991. Joye also dissects Trump's economic revolution in America and reveals why Australia risks becoming "Asia's Ibiza" unless we fundamentally change course. Join my exclusive Mentored+ community: https://mentored.com.au/become-a-member/ Subscribe to the Mentored newsletter here: https://mentored.com.au/newsletter See omnystudio.com/listener https://omnystudio.com/listener for privacy information.

• 0:00Speaker 00

  Chris Joy, welcome straight to it, mate.

• 0:01Speaker 01

  Hi, mate.

• 0:02Speaker 00

  Thanks for coming in.

• 0:03Speaker 01

  Thank you.

• 0:03Speaker 00

  Like, this is a public holiday, you know, it's a big couple of weeks coming up. It's been big days every day since March 3rd or whatever date it was, whenever the Iran war started. People could be excused for having conniptions right now because they don't, 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 the last time we spoke to you, you did exceedingly well in our, 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? We didn't want to start, let's talk, let's start with America. Let's start with Trump, America, Iran. What's your prognosis on what's going to happen there? And, and how will it spill back here to Australia?

• 0:48Speaker 01

  So I think the Iranian conflict, we had an unconventional view on that, that was it would be quarterized 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 ceasefire on the first week of August and we positioned accordingly. So we bought hundreds of millions of dollars of assets late March.

• 1:13Speaker 00

  You're talking about bonds now? Government bonds?

• 1:15Speaker 01

  Yep, government bonds, bank bonds, corporate bonds. And, you know, 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.

• 1:40Speaker 01

  And they've basically achieved most of their objectives in terms of destroying most of, you know, the Air Force, Navy, Army. They've killed most of the existing regime. I think Khamenei and his son are both dead. And if his son's not dead, he's, you know, well incapacitated. I don't know if there'll be regime change, it doesn't really look like there'll necessarily be regime change.

• 2:05Speaker 01

  There is this 500 kilos of. Sixty percent of rich uranium sitting under the rubble in Isfahan that he needs to resolve, which is why I think he's still negotiating with them. He doesn't need the Strait of Hormuz opened necessarily. I think once they exit, which is a key waterway where roughly 20% 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 they're a net energy exporter. But the minute he exits, the Iranians, that's their lifeblood, they have to open up the strait. So, once he's gone, I think that gets resolved. And he

• 2:46Speaker 01

  doesn't need a ceasefire 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, I mean, Trump more generally has had some interesting results. If you look at illegal border crossings in the US, down 95%. 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 slashed taxes. He's paid for the four trillion of tax cuts in this one big, beautiful bill act with the tariffs,

• 3:25Speaker 01

  which has been a bit of a genius move. He has coalesced the mother of all capex booms, about a trillion dollars 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 just no doubt about that. They are now the dominant global hegemon and having their way with the world, you know, whether you like it or not. And I think he's reasserting US economic exceptionalism because the US is unambiguously the, by far the biggest beneficiary.

• 4:08Speaker 01

  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 we see it everywhere, here in Australia with One Nation, in the UK with Reform.

• 4:28Speaker 00

  Europe.

• 4:29Speaker 01

  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 shift.

• 4:45Speaker 00

  Go to the lower house.

• 4:46Speaker 01

  Yeah. But yeah, it's fascinating.

• 4:49Speaker 00

  So the US stock market is sort of traveling at all time highs or close to.

• 4:56Speaker 00

  If there is an inflation, there is inflation in the US.

• 4:58Speaker 01

  Yeah.

• 4:59Speaker 00

  The US Fed 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.

• 5:07Speaker 01

  Yeah.

• 5:07Speaker 00

  Or continue to put the rates down. How is, how is the US traveling so well if they don't have, you know, new people coming into, into the town and starting to spend money?

• 5:16Speaker 01

  Yes.

• 5:16Speaker 00

  As an experiment.

• 5:18Speaker 01

  In relation to the US equity market, I mean, 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 priced for interest rate cuts, despite the fact that core inflation in the US is running more than 50% 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, but B, it's kind of astonishing for me. So US core inflation, the Fed has a particular measure called core PCE that they focus on, slightly technical, but that's been running at 3.4% annualized last six months.

• 5:55Speaker 00

  That's way above what number?

• 5:57Speaker 01

  The 2% target. Yeah, they target 2%. And then the last 12 months, it's been running at 3%. So US core inflation not only was way above target, but it was accelerating. All those numbers, Mark, are pre-March, pre this, you know, huge oil.

• 6:10Speaker 00

  Pre now. Wow.

• 6:11Speaker 01

  Yeah, that's before the inflation shock.

• 6:13Speaker 00

  Wow.

• 6:13Speaker 01

  Accelerating. And so it makes no sense. Our modeling suggests the Fed needs to hike rates by 50 to 60 basis points. Trump's been very successful in jawboning the Fed to cut rates last year. He has this beef with the current boss of the Fed, Jay Powell. He appointed him in his first term. He feel that Powell was lobbying for the Democrats, which he was pre-election. And so Trump's gone eye for an eye mode, wants to take him out, which he's he's definitely had his way with Powell and he's appointed this new guy called Walsh, who's been ostensibly much more dovish, which means supportive of the notion of interest rate cuts. So markets are thinking, well, Powell's getting replaced by Walsh. This is Trump's proxy, Trump wants cuts.

• 6:58Speaker 01

  But there's no way they can cut rates, in my view, because they've got this huge inflation shock. And they were running more than 50% above target before the shock. And so what that means for listeners is that it's very difficult to rationalize US equity valuations. It makes no sense at all.

• 7:11Speaker 00

  Are we talking about new style though? Are we talking about a new approach to this stuff or is?

• 7:15Speaker 01

  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 out, 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 Chalmers here, Sacks feel low, as he's entitled to do. And he appointed the governor, the deputy governor and seven of the nine voting interest rate committee members.

• 7:47Speaker 00

  The whole of your board.

• 7:48Speaker 01

  Yeah, and what did we get? We got a W R B A, which means the R B A cut rates before the election. They cut rates three times last year and Chalmers, you know, all power to him. I would have done more or less the same thing, like everyone, you know, wants to tilt 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 R B A wakes up last year. They forecast 2.6% core inflation. Michelle Bullock, the boss of the R B A. The governor said, we're going to hit our target. The target's two and a half percent. We said, no, no, no, you're going to be running at three.

• 8:19Speaker 00

  You were cooler bar, cooler bar.

• 8:20Speaker 01

  Yeah. And my guy said, that's no, no, snowballs chance of hell are hitting 2.6. You're going to run at 3.3 for core inflation. They printed 3.4 for the year, way above target disaster. So, but to the RBA's credit, what do they do? Data dependence style, they're like, okay, we got it wrong. Guess what? We're hiking rates and they've hiked rates twice. The market's pricing in another two to three hikes. They're pricing in a 4.7% cash rate. Now, remember at the peak of the hiking cycle after the pandemic, we peaked at 4.35%. 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 then had to turn around 180 degrees and say, we got it totally wrong.

• 9:03Speaker 01

  We're hiking again, first in the world to do that, right? And now, interestingly.

• 9:07Speaker 00

  Serious first in the world.

• 9:08Speaker 01

  First in the world.

• 9:08Speaker 00

  Yeah.

• 9:09Speaker 01

  Yeah, the Japanese were always hiking, so they don't count.

• 9:11Speaker 00

  Yeah.

• 9:12Speaker 01

  But yeah, first in the world, most embarrassing, you know, but in the RBA'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 100 basis points of hikes.

• 9:38Speaker 00

  A hundred basis points.

• 9:39Speaker 01

  Yeah, we've already had two and we're talking about markets pricing another two to three.

