Economist Chris Joye WARNS: "We're Going Into Recession" And How We Fix It

In this episode of Straight Talk, I sit down with economist Chris Joye for round five, a frank conversation about government spending, immigration, productivity and Australia’s economic future. Chris argues that Australia’s challenges run deeper than events in the Middle East. He examineswhat he describes as $660 billion in additional government debt since 2022, the pressure population growth is placing on housing and infrastructure, and an expanding public service alongside declining private sector productivity. He also questions the Reserve Bank’s “narrow path” strategy, whether political influence has shaped its approach to inflation, and the cost to Australian households. I then ask Chris what needs to change: how to rein in spending, lift productivity and get Australia’s economy back on track. Join my exclusive Mentored community: https://mentored.com.au Subscribe to the Mentored newsletter here: https://the-mentored-platform-pty-ltd.myklpages.com/l/WWJGc5 Executive Producer: Samuel Morgan Head of Production: Jonah Mclachlan See omnystudio.com/listener https://omnystudio.com/listener for privacy information.

• 0:00Speaker 00

  Well, I'm straight to it, Chris. Good to have you back, mate.

• 0:02Speaker 01

  It's good to be here, buddy.

• 0:04Speaker 00

  What a weird time it is. Is this, is this structural change? Are we seeing structural change?

• 0:09Speaker 01

  Yeah, you bet. Like, um, higher for longer rates, higher inflation, the battle between communities and politicians, you know, profligate spending and

• 0:21Speaker 00

  Failures?

• 0:22Speaker 01

  Yeah, um, we're seeing, you know, huge increases in insolvencies. And that's the beginning, like huge. We've got record insolvencies in Australia and businesses are going to go bust. They are going bust. We're seeing, if you think about Sydney, house prices falling at an eighteen percent annual rate right now. Our forecasts currently have the peak to trough fall in Sydney prices at seventeen percent. But here's the rub, mate, as you would know, that's the five million person city average within the city. On our numbers, individual suburbs will fall as much as twenty to forty percent. National house prices are currently falling at about a sixteen percent annual rate. We're

• 1:05Speaker 01

  expecting the national peak to trough fall to be about thirteen percent. We'll break the record for the biggest fall ever in house prices on our numbers before Christmas. So Sydney's falling at eighteen percent per annum, Melbourne, a bit less than that, but double digit all around the country. And, and then at the same time, it's not only the RBA lifting interest rates, but long-term government borrowing rates, the so-called government bond yield at the highest level in the US since two thousand and two.

• 1:32Speaker 00

  And, and here too.

• 1:33Speaker 01

  And here, highest level since two thousand and eleven. And there's real parallels to the tech boom, mate. And not, not many people are talking about this.

• 1:39Speaker 00

  You told me tech boom in the nineties, late nineties.

• 1:41Speaker 01

  Late nineties, yeah. And you've got to remember, again, people forget this, the US share market fell forty nine percent in two thousand and the NASDAQ fell, wait for it, seventy eight percent, right? And then they had a recession. So basically, we're having the mother of all capex booms right now globally. But in the late nineteen nineties, we had a similar boom investing in the internet. And it's fascinating.

• 2:05Speaker 01

  We are likely to see the US increase interest rates on our numbers. They've already started hiking. No one expected this. I've said on this potty for some time. I think this is episode number for us, six or maybe.

• 2:16Speaker 00

  Yeah, close to.

• 2:17Speaker 01

  And I said that the, you know, US will be raising rates, Australia will be raising rates, the rest of the world will be lifting rates. And we've seen that now. But we're expecting the Fed to lift rates by one point two five percentage points. That's our official number. My personal number is more like a hundred and fifty to two hundred basis points. So that started hiking in September. In the tech boom, they hiked by a hundred and eighty basis points. And the US ten-year government bond yield, which is like the price of money. So every borrowing rate in the world prices off that number. It started in the tech boom at four percent and it went up to six and a half to seven percent. Now, in this recent cycle, the

• 2:52Speaker 00

  For two fifty, two hundred and fifty points.