• 9:42Speaker 00

  Yeah.

• 9:43Speaker 01

  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 reaction to rate hikes in mortgage approval flows and mortgage settlements. So this is a game changer for Australia. 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 they started talking about hikes late last year, Sydney and Melbourne got KO'd. Wushka, market rolled over. Brisbane and Perth house prices are still as strong as 10 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 prices were falling. Everyone was saying, oh, house prices 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 argue. That house prices would rise five to 10%. National house prices rose nine percent.

• 10:26Speaker 01

  And within that, you had like killer growth in Perth, 20 plus percent. Brisbane, 15% Sydney and Melbourne weaker. So the the RBA, I think, has done the right thing. And we can talk about this later, but just coming 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 Fed price for rate cuts, which makes no fricking sense. And again, our models, which are very accurate at saying the Fed has to raise rates. And what does that mean for Australia and the world? Well, that means a hiking cycle. And what we're starting to see the portents of Mark is a globally synchronized hiking cycle. Now, last year.

• 11:04Speaker 00

  You serious?

• 11:05Speaker 01

  Yeah, yeah, yeah. So 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 clients, prepare your portfolios for the the specter of a second hiking cycle. Everyone thought I was crazy. The US bond market, the most powerful market in the world, right? Trillions and trillions of dollars of bonds was pricing in as zero percent. Zero percent chance of a rate hike in the US in 2026, 2027, 2028.

• 11:32Speaker 00

  At what point, sorry, what point was this?

• 11:33Speaker 01

  Oh, mid to late last year.

• 11:34Speaker 00

  Right.

• 11:35Speaker 01

  Yeah, but think about the US economy right now. Unemployment's falling.

• 11:38Speaker 00

  Yep.

• 11:38Speaker 01

  4.3%. Growth is strong. You ask 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 the you're producing more for a given set of human and money inputs.

• 12:00Speaker 00

  Hours.

• 12:00Speaker 01

  Yeah, so more output per hour worked. So they're just being more efficient.

• 12:04Speaker 00

  Well, let's talk about what's driving that now.

• 12:05Speaker 01

  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 have come home. With automation, robotics and digitization, you can now make a lot of stuff cost effectively in the US. Look at SpaceX.

• 12:24Speaker 00

  Yeah.

• 12:24Speaker 01

  You know, number one producer of rockets and satellites in the world. So the US economy, and I've traveled a lot of many states through the US in the last six months. And the zeitgeist 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. Wow. It'll remove red tape, remove regulation, whatever you want to get done, you call Washington, they've got your back. I'll tell you an anecdote. A guy I know was speaking to the CEO of Wells Fargo, one of the biggest US banks, and he said, under Biden, he couldn't get a single meeting. Under Trump, he's had five meetings with Trump, and Trump will randomly call him 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

• 13:09Speaker 01

  right now is in massive entrepreneurial innovation mode, and the zeitgeist and atmospherics are super positive. I was actually, on the way here, I was 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 speaking to this dude, and he said, mate, the unions are booming because there's so much fricking building in the US right now because of all the data centers that they're constructing. So we're talking about a 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 means so, strong productivity growth, you've got strong economic growth, you've got strong

• 13:51Speaker 01

  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 higher in the US, in our view, but the market thinks I'm totally wrong. Markets pricing cuts still because I think Trumpy has whipped the Fed and Powell, and they think that, that basically his butt boy, Wash, is going to rock in there and cut rates. But I think there'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. Yep. He's going to say, listen, you just set off this, you know, mother of all oil price shocks, I've got this huge inflation crisis, I can't cut rates. And, but there's a real dichotomy or cognitive dissonance between market pricing for equities and what's actually

• 14:36Speaker 01

  happening in the economy. And I see the economy just getting stronger and stronger. And we've been arguing this for a year.

• 14:40Speaker 00

  Because often I think to myself, particularly with the equities, I wondered 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.

• 14:52Speaker 01

  I think he does.

• 14:53Speaker 00

  Like media style pitching and also to your markets, to the interest rate markets to go around and say, look, don't worry, we're going to control this. We're going to control inflation number two. So somehow we're going to control inflation and somehow we're not going to have to put rates up.

• 15:08Speaker 01

  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 50% above target. The only way to resolve that is through productivity. And that means again, just being more efficient, more innovative and producing a whole bunch of stuff with less inputs.

• 15:32Speaker 00

  So let's just talk about the Chris, because this is important. This piece is really important because our Fed, our Reserve Bank 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.

• 15:53Speaker 01

  Yeah.

• 15:54Speaker 00

  But certainly in the US, you could believe that argument if the Trumps guys are out there talking about this.

• 15:58Speaker 01

  Yeah, it's pretty simple. If you work harder, if the same team is working harder and producing more for the same wage bill, then you can grow faster.

• 16:07Speaker 00

  And if I pay you more, but you sell work even harder or I produce more.

• 16:12Speaker 01

  Yeah.

• 16:12Speaker 00

  That's okay.

• 16:13Speaker 01

  That's okay.

• 16:13Speaker 00

  Because that's non inflationary.

• 16:14Speaker 01

  Correct.

• 16:15Speaker 00

  Because the vendor of the product.

• 16:17Speaker 01

  Yeah.

• 16:18Speaker 00

  Doesn't need to sell for a higher price because he can just sell more of the product.

• 16:22Speaker 01

  Yeah. 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 to be cost base.

• 16:31Speaker 00

  Yeah.

• 16:31Speaker 01

  And that's going to be inflationary.

• 16:32Speaker 00

  Which means the vendor will have to put his price up to maintain his margin, which becomes.

• 16:37Speaker 01

  Yeah.

• 16:37Speaker 00

  Inflationary.

• 16:38Speaker 01

  Yeah.

• 16:39Speaker 00

  Do you think people are buying that argument in America? That, look, we'll open the doors to productivity, we'll open the doors to, let's call it AI, or we'll just get rid of red tape. And if you need to produce more widgets, um, because you've got to pay more wages, uh, if you help us with the inflationary game.

• 16:56Speaker 01

  What's happening, I mean, he, he has absolutely destroyed red tape, he's massively deregulating, so it's happening as.

• 17:01Speaker 00

  Cause you just gave us an example of your mate.

• 17:03Speaker 01

  And, uh, you know, I'll give you another example, he's shrunk the federal workforce by three hundred and fifty five thousand people. He has shrunk government by twelve percent.

• 17:13Speaker 00

  Does that by definition?

• 17:15Speaker 01

  In a short period of time, mate.

• 17:16Speaker 00

  Does that by definition shrink red tape or get rid of red tape by getting, is that, is that part of the project?

• 17:20Speaker 01

  A lot of business people would say, if you slim down these government institutions that were trying to suffocate us, uh, it might make decision making a little easier. Particularly if Washington's telling those same government institutions, hey, approve stuff.

• 17:31Speaker 00

  Hurry up.

• 17:31Speaker 01

  Yeah, hurry up. So it's just unambiguous that like the US economy has got a lot of momentum.

• 17:37Speaker 00

  How does this spill back to us? And does that help us?

• 17:39Speaker 01

  Well, just staying on AI, the one of the wrinkles though is that, uh, and, and this answers your question about, well, what's he saying? Are people buying this argument that you can grow fast without creating 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 in 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 eviscerate a big part of the workforce. You know, we're going to have driverless cars, Uber's dead, we're going to have, uh, Optimus robots produced by Tesla. Uh, and rather than being interviewed by Mark Bouris, I could have a, a, an Optimus here, cost twenty three grand, about one percent of Mark's cost and, uh.

• 18:21Speaker 00

  Mark's very cheap, isn't he?

• 18:23Speaker 01

  And Optimus can interview Chris Joy and, uh, and, uh, you know, your business can get rid of Mark and, you know.

• 18:30Speaker 00

  Hologram Mark.

• 18:31Speaker 01

  Yeah, hologram Mark. But there's a problem, we think, with those arguments. So the first issue is that we're not seeing any of that happen. What we're actually seeing. Rather than kill jobs, AI is creating jobs. So if you look at new business openings in the US, this is another positive for 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 being spent on AI. Every man and their dog wants to do something in AI. Everyone we know is trying to riff off the, you know, 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'd see them in. For example, everyone said management consultants are completely fucked.

• 19:16Speaker 01

  You know, they're dead as a doorknob, but the consultants have reinvented themselves as AI experts and their industry is booming. People said that radiography would be wiped out, but radiography employment demand is growing faster than the broader labour market. So I think we are of the view that rather than being deflationary, actually AI is inflationary. Why? Basically, you've got these big companies like, you know, Amazon and Google and, you know, Meta and others, known as hyperscalers, 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 Aussies being paid a hundred million bucks to go and lead AI research centers in these firms.

• 20:02Speaker 01

  They're competing for the same energy that needs to power the data centers and also obviously the same bricks and mortar to produce this.

• 20:09Speaker 00

  Electricians, like, like you've got to, because everyone gets got to some weird thing about AI or data centers, for example. Data centers is just bricks and mortar and metal and electricity and power and water, like, that's all it is.

• 20:22Speaker 01

  So it's, so basically our hypothesis has been a couple of fault. One, we last year originated this idea that the hyperscalers were lying about the CapEx. Cause when we looked at, you know, the Googles and the Amazons and what they said they were going to spend each year on AI. And then when we, when we studied what they actually spend, they were spending 50 to 100% more than their intention. So we think they're deliberately understanding the size of the CapEx boom because they don't want to tip off their rivals because they're competing for the same people, the same resources. Same chips and memory cards. So we think the capex boom is going to be bigger than people think. We think it's going to be a huge spending shock, positive spending shock that is basically an income demand and wealth shock, which is inflationary, and it's going to create bottlenecks. And then we're not seeing the the evisceration of the workforce that was predicted by many.

• 21:05Speaker 01

  Now, that may play out in the future, but we've had very contrarian 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 10 year government bond yield, which is the market's guess of where the RBA cash rate will be for the next 10 years. A year or two ago, that was like 0.15 to 0.3 percentage points below the US 10 year. Right now, it's 0.7 percentage points or 70 basis points above the US 10 year. Australia's pricing and rate hikes, those two to three rate hikes we talked about. Our view is that RBA cash rate 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, and we can talk about this later.

• 21:51Speaker 01

  There's a possibility this rate hiking hiking cycle we're having in Australia could be protracted, elongated, it would be multi-year. And we've seen this in the past. You look at the decade before 2007, we had this stop-start hiking cycle. They paused for six to 12 months and they started again because they couldn't get inflation under control. So again, we need to kind of think about that. But but coming back to equities, the US 10 year government bond yield is quite low. It's only 4.3%. Our 10 year government bond yield is 5%. Now, our 10 year government bond yield in 2021 was 1%. So it's gone from one to five. Was that important to Aussies? Just a little aside, between 2019 and today, governments have racked up no less than $800 billion of debt to fund their political spending, which is completely out of control.

• 22:33Speaker 01

  Back in 2007, we were running across all Aussie governments

• 22:37Speaker 00

  Surplus.

• 22:37Speaker 01

  A $17 billion surplus. Today, we're running an $80 billion deficit. So our fist, like the amount of they're spending 97 billion a year more than they're making in terms of revenues than they were back in 2007.

• 22:52Speaker 00

  And that doesn't include off balance sheet, off, off, off, off the balance sheet?

• 22:56Speaker 01

  Yeah, it doesn't include. The M B N and things like that. Um. And the problem, of course, is as that eight hundred billion dollar debt bill, which we all have to repay through our taxes, uh, was racked up. The cost of that debt used to be one percent premium, it's now five percent premium. So that's a big problem. But again, uh, the challenge for the U S is if that four point three percent ten year government bond yield in the U S, which assumes cuts, if that was to lift, then equity is a cactus. I think you can see equity valuations easily pulled back by more than ten to twenty percent. So this dichotomy that, you know, I believe listeners with is think about what uh, the U S inflation problem, if it intensifies, which I believe it will, means for the valuations of equities and your super portfolios.

• 23:40Speaker 01

  And think about uh what a U S hiking cycle means for those portfolios. Cause I think it's not priced, markets are not thinking about it. So what we're discussing here is is kind of quite novel. It's not a popular debate, like no one's really talking about an aggressive.

• 23:54Speaker 00

  Why not?

• 23:55Speaker 01

  Well, they're ignoring the inflation and I think it comes back to your original question. They're saying productivity is a panacea.

• 24:00Speaker 00

  Yeah.

• 24:00Speaker 01

  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 need massive job losses and it'll all be fine because productivity will go through the roof.

• 24:10Speaker 00

  So what does it mean for Australian equities? Cause Australian equities are also, um, you know, hitting the heights as well.

• 24:17Speaker 01

  Yeah, so there's two thoughts there. Um, and full disclaimer, I don't run equities at this point. We run fixed income, bonds, debt, so that's my wheelhouse. But um Aussie and U S equities are hyper correlated. So where U S equities go, uh, Aussie equities will follow. But I think Australia has a bigger problem. Um, so in Australia, uh, we have even higher inflation than the U S. So last, I mentioned the U S, they're running at three point four last six months, three last twelve months, targets two. In Australia, the target's 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, you know,

• 25:01Speaker 01

  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 racked up since twenty nineteen. The N D S is a great example. It was meant to be thirteen to fourteen billion sized by the Productivity Commission a year, so thirteen to fourteen billion a year. They're now spending over fifty billion a year. All that waste is basically like a python squeezing a balloon. And and the balloon is kind of getting bigger and bigger and it's crushing or asphyxiating the private economy. And it's creating price pressures. So government spending is so large that eighty billion deficit per annum is so large that it's pushing up the price of everything. It's pushing up our cost of living, it's pushing up inflation, and ultimately it's pushing up interest rates while we're getting rate hikes.

• 25:46Speaker 01

  But the other dynamic is immigration. We had record, a record number of five hundred thousand people arriving in the country in January. So we've got record migration.

• 25:54Speaker 00

  Wow.

• 25:54Speaker 01

  Yeah, and if you dump five hundred thousand people, half a million people a year on Sydney and Melbourne. The, 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 Two. This is actually stealth socialism, right? Because Australians have been addicted to the idea that the Dan Andrews of the world will bail them out.

• 26:38Speaker 01

  And according to the Centre for Independent Studies, one in two Australians now derive 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 cost pressure.

• 26:50Speaker 00

  Built on debt.

• 26:51Speaker 01

  Built on debt and immigration.

• 26:53Speaker 00

  Yep.

• 26:53Speaker 01

  And and we have a huge amount of fake growth, the private. Sector is actually struggling. So if you speak to mums and dads, they're like, I'm working my ass off. And why rates rising and why is my cost of living rising? Like, how am I contributing to these problems? You're not. It's got nothing to do with you, mate. It's got everything to do with politicians and population.

• 27:11Speaker 00

  So when the Reserve Bank, Chris says, um, um, inflation is to some extent being driven by both private and public demand.

• 27:18Speaker 01

  It's horseshoe.

• 27:19Speaker 00

  Yeah. Okay. Can you explain that? Because, because of course our treasurer gets up and goes, well, I told you it's private demand. Private demand is fantastic. Everyone's, which 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?