• 2:53Speaker 01

  Yep. And in this cycle, uh, we started also at about four percent in the US, about three point nine. And right now we're at five point three. And it looks like, you know, there's a risk it could drift a lot higher. And the end of that cycle was all about interest rates. So what happened was you had so much spending on the internet.

• 3:12Speaker 01

  You had a lot of inflation and the Fed started lifting rates. Um, and specifically the Fed raised rates by a hundred and eighty basis points. So they lifted rates from four point seven five to five percent. They have a range to, um, uh, about six hundred and fifty, six point five percent. So there was a hundred and eighty basis point increase in rates. That's roughly what we expect for the Fed. I mean, one number's one twenty five, my number's one fifty to two hundred. Uh, and then you saw a parallel increase in that ten-year government bond yield, as I mentioned, from four to six and a half to seven.

• 3:45Speaker 00

  What happened when they raised those rates?

• 3:47Speaker 01

  So basically, so it's, it's just like a python asphyxiating the economy. And it's what we're seeing right now. So think about what happens when we raise rates here. House prices go down, businesses go bust, people get really fearful, they stop spending money, uh, activity grinds to halt. You'd know this better than me, but I've spoken to two big resi developers during the week. And they've said, sales aren't down, mate. Sales have freaking stopped.

• 4:13Speaker 00

  They don't exist.

• 4:14Speaker 01

  They don't exist. There's no sales. And so that in the tech boom, in the late nineteen nineties and two thousands, eventually that discount rate or hurdle rate or the government bond yield gets so high. And because all borrowing rates are set off that level, so they're above that, uh, that it just crushes everything. And it basically, the boom cannibalizes itself. And I have a feeling that's what we might see here in this cycle. Uh, and they had a recession, equities fell fifty percent, tech, tech stocks fell eighty percent.

• 4:45Speaker 00

  On the NASDAQ.

• 4:46Speaker 01

  And potentially we're going to, you know, sit in the barrel of something similar in this cycle.

• 4:50Speaker 00

  Is it over exuberance? So what, what causes this? But I, I do remember the tech boom in the, in the late nineties, early two thousand. Um, I don't remember what happened after that. And I have been watching what's going on at the moment, especially this so-called AI boom, how it's distorting GDP, et cetera, not only here but everywhere else. Um, and we are seeing some big stories come out more recently. I know, I see Joe put up a story about, uh, Fermus today. And, uh, that, that, that's been pulled. I'm not saying it's a disaster, it's just been pulled, um, because of appetite. Um, are, are we now facing off the over exuberance of the last two years?

• 5:26Speaker 01

  I think that this cycle is really legit in terms of, you know, AI is revolutionary.

• 5:33Speaker 00

  But internet was too.

• 5:35Speaker 01

  Yeah, that's true. And, um, so, so I think on the one hand, yes, the extrapolation of earnings and profits from these unprecedented innovations is inherently, uh, very difficult and uncertain. So basically, there's a lot of bullshit. Um, but what I will say is this, that, uh, we are seeing huge productivity growth in the US. We are seeing, uh, massive growth from the US. And we talked about this in past episodes, that our central case was the US economy would be as strong as ten men. Unemployment's come down, inflation's gone up. Uh, and what's novel, mate, that we've never seen before is for the first time, more or less in our lifetimes in forty years, you might be a touch older than that,

• 6:20Speaker 01

  we're seeing technology as a driver of inflation. Uh, and this is one of our hypotheses. We, we argue that AI would be inflationary, not deflationary, and that AI would create jobs and not destroy jobs. And it's amazing when you look at the US inflation data. So basically, for the last forty years, technology, by which I mean things like laptops, consumer tech prices were falling every year. And so you'd buy a laptop every year for a thousand bucks and you'd get every year more processing power, more storage, you know, more for the thousand dollars. And that gave us over the nineteen nineties and two thousands mark, that gave us the low inflation, the stable inflation world that allowed rates to remain low. So again, a lot of punters listening to this wouldn't realise that in January

• 7:03Speaker 01

  nineteen ninety, the RBA cash rate was like eighteen percent, right? And the reason it came down from eighteen percent all the way down to zero point one percent in November, uh, twenty twenty is, uh, partly because of the miracle of, um, technology deflation. In the last twelve months, for the first time in almost half a century, tech prices are going through the roof. Technology is now a major driver of inflation, uh, and it's lifting the price of goods everywhere. So that's one problem. Part two is you've got the Dan Andrews effect, where every politician in the world has thought money was cheap, like super cheap. So you've got to remember, the US ten-year government bond yield in twenty twenty was zero point five percent. Here in Australia, it was zero point six percent. When those fucking pollies saw those interest rates, they were like, we're

• 7:48Speaker 00

  Hallelujah.

• 7:48Speaker 01

  Hallelujah, we're going to make our look banders because we can borrow as much money as we want for free and we can build the MBN, we can build the NDIS, happy days. So they racked up massive amounts of debt and, um, the public spending has driven a lot of inflation on top of the AI capex boom driving up tech prices. So all around the world, we see these monstrous budget deficits. So I think since Albo came to government, Aussie government debt has increased by about six hundred and sixty billion gross. The, the next influence is particularly in Australian migration. So massive amounts of migration, dropping half a million people on the east coast every year. It just puts pressure on

• 8:28Speaker 01

  prices. Uh, another influence in Australia on inflation has been, um, this wanky word productivity, which I hate, but basically means we've lost our mojo and we're not working particularly hard. The lucky country's become the lazy land. But really what it's about is the, uh, the kind of, the CFME, you writ large, um, dynamic that is emerging Canberra, which is basically tax and take from those that generate, uh, has dulled the incentives for entrepreneurs to create things. So they're taxing everyone to the bejesus and they are really reducing the motivation to build new businesses, hiring people, uh, to, um, innovate and, and to be entrepreneurial in the private economy. And instead, people

• 9:10Speaker 01

  are either leaving Australia, like myself, or, uh, they're, you know, working for the public service. So the size of the bureaucracy has expanded twenty five percent and productivity is abysmal. We've got like the worst productivity in the world. But on top of all that, there's more. Globally, we have deglobalisation and that basically means we're taking our factories out of China or rebuilding them locally around the world. So the supply chains are coming home and that's inflationary, part one. Part two, you've got global remilitarisation. Everyone in the world is spending a shit ton more on defence and that defence spending is massively inflationary. And then the final dynamic is you've got these huge supply side shocks.

• 9:49Speaker 01

  Russia, Ukraine, Iran, increasing the price of gas, fertilizer, uh, petrol, diesel. And so we just live in this inflationary world. So to answer your original question, uh, is it exuberance? Yes, there's unambiguous, like PE multiples. Let me put it this way. The one line answer to that question is simply this. The cyclically adjusted price earnings multiple, which is a valuation measure for US stocks, is at the highest level in two hundred years. And there's only one time in history where it's been higher, at the peak of the tech boom. So we're at forty one times, the tech boom was forty four times. So, you know, the downside is significant.

• 10:23Speaker 00

  It's, it's very interesting in the, in the way you put it because, uh, um, Jim Chalmers, our treasurer, um, has been talking, continually blaming the Middle East.

• 10:34Speaker 00

  What if someone like you, who's like analysing this stuff uphill, down, down, every single moment of the day, not every day, but every single moment of the day in your team, what does someone like you think about that narrative?

• 10:46Speaker 01

  I mean, all of our inflation, most of it, like the lion's share is driven by the professional politicians. It's the fact that they've racked up 660 billion of debt and spending since 2022 alone, across federal and state governments. The fact that we started in 2007, we only owed $100 billion. Australians via federal and state government authorities owed the world 100 billion. By 2030, it'll be 2 trillion. Our annual interest-

• 11:13Speaker 00

  That includes state, state, state debt.

• 11:14Speaker 01

  State and federal. But here's the rub. Our annual interest bill, mate, is gone from 5 billion a year to basically, if you take that 2 trillion in a few years, and you assume it all gets refinanced at current interest rates, which is pretty likely, we will be paying about 110 billion a year in interest. And that is the equivalent-

• 11:38Speaker 00

  110 billion?

• 11:39Speaker 01

  A year in interest.

• 11:40Speaker 00

  That's 10% of our current federal debt.