• 27:32Speaker 01

  No, no. Almost all, almost all the inflation in 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 a statement of fact. It's an, you know, an objective fact that interest rates and inflation would be much lower. Were not for the extreme government spending and population growth we're seeing. I think the politicians probably think the ship in half a million people a year, they'd probably vote for you, but it's not sustainable. And the, the broader question is, well, the challenge for the R B A and in your question is really, why isn't the R B A calling this out? The reason the R B A isn't calling this out is because they've been whipped by charmers. Chalmers appointed the governor and deputy governor.

• 28:15Speaker 01

  Chalmers appointed most of the voting members of the interest rate sitting committee, which is entitled 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, you know, governments need to balance their budgets and pull in the purse strings and, and kind of contribute to more, um, you know, prosperity. Because you can't drive living standards up without an increase in productivity. So this is the other problem. So it's all related. The government's sector completely asphyxiating the overall economy and private activity is crushing productivity. Cause there's no productivity in the government sector. In the public sector, there's been no productivity growth for 25 years. So Australia actually has gone from one of the most competitive nations in the world.

• 28:59Speaker 01

  When we were growing up as kids, the whole world in mind, our sports people and our business leaders, um, you know, the Don Bradmans, Rupert Murdochs. You know, the Shane Warnes, uh, for their innovation, ingenuity, intensity and work ethic. And that's more or less disappeared. So our productivity performance is amongst the worst in the world. Whilst the U S productivity is soaring. We are worse than 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.

• 29:41Speaker 01

  And low productivity means you just have to pour more money and people into producing goods and services, which is inflationary. So, um, 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 less and you need to pull back on immigration. Now, the interesting thing is the government is 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.

• 30:19Speaker 00

  And it works against, that also works against productivity. Why is someone going to work harder if they've just got to pay more tax?

• 30:24Speaker 01

  Mate, 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 38%. Why would you stay in Australia and be, if you're a top producer and pay 47%?

• 30:37Speaker 00

  And by the way, kicks in much earlier too.

• 30:38Speaker 01

  Yeah.

• 30:39Speaker 00

  I mean, in the US, you can be only 500 grand a year until you get the top rate.

• 30:42Speaker 01

  Yeah.

• 30:43Speaker 00

  You, US dollars.

• 30:44Speaker 01

  Yeah, US dollars.

• 30:45Speaker 00

  Here, you're, you're in the top rate 200.

• 30:47Speaker 01

  So you're exactly right. So not only are they raising taxes to crush entrepreneurship and innovation and disincentivize hard work, but they're trying to say that our spending problem is going to be resolved, Mark, by giving us more money.

• 30:58Speaker 00

  Yeah.

• 30:59Speaker 01

  Which makes absolutely no sense. Your spending problem, mate, is resolved by you spending less, my folk.

• 31:04Speaker 00

  Yeah.

• 31:04Speaker 01

  It's pretty simple.

• 31:05Speaker 00

  Right, but also do you, would you suggest that?

• 31:06Speaker 01

  I can't say, I think when, sorry to interrupt, but when Main Street connects the dots, which I think may or may not be.

• 31:12Speaker 00

  Here, here.

• 31:13Speaker 01

  Yeah, when, when mum and dad understand that whilst they're making out like a bandit on the NDIS and probably robbing the NDIS, the quid pro quo, quote, or cost of that is a higher cost of living, higher inflation and getting whacked by higher interest rates.

• 31:27Speaker 00

  Net, net against you.

• 31:28Speaker 01

  Yeah, yeah, yeah. And then higher taxes, right? I think people start to realise, actually, this is not sustainable, particularly if the government, as they're already doing, starts to self-cannibalise and say, well, actually, we've got a massive corruption problem with the NDIS, we need to start pulling it back in. Um, and it was interesting that they raised that last week, but, um. The other, the other dynamic in Australia is the swinging the political pendulum to the right here. I think the casualty of that will be immigration, which we do need to pull back on.

• 31:55Speaker 00

  Can we talk about that, Nick? What's your prognosis on that?

• 31:58Speaker 01

  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, you're now asking us to pay it back through high taxes. Our interest bill's gone from 1% per annum to 5% per annum. And the casualty is our cost of living is going through the roof. And yeah, we're getting

• 32:31Speaker 00

  Standard of living is going backwards.

• 32:32Speaker 01

  Standard of living, yeah, that's the key point, I think. Yeah, our per capita income's actually declining. So our standard of living and our prosperity is shrinking. You know, I think that galvanizes or catalyzes the change in the political zeitgeist. 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, they had 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 happen in the UK. So I think whether Labour judges that, hey, all of

• 33:13Speaker 01

  this immigration is creating lots of problems, whether it's assimilation issues à la Bondi, whether it's inflation issues, cost of living issues. I mean, I think blind free 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.

• 33:31Speaker 00

  Either, either party.

• 33:32Speaker 01

  Yeah, yeah. But I think you'll see big policy change. And what's profoundly important, I think, for viewers is

• 33:39Speaker 01

  We have to imagine an Australia, and there's a sequencing to this, but we've got to think forward and imagine an Australia with no population growth, which we've never seen before, Mark. That hasn't happened, really. We've always run.

• 33:49Speaker 00

  No population growth through immigration. Yep.

• 33:51Speaker 01

  We don't have, that's, that's the only.

• 33:52Speaker 00

  Well, that's a natural.

• 33:53Speaker 01

  Family for Kundalini 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, as we're 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,

• 34:22Speaker 01

  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 are 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 charm is starting to see the writing on the wall. I think there's a, there's a groundswell of animus around the NDIS starting to brew, I think. Just in terms of the corruption and rotting and, you know, the inequity of it all. So I think you're going to see some fiscal consolidation, which is fancy terminology for just governments spending a little less. Not much less, but a little less at the margin.

• 35:06Speaker 00

  You're talking about the next budget?

• 35:07Speaker 01

  In the next budget, but just looking ahead, I think they're going to, coming into the next election, at the margin, government spending won't increase nearly as much as it has in the past. So the, the idea that government's growing the economy, that leg won't really be there. Now, how much they, 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 you why they're going to keep hiking is because they've got it relentlessly wrong, right? They, their forecast missed last year was the worst since the early nineteen nineties. And, you know, they expected two point six core inflation and printed three point four. They've been humiliated repeatedly for big misses. They, this is slightly technical,

• 35:49Speaker 01

  but in late 2021, they dropped their interest rate target called the yield curve target, which was affixing the interest rate yield on the 2024 government bond at 0.1%. 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 in the early 1990s. So, so that was a disaster for the RBA, like a global humiliation. And, and then they've got all their inflation forecast wrong as the first central bank in the world to cut, hike, cut, and now hike again. We've got a second hiking cycle. So they're in full data dependent mode because their legacies and livelihoods are 100% in the process. I don't think they give a rat's ass anymore

• 36:32Speaker 01

  about Chalmers. It is laser like focus. They're not going to criticize Chalmers for all this spending and the states, by the way, because it's not just Chalmers. It's very much 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 4.7% cash rate or 4.6% 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, in my own view, is it bleeds into the fives. 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 Aussie equities, the, the fly in the ointment for Aussie equities is not just higher interest rates, it's an Aussie

• 37:12Speaker 01

  recession and possibly the first decent recession we've had since 1991.

• 37:18Speaker 00

  Can I talk about that for a second? I mean, you and I probably not, he's probably not quite our flavour, Keating, but one of the things he was, about him was very honest, probably to his own demise, 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 80, 89, 1991, we had to have a recession.

• 37:41Speaker 01

  Yeah.

• 37:41Speaker 00

  And he said, well, this is a recession we had to have. Yeah, he, he was the king of, you know, one liners, but. But he actually meant it. That was the truth.

• 37:49Speaker 01

  Hmm.

• 37:49Speaker 00

  And it's nearly like in order to control inflation today, here, we probably have to have a recession.

• 37:56Speaker 01

  You're right, mate. You're a hundred percent right.

• 37:57Speaker 00

  Because we've got a part of our economy that loves interest rates going up. You know, one third of the economy, over sixty, own their own home, have no debt, have big super because Keating introduced it. Feeling pretty comfortable. Interest rates go up. They say, how good is this darling? Let's go on a holiday to Bali. But one thing those people are very aware of, very cognizant of, is recession. They get nervous about that.

• 38:18Speaker 01

  Hmm.

• 38:19Speaker 00

  Shit, everything's going up and prices going up and the economy's 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're to stop spending money?

• 38:36Speaker 01

  Hundred percent.

• 38:37Speaker 00

  And if, if there's a whole group of people who, like, I don't affect because I'm the reserve bank. One way I can do it if I am in reserve bank is put us into recession.

• 38:44Speaker 01

  Yep, hundred percent. And I think, you know, we're leaving them with no choice because of the rampant government spending and the rampant immigration. And I think you're a hundred percent right. It is a recession that it looks like we have to have on the lines of, you know, Keating's famous commentary. And there are parallels. They had very strong inflation for years prior to the ninety one recession. Unfortunately, unemployment, you know, rose dramatically. Aussie unemployment's at four point three percent, exactly the same as the US.

• 39:10Speaker 00

  That's historically low.

• 39:11Speaker 01

  Very, super low. And it's been much lower than the R B A expected. But here's the rub. The R B A 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.

• 39:26Speaker 00

  What is it?

• 39:27Speaker 01

  So the staff believes it's four point nine percent.

• 39:30Speaker 00

  Oh, wow. It's gone from, it was four point five, but when she was deputy, she had it at four point five.

• 39:34Speaker 01

  Yeah. So well, they actually, the board said, we think the natural rate might be in the high threes to low fours. So the board ran this experiment. So what, if we backtrack.

• 39:45Speaker 00

  I call it the experiment too. I'm glad you said that. Thank you.

• 39:47Speaker 01

  The, the big mistake they made was actually in twenty twenty three.

• 39:51Speaker 00

  Yeah, but that was, that was a treasurer's fault. I mean, he introduced this new part of the mandate, unemployment and no inflation.

• 39:57Speaker 01

  Hundred percent. Yeah. So they changed the mandate. He, he kind of. He uh he he kind of rigged the mandate to make the R B A more dovish.

• 40:06Speaker 00

  It's not her fault, by the way. She's just running to what she's been told to do.

• 40:09Speaker 01

  Hundred percent. And um although you could argue that, you know, she's a statutory independent institution. So she can actually do whatever she wants. But but the 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. New Zealand, Canada, U S, U K. 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 R B A's own model said rates needed to go to five. Right? The the Martin model, the macro economy, which we run, which is the R B A'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 the Australian economy had fallen dramatically, which means you could run the economy a lot hotter.

• 40:51Speaker 01

  You could have all this government spending. 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 or low fours. They said this repeatedly. And the staff were like, no, no, no, no. You know, the eight hundred analysts, the R B A were like, no, no, no, no. It's mid to high fours. The current number's four point nine. And the.

• 41:09Speaker 00

  That's where they they they believe it should be.

• 41:12Speaker 01

  The current number's four point three. Was uh the the board, overall, the staff said it could be high threes to low fours. And therefore we can run rates lower and a hotter economy. We don't need to have all these hikes. And they used to talk about this threading their needle needle and they thought they were sort of economic geniuses in delivering uh low inflation, high growth and much lower unemployment.

• 41:29Speaker 00

  Well, June last year, they got there.

• 41:31Speaker 01

  Yeah.

• 41:32Speaker 00

  June last year, what inflation was headlining with two point one or something like that.

• 41:35Speaker 01

  Oh, no, no, the core got to two point seven in June. So still slightly above target.

• 41:39Speaker 00

  But around the territory.

• 41:39Speaker 01

  But one quarter.

• 41:40Speaker 00

  Yeah, I understand that. I get that. But I think they were sort of celebrating a bit too early.

• 41:44Speaker 01

  Hundred percent. 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.

• 41:50Speaker 00

  Yeah, yeah.

• 41:51Speaker 01

  Yeah.

• 41:51Speaker 00

  And with unemployment as well, because unemployment was four point two or four point one or something like that.

• 41:54Speaker 01

  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 untrammelled and um. Uh. And now they've capitulated on their natural rate view. So they've basically said, we got it wrong. It's not low threes, uh, and it's not, um, uh, sorry, 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. Uh, the staff are still at four point nine, but let's get back to the kind of meaty topic, which is recession and unemployment. Basically, the corollary of consequence of all this, folks, is the R B A 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.

• 42:37Speaker 01

  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. Um, uh, 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, you know, choice is of course you could crush population growth and that will be deflationary. And you could crush government spending, which would also be deflationary. But whether the politicians have the metal to do that, open question, but all roads lead to one way or another, a recession, I think.

• 43:13Speaker 00

  So on the unemployment number, like you said, let's say we go from just argument in an argument, argumentative or debate way. Let's say we go from four point three to four point nine or five, just to, just to make it round. Um, 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, 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 market because we haven't seen distress selling in Australia for a long, long time.

• 43:45Speaker 01

  No.

• 43:45Speaker 00

  I have been through periods where there is distress selling in Australia, but we certainly haven't seen it for the last. Probably haven't seen it since the G F C, to be honest with you, like it's been pretty good. That could sort of, uh, give us distress selling. And I'm not saying that people who have to sell their house all of a sudden would create a market where prices get deflated. But what happens is real estate agents get a little less, um, 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 for one point eight every, they start to condition the market. And vendors get conditioned and vendors, you know, like unless they're.

• 44:20Speaker 00

  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 earlier, 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 buyer, willing seller. Vendors are saying, look, I've got a mortgage, but you know, I took it out in two thousand twenty. I took it at, you know, low rates or I had a mortgage prior to that. And during the two thousand twenty period, I just kept paying off my old rate and I've reduced my, you know, my scheduled repayments quite low. Plus the property's gone up by, you know, seventy or eighty percent since then. Yeah, 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. Um, you know, I've been well looked after. Um, therefore I don't

• 45:04Speaker 00

  need to sell. So you buyer who can't borrow as much as you used to be able to borrow because there's been a couple of rate rises and there will be more. Um, there's a mismatch. So I'm not going to sell. So we, we don't, don't get any sales.

• 45:14Speaker 01

  Right now. And I think.

• 45:16Speaker 00

  Well, what will break that?

• 45:18Speaker 01

  Yeah. So I think to answer your question on defaults, delinquencies and insolvencies, we were seeing some signs of stress creeping into the housing market in late twenty twenty four. So national house prices have actually started falling. This is before the R B A rate cuts. Sydney and Melbourne prices were falling. Um, 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 eastern suburbs of Sydney, I remember on Victoria Road, one house sold for like, you know, ten, twenty million more than expect, originally expected, uh, because the guy had five or six lines against it from private debt. Uh, we were also seeing in late twenty four, record insolvencies. So just in terms of

• 46:03Speaker 01

  the absolute number of insolvies, all, all time high. And we were definitely seeing a big increase and you would have seen in your book in mortgage defaults. So in late twenty four, all of that was bailed out by the R B A rate cuts. The R B A cut rates three times. What happened? House prices boom nine to 10% bang. Commercial property valuation started to turn. The private credit guys, you know, were given a stay of execution and all these borrowers in distress, uh, were, uh, you know, basically given accommodation. Now we're staring down the barrel. A very different situation whereby not only is the RBA 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've got four to five hikes. That means you're going to have a return of all that distress.