• 11:42Speaker 01

  Yes, yeah, yeah. Or it'll be our current federal debt, but the total debt will be 2 trillion.

• 11:46Speaker 00

  Yep.

• 11:47Speaker 01

  So we'll be paying about 110 billion a year in interest, mate. That's 24 hospitals, mega hospitals a year in interest. And it's all public spending, it's all population growth and migration, and it's all productivity. I mean, the oil price stuff is at the margins. It's not really a, it's not, it's not the reason the RBA hasn't hit its inflation target since 2021. That's a recent innovation, that's a recent event. So he's just bullshitting.

• 12:12Speaker 00

  Yes, so, but what would you say, what would you say? How do we solve this? Like, and it's an easy, easy question to ask, hard one to answer, but like, how do we solve it apart from changing government? I mean, if you, if you were Jim Chalmers today, what would you, what would be one thing you would look at?

• 12:27Speaker 01

  I actually think it's pretty easy to solve. I mean, there's quite a few things you could do.

• 12:32Speaker 00

  If I was Prime Minister, you were Treasurer, how would we solve it?

• 12:35Speaker 01

  Pretty good team, hey?

• 12:36Speaker 00

  Be a good team. Just putting it out there.

• 12:41Speaker 01

  Oh, man, that would be-

• 12:43Speaker 00

  That'd be fun.

• 12:44Speaker 01

  I remember Malcolm Turnbull, love NBC, once I was sitting in his house, he said exactly that same thing. He said-

• 12:48Speaker 00

  Did he?

• 12:49Speaker 01

  Yeah, he said, Chris, if I was Prime Minister and you were my Treasurer, what would you do? So, okay, first thing you do is you sack 25% of the entire public service, Gonski. Everyone says we have a shortage of labour, a shortage of workers. Well, if you take a quarter of Canberra, right, the professional, political and public class, and redeploy them to all the other, I mean, we've got more than enough labour, so that's part one, and you'd save an enormous amount of money.

• 13:14Speaker 00

  That's interesting.

• 13:15Speaker 01

  Part two is, I would zero migration, or at least zero, I would reduce it as much as you can practically, to allow the country to assimilate the circa 1.6 million people that have come to the country under Albanese. We just can't cope with those population pressures, and that's what's putting a lot of-

• 13:34Speaker 00

  The Canada model.

• 13:35Speaker 01

  Yeah, and we've seen the same thing in the US, and they've killed migration, and New Zealand killed migration, and the Canadians have done it.

• 13:40Speaker 00

  And it's no surprise that the US has gone fantastic, like fantastic.

• 13:44Speaker 01

  With zero migration?

• 13:45Speaker 00

  Yeah.

• 13:46Speaker 01

  And the next thing I would do is sell the national broadband network. So I'm not sure exactly what you get, probably 20 to 30 billion, best case scenario. But I'd flog that off, I'd cut the NDIS down by 75%, right size it to, you know, 25 odd billion a year, or whatever that number ultimately proves to be. So you massively reduce government spending.

• 14:13Speaker 00

  What about our debt?

• 14:15Speaker 01

  I'll come to the debt on taxes, I would, I would basically unwind all of the recent budget measures, but I'd reduce income taxes, I'd reduce corporate taxes, I would normalise the capital gains tax back to where it was previously, which is more or less in line with every other country in the world. I'd boost the consumption tax at GST from 10 to 15%. And with debt, like, there's an idea that I wrote about actually today, that I don't think anyone's ever thought of, which is pretty unbelievable, frankly. The, the Polis came up with an idea decades ago, which was, oh, we're entitled to these retirement incomes as politicians and public servants.

• 14:59Speaker 01

  Maybe we won't get paid.

• 15:01Speaker 00

  What do you mean by that, retirement incomes? The politicians-

• 15:04Speaker 01

  Superannuation, yeah. So basically, we're entitled to our version of superannuation in retirement, and there's no pot of money guaranteeing it. So the Polis had a brainwave, which was, why don't we take the budget surpluses that we had pre-GFC and start putting them into a fund just for the public service and the Polis? This is our money, your and my money, being set aside just for the public service and Polis. And that will then guarantee that we get paid what we're owed in our employment agreements in relation to our retirement entitlements. Now, that fund today is about $350 billion. And if you take, it's a future fund, and if you take its return target,

• 15:47Speaker 01

  it's got about 60 billion too much of our savings squirreled away in that fund for Polis.