• 46:46Speaker 01

  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, you're going to see less government spending and reduce population growth. Again, which, you know, implies even higher defaults, 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 nineteen ninety one.

• 47:14Speaker 00

  Could this be a perfect storm?

• 47:16Speaker 01

  What's that?

• 47:16Speaker 00

  Could this be the perfect storm?

• 47:17Speaker 01

  I think it is, yeah. The key is, you know, the idea that we want to have population growth. It's hugely important to Australia to ship in half a 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 imprimatur 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' defence. The RBA, Phil Lowe, 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 genie out of the bottle, you've never been able to get it back in. You know, we rack up eight hundred billion dollars of debt and we now have this huge inflation problem.

• 48:02Speaker 01

  So I think, I think my prediction is it's going to be difficult to get the inflation out of control, particularly in Australia where there is no productivity growth. I think you're going to see much higher unemployment. So I'd see unemployment going to the fives. I think you're going to see an RBA cash rate into the high fours and possibly fives. 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 rates because I'm working my tits off, right? Like who's to blame? Is all this NDIS probably? You know, M B N, all these, you know, the eighty billion in deficits a year, probably. Is it the half a million foreigners who are landing in Australia? Yes.

• 48:48Speaker 01

  So, so that's going to really set the seeds of this much more vigorous political debate. And I said last year, you watch the process will turn to government spending and fiscal policy. And it's, it's really fertile 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 N D I S as people should do. Cause you know, it's chock a block full of extreme corruption.

• 49:14Speaker 00

  Do you, do you feel as though in the upcoming budget, the May budget, the Chalmers is going to also hit us on the head again in relation to taxes relative to property? And what effect is, are you guys thinking that's going to have on property prices?

• 49:28Speaker 01

  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 midterm announcing new taxes that you never campaigned on.

• 49:42Speaker 00

  Well, you said they weren't going to happen.

• 49:43Speaker 01

  Yeah, you said weren't going to happen. You never consulted the community about. And the rationale 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 taxpayers, 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 pokies and saying, you got a pokies problem. We're going to give you a bit more cash to make you feel, feel better.

• 50:10Speaker 00

  Well, he, well, he's going to sell it because he's a genius at 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, you know, rorting their negative gearing and getting capital 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.

• 50:32Speaker 01

  Bullshit. Just spend less, mate. It's pretty easy, right? You know, you're, you've got a spending problem by the guy at the pokey machine. And he just needs to stop playing the pokies 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.

• 50:50Speaker 01

  Were low, money was basically free. There wasn't, you know, uh, an inflation crisis to explain. And um, and there were interest rates were also incredibly low and taxes weren't necessarily increasing. But when all those things shift, I think, um, you know, the cross is going back to, you know, the, uh, 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 a higher cost of living, higher inflation, higher rates, when they link all that together, I think we'll get policy change. Whoever wins the election.

• 51:26Speaker 00

  Do you think, what about the younger people though? I mean, like, they don't, you know, we're talking twenty to thirties, the big voters.

• 51:32Speaker 01

  Yeah, yeah, yeah. 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 centre left. We all start idealistic. I don't know how you felt.

• 51:40Speaker 00

  Yeah, yeah.

• 51:41Speaker 01

  Yeah, 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 world a 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 idyllic aspirations for making positive change. But then you realise that by the time an idea gets completely tortured and corrupted by the political process, there's really. Uh, balance of probability is most of the political change is actually suboptimal and destructive and often corrupted, right? And, and really, you know, very, uh, negative. And, and so you become much more jaundiced, jaded and sceptical. People like us are like, well, actually.

• 52:22Speaker 01

  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 products, because this is what Australians do. 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 be on, you know, in sending folks. Uh, to innovate and, um, uh, build world-class companies and, um.

• 52:52Speaker 01

  If you do that, I think the rest sorts itself out. It's kind of like, as an investor, if you've got strong returns, well, everything sorts itself 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're going to 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 Abu Dhabi, you can move to lots of different destinations.

• 53:34Speaker 00

  Singapore.

• 53:35Speaker 01

  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, you know, where do I need to be based to compete against the AIs?

• 53:56Speaker 00

  Well, I'm seeing the same thing, and young people going to San Francisco and places like that, so get me out of here.

• 54:00Speaker 01

  Yeah. But coming back to your 2030 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 a centre-left, and then when we see, well, the outcome of that effort is, and it's disappointing, then we tend to swing to the right.

• 54:28Speaker 00

  I mean, you and I have had these discussions many times over a long, long period of time. And we can go right back to, I remember one stage that we went and saw.

• 54:36Speaker 01

  Wayne Swan.

• 54:37Speaker 00

  Wayne Swan, when he was the treasurer. And their sensitivity, the left party's sensitivity to lobby.

• 54:45Speaker 00

  Is like out of this world. I mean, it's off the Richter scale. Do you think that this government, I mean, I'm just sort of a little bit outside of what we should be talking about, but let's go there for a moment. Do you think that this government has any possibility, this Labour Party government, and we're talking about states and federal too, by the way, has any possibility of rewriting us? In other words, putting us back on the right path?

• 55:05Speaker 01

  Listen, I'm always last half full and these guys, as much as most politicians are pretty underwhelming and disappointing and everyone in that field tends to have pretty narcissistic tendencies. If we pack all that aside, I'm glass half full. There's a lot of smart folks in that space. And there's also a lot of good folks. Like, look at

• 55:25Speaker 00

  Daniel Mooki.

• 55:26Speaker 01

  Yeah.

• 55:27Speaker 00

  Both.

• 55:27Speaker 01

  The words out of my mouth. Yeah, Mooki's a beast. He's an absolute weapon man.

• 55:31Speaker 00

  But you think he can get his, his influence into the feds as well?

• 55:33Speaker 01

  If you had Mooki in the feds, it would just be world class. Like, he is one of the most impressive human beings I've ever met. And

• 55:41Speaker 00

  And very practical too.

• 55:42Speaker 01

  Incredibly practical, incredibly smart, incredibly hardworking, and he just wants to find the right solutions. I mean, Chalmers is absolutely capable of making the right decisions.

• 55:51Speaker 00

  But he's ideological too.

• 55:52Speaker 01

  Yeah, but whether like, whether, you know, his propensities lead him in that direction, I have absolutely no idea, but I hope. Cause the solutions are actually really, really fricking simple. Slash the size of government, reduce taxes, put the foundations in place for Aussies 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, 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.

• 56:34Speaker 01

  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've got an intellectual civil war between California and New York, which are basically looking like failed states, running huge budget deficits. Juxtaposed against Florida and Texas, which are booming and you've got massive population shifts out of California into these business friendly states, which are running budget surpluses, which have got very high growth.

• 57:08Speaker 00

  Low taxes.

• 57:09Speaker 01

  Not only low taxes, they're slashing taxes even further. I think in Florida, they're looking at getting rid of land tax altogether. And, you know, the playbook is pretty simple.

• 57:17Speaker 00

  And they can too, Chris, because they can slash the taxes because the, the, the amount of turnover is higher. So they're getting the same amount of tax off a higher turnover.

• 57:25Speaker 01

  Correct.

• 57:25Speaker 00

  So therefore reduce the tax rate.

• 57:27Speaker 01

  Yeah, yeah. So the, the, the bottom line is the people, not the politicians are the solution for prosperity. So just back the 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 is undertaking a six billion dollar project employing two and a half thousand New Yorkers. And he vilified him and, you know, this guy Ken Griffin said, or at least his, one of his underlings has said, 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, um, uh, personalizing, uh, and vilifying entrepreneurial success in this way,

• 58:12Speaker 01

  which you think New York could be a standard bearer for, you know, a place to build world-class businesses. But now tax rates in New York are prohibitively punitive, sort of fifty to sixty percent total tax rates. Uh, similarly, uh, you know, you've got a, um, a comparable, uh, tax burden, if not higher in California. So I think that any country that doesn't put itself in a position um, to encourage the development of world-class businesses is going to have a very, very grim future. Uh, in this intensely competitive AI-driven environment.

• 58:44Speaker 00

  So we sort of did have that, that type of thought process. I wasn't AI-driven, but that type of thought process. We had that in two thousand seventeen, eighteen, Turnbull, the Innovation Nation.

• 58:53Speaker 01

  Yeah.

• 58:54Speaker 00

  Malcolm had this.

• 58:54Speaker 01

  We've talked about this for decades.

• 58:55Speaker 00

  And, and like, why did it fail though? Like, uh, what happened? Because it was a great idea. Was it too early?

• 59:01Speaker 01

  I think the issue is, it was a great idea. It was too early, but there was no impetus for change, right? 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. Um, and uh, the budget wasn't in the deleterious crazy position it is right now. And we didn't rack up almost a trillion dollars worth 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. And we've created all these problems, the problems need to be resolved. And unfortunately, that means um, basically taking uh, these very good people that work in government related sectors.

• 59:41Speaker 01

  And we need to take those jobs away from them and we need to find them jobs and even better opportunities in the private sector. Um, 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, you know, 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?

• 1:00:23Speaker 01

  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.

• 1:00:40Speaker 00

  They run parallel.

• 1:00:41Speaker 01

  Yeah, they run in parallel. And for those who are self-employed, they pay no more than twenty-five percent tax. And uh, you give everyone in the world the incentive to go and start businesses, which is what we want to do. And create employment, create jobs, um, innovate, build the world's best products, which is again what we need to do.

• 1:01:01Speaker 00

  She might just open that up a little bit because like a lot of people won't quite understand the reason why that might work. Um, we've got this alternative tax system, it's encouraging people to set up their own business. But let's just go through what happens if they employ people, they buy inventory. How does that build the economy?

• 1:01:14Speaker 01

  Well, it gives people a very strong commercial imperative where they can move from a top marginal tax rate of forty seven percent down to or forty five, depending on how you calculate it, but down to twenty five. And so if you're working at CBA, ANZ, NAB and Westpac, the four biggest employers in Australia, and you're just an employee. And, you know, almost half of your income is getting taken away by the government. If there's an alternative route where if you go out on your own, you back yourself and you decide to create a new product and service that can compete globally. And you can establish that firm, employ people,

• 1:01:53Speaker 01

  create jobs, generate a new stream of income and new sources of growth and innovation.

• 1:01:58Speaker 00

  Cause you're encouraged to do it.

• 1:01:59Speaker 01

  Cause you're encouraged to do it, then you might make that leap. Cause 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 than, uh, 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 anti-Diluvian existing system, which is going to be death by a thousand cuts, just create a parallel system.

• 1:02:26Speaker 00

  It's too hard to change, you're right.

• 1:02:28Speaker 01

  Yeah.

• 1:02:28Speaker 00

  It's a, okay.

• 1:02:30Speaker 01

  How do you think that would work?

• 1:02:31Speaker 00

  Yeah, I, I don't mind the idea. I, I think probably people will get a little bit nervous to, in this, in the early period, the start period, like.

• 1:02:39Speaker 01

  As in taking the risk?

• 1:02:39Speaker 00

  Well, yeah, well, I have, well, I, and I think that probably what needs to happen is that there needs to be some sort of government encouragement incentive around that. A bit like the, um, if you remember when they got the film industry going here in Australia many years ago, governments, state governments used to contribute to that. There, there was a contribution by the government to, to, to you starting up a new business.

• 1:02:57Speaker 01

  Yeah.

• 1:02:57Speaker 00

  It's sort of like beyond investment allowance, some other thing, you know, maybe the, or maybe the money you put into the thing is, or goes to your investment. So you'll get that as a write-off straight away.

• 1:03:07Speaker 01

  Yeah.

• 1:03:07Speaker 00

  Or your, everything, every dollar you spend. You've got to get, I mean, I, I'm in a game where we try and encourage people to leave banks that come and work for my yellow big road 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, you know, a hundred fifty grand a year plus a fifty thousand dollar 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. Build revenue. How do I exist in that period?

• 1:03:43Speaker 01

  Yeah.

• 1:03:44Speaker 00

  And that's a, that's a bit of a, that's a, it's a tough one. And we find, and 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 um um autonomy. We, we know that they know that they can earn more money working in as a broker, for example, than they can working for the bank. Um, 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 um, 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, um, and I'd say this would have cut across all, all industries. Most people have a mortgage.

• 1:04:28Speaker 00

  These aspirational people, they're aspirational people. They got a, they're already got a mortgage. They've got two, three kids or a kid. And uh, they're not in the sort of the fortunate position of, you know, superstars like yourself. I mean, they're not, you know, they, they can't, they don't have anything saved up. Everything's in the house.

• 1:04:44Speaker 01

  Hmm.

• 1:04:44Speaker 00

  So I think, I think it would work if the government could somehow.

• 1:04:47Speaker 01

  Create the incentives.

• 1:04:48Speaker 00

  Create the incentive in the, in the initial stages.

• 1:04:50Speaker 01

  We do need to kind of resolve the fact that the economy is uh in the grips of these big oligopolies. And whether it's the major banks, Coles, Woolies in Australia.

• 1:04:59Speaker 00

  Insurance companies, telcos, all of them.

• 1:05:02Speaker 01

  Yeah, they're all oligopolies or an oligarchy, so to speak. And if we can encourage people to back themselves, start new businesses, uh encourage small business. Um, 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 entrepreneur is twenty five percent. I mean, that's kind of, you know, up there with world beating.

• 1:05:22Speaker 00

  Well, I've been talking for a long time about changing the, the, the, the top rate tax, I mean, across the board. I just take the view that if you, if you either change the top rate tax or alternatively you change the point at which the top rate tax kicks in, or both. We'll have more turnover, more money will be made and therefore there'll be more tax gathered.

• 1:05:36Speaker 01

  We've seen this in the US, in Florida and.

• 1:05:38Speaker 00

  It's just crazy.

• 1:05:38Speaker 01

  Texas.

• 1:05:39Speaker 00

  I don't understand why we don't.

• 1:05:40Speaker 01

  Budget circles with lower taxes.

• 1:05:41Speaker 00

  I mean, I know that you've got to travel, so like, I just want to finish off, mate. Where do you think we'll be in the next, between here and December? And how long do you think this tough period will last?

• 1:05:50Speaker 01

  I think it's multi-year. I think getting governments to do what they need to do is going to be very tough.

• 1:05:56Speaker 00

  But how long before GDP 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 a typical GDP recession.

• 1:06:05Speaker 01

  Yeah, I'd say in the next one to two years, we should expect to see a recession. I think we should, you know, unemployment should increase. I think we, you know, subject to possibly the fact that, you know, the election will be in 2028, is that right?

• 1:06:19Speaker 00

  Yep.

• 1:06:20Speaker 01

  Yeah. So, you know, depending on the political will and impulses coming into the election, you might see some of the things they need to do dissipate and atrophy. So like my, 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, the central case, let's assume they go to close to 5% in terms of the RBA cash rate from 3.6, possibly drift higher. You can see house prices fall, commercial property prices fall, much higher defaults, delinquencies, insolvencies. If government spending is constrained at the margin, and crucially, and this is really, really important, if there's a radical reduction in immigration,

• 1:07:02Speaker 01

  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, you know, 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 battle. And 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 and immigration and political spending. The central bank wants lower inflation. The two things are butting heads and it's sort of intractable. So somebody has to give. The central bank ain't going to give because it's data dependence. So rates are just going to continue climbing higher. Now, the central bank will get a bit yipish because this central bank is a bit whipped by charmers. Like they hiked in February

• 1:07:46Speaker 01

  and instead of saying, hey, we're sitting up for a hiking cycle and you were talking about central banks 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 four. So you better pull your horns in and they can through their words affect behaviour. They can convince people to be more prudent, uh, to, uh, spend less recklessly, reduce activity, reduce inflation and pressures. And if they had any balls and actually said to Chalmers 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 reaction.

• 1:08:24Speaker 00

  But they won't say that.

• 1:08:25Speaker 01

  No, but they won't. But if they did, uh, and they could have and they haven't, and what this means is, mate, um, that the whole process is stretched out. So instead, what happened was Bullock got up there, the governor of the R B A and said, oh, we're hiking, we might be one and done. Absolutely preposterous.

• 1:08:38Speaker 00

  Yeah.

• 1:08:38Speaker 01

  They immediately hiked the next month, uh, that they met. And, um, so the, the, the, the suboptimal central bank behaviours, 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, uh, a big reduction in immigration, it'll get stretched out. So it could be a, you know, three to five year plus process, um, depending on, you know, whether we see those changes.

• 1:09:03Speaker 00

  Wow.

• 1:09:04Speaker 01

  But by the way, is anyone that you're talking to, talking about recession right now or?

• 1:09:08Speaker 00

  No.

• 1:09:09Speaker 01

  Okay, interesting. I mean, it's like no one's talking about rate hikes in the US.

• 1:09:11Speaker 00

  I am, but I am, but no one else is.

• 1:09:13Speaker 01

  Yeah, yeah. I mean, like last year, no one was talking about double hiking cycle. I find it really interesting how people, like, it seems to be staring us, you know, it's like, you got core inflation running at almost four percent, record immigration, record government spending. And the only solution is higher rates and a recession, because the very, what people need to understand is the R B A has to lift unemployment to that circa five percent level. It's at four point three right now, which would basically, uh, satisfy the test for a, uh, recession. It has to get unemployment up just to get back to the maths of being able to run an economy without inflation. Cause the, they, this viewers and listeners might not understand this, but in the R B A's mathematical models,

• 1:09:56Speaker 01

  unless you get unemployment back to its natural rate, you will get unsustainably strong inflation. And again, in unemployment's so low because the, the political spending and immigration. So it seems really obvious to me that, um, the idea that we can just thread the needle and, you know, push rates up and not reduce house prices and not increase unemployment and get inflation back to target, absolutely preposterous.

• 1:10:17Speaker 00

  Warren Hogan's been a bit, uh, uh, very much along your line. And I noticed Lucy Ellis recently, uh, maybe two weeks ago, much more, again, uh, much more in favour of more, much more predictive around many more hikes and also getting close to recession.

• 1:10:30Speaker 01

  Warren's a famous economist and Lucy works with Westpac and used to work at the R B A.

• 1:10:33Speaker 00

  She's she's chief economist now at Westpac.

• 1:10:36Speaker 01

  Yeah, yeah.

• 1:10:36Speaker 00

  Yeah, so. So she's now come around, like she actually changed her view about three weeks ago.

• 1:10:41Speaker 01

  But yeah, and markets are pricing in two or three hikes. So the markets are there.

• 1:10:46Speaker 01

  So I think the future for Australia made is very, very grim. And this idea of thinking about the economy without population growth is super important because it'll impact everything. Commercial property, resi, you know, those two asset classes have been massively boosted by the world's strongest population growth rates.

• 1:11:02Speaker 00

  We are, we are one of the world's strongest population growth.

• 1:11:04Speaker 01

  I have been for decades.

• 1:11:06Speaker 00

  Yeah.

• 1:11:06Speaker 01

  Like literally, we've had the strongest population growth in the OECD for decades. Australia has, I mean, think about the Aussie, the Aussie that we grew up in. Sydney and Melbourne just ethnically looked radically different.

• 1:11:16Speaker 00

  Yeah.

• 1:11:17Speaker 01

  Like we, you know, our two biggest sources of migration are China and India. That's great.

• 1:11:20Speaker 00

  Yeah.

• 1:11:21Speaker 01

  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.

• 1:11:35Speaker 00

  The long term immigration number, I think, was closer to 270,000.

• 1:11:39Speaker 01

  Yeah, yeah, historically we ran about, I think, you know, 200.

• 1:11:42Speaker 00

  Yeah, so it's like we're running double.

• 1:11:44Speaker 01

  Basically double, yeah.

• 1:11:45Speaker 00

  Yeah, and, and what's interesting is they're all, they all come to where the jobs are. And then we're talking about Sydney, Melbourne, Brisbane. And it's, it's interesting that, I mean, I don't know, but I just know it's the traffic. Every year, the traffic seems to double.

• 1:11:56Speaker 01

  Yeah.

• 1:11:56Speaker 00

  And it's like, it's, and the intensity, it's, it's an intense environment to live here now in Sydney in terms of density. Density is a big issue for me anyway, personally. And I have mates who sell cars, like the big in the car industry, like the biggest in the car industry. And they tell me that the, the number of cars they're selling is ridiculous because everybody comes to the country and needs a car.

• 1:12:17Speaker 01

  Yeah, yeah, Australia today just looks, literally looks very, very different to what it did 30 to 40 years ago. And it is very, very different. And that's a good thing because we're the most multicultural country in the OECD. And, you know, one in three of us wasn't born here. So that brings with it lots of positives, but it also brings with it challenges. And one of those challenges is a massive, you know, basically amongst the world's highest inflation rates and highest cost. Rates and and now we're actually seeing one of the highest interest rates in the developed world because the R B A is hiking ahead of everyone else because um you know they've got bigger problems than everyone else. So.

• 1:12:51Speaker 00

  And you're always doing those roadshows around the world. I mean, you know, doing and raising money for your funds, your various various successful funds here in Australia. What are they saying? What are what are all the roadshow people saying? The people you're presenting to?

• 1:13:04Speaker 01

  They're not really focused on Australia. I think Australia feels like it's in a bit of a time warp. 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, you know, cartoonish caricature, which is not like the guy is completely single handedly reengineered defensive policy in Europe, foreign policy in Europe, you know, policy in the Middle East, the the, you know, the organizational and political administrations in the Middle East.

• 1:13:45Speaker 01

  He's reengineering all of the, you know, 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 one things I notice are just that disconnect between the rest of the world and us. We're in a bit of a time warp. We're, you know, in a bit of a bubble.

• 1:14:15Speaker 00

  Is it too easy for us?

• 1:14:17Speaker 01

  You know, the wonder down under, you know, the like, 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 Asia's Ibiza, 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.

• 1:14:59Speaker 01

  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 growing up as a kid was Aussies in every domain. Whether, you know, it was, you know, the cricket, the rugby, the Olympics, Rupert Murdoch. We were just winners.

• 1:15:24Speaker 00

  Yeah.

• 1:15:25Speaker 01

  And we're not, we're losers right now.

• 1:15:27Speaker 00

  Well, that's where I'm going to stop right there. And I hope you have a safe flight, mate, and I'll see you when you get back.

• 1:15:31Speaker 01

  Thanks, mate.

• 1:15:32Speaker 00

  Thanks, mate.