• 15:53Speaker 00

  So in other words, as politicians retire over the next, say, so many years, there is 60 billion more in there than we currently need, assuming certain earnings for the future?

• 16:02Speaker 01

  Assuming that it hits its return target. Now, that's 7% a year.

• 16:05Speaker 00

  Yep.

• 16:05Speaker 01

  It's actually delivered 9% a year. On that basis, the 60 billion jumps to 110 billion.

• 16:11Speaker 00

  So even more.

• 16:12Speaker 01

  110 billion of Australians' cash set aside for Polis and the public service that shouldn't be there, right? That's based on the realised return, since we set up the future fund. If you take the more conservative number, it's about 60 billion. But in addition to that, there's about 60 to 70 billion of other stuff that is sitting in what we call special interest funds for-

• 16:33Speaker 00

  That's been taken out of the future fund.

• 16:34Speaker 01

  That's, no, no, that's been allocated to the future fund. So there's another 60, 70 billion of pork barreling, where basically they said, we want to help out housing, so here's a bunch of money, and we want to help out disaster relief, and we want to help out the Aboriginals, and we want to help out, you know, the medical sciences. Now, the government has a free option to write a cheque at any point in time to all those special interest groups, if it warrants it. We don't need to squirrel away cash.

• 16:58Speaker 00

  It doesn't need to be there forever.

• 17:00Speaker 01

  Yeah, and check out this, of the 66 billion, 30 billion of it is actually sitting in cash deposits, earning about 4%, whereas the government's paying interest on the debt that exists right now of 5.5%. So we're losing money on that money, and it doesn't need to be-

• 17:15Speaker 00

  What they call negative carry. If you did that in your business, one of your funds, they'd be talking about it forever.

• 17:21Speaker 01

  Yeah, so, so the simple idea is to say, let's take the 60 to 100 billion from the future fund, that doesn't need to be there. The Polis in public services have furthered their nests more than enough. And so if we assume the future fund hits its mandated target, not the higher return that it's actually delivered, the 7% per annum, not the 9%, there's about 60 odd billion. And then there's another 60 billion of special interest money, so that's 120 billion combined. All up, it's probably about 150 billion. Now, if you take the 150 billion off the 2 trillion in government debt, you reduce government debt by about 12%, and you're also reducing an annual interest bill, which is about 8 billion a year.

• 18:05Speaker 01

  So you save 8 billion a year, you reduce the government debt by circa 12% or by 150 billion, which no government, I don't think in the history of governments, has really ever done before. And they could do this, I think, tomorrow. I mean, it's not very hard to get a parliamentary consensus around the idea, we're carrying 150 billion of excess cash, which is actually taxpayers' hard-earned savings, and they'd be much better served just by paying back the debt, cutting the annual interest bill by 8 billion a year, and moving on. So that's, that's what I would do.

• 18:33Speaker 00

  So Chris, you assume that the, the government, parliamentarians, have squirreled aside billions, hundreds of billions of dollars, just to make sure that when they retire, they get their pension, whatever, however they get paid upon retirement,

• 18:54Speaker 00

  just to make sure that there's enough money there to pay them?

• 18:56Speaker 01

  Yeah, it's the unfunded pension-

• 18:58Speaker 00

  It's from tax, it's from tax.

• 18:59Speaker 01

  It's from our tax, our earnings, our labour earnings and our capital gains have been taxed and turned up in government revenues, and those revenues have been put into the future fund to pay for what they call the unfunded pension liabilities of politicians and public servants, which is fine, I don't have a problem with that, it's a good idea. The bad idea is that they should have an extra 100 billion odd sitting in there. And of course, the future fund doesn't want to give the money back, because they're being paid based on the funds that they're running. So we pay the future fund to run that money.

• 19:30Speaker 00

  They, they get a percentage.

• 19:31Speaker 01

  Yeah, well, they get a fee, and these guys are, you know, the top guys are making millions of dollars a year, and there's 500 people working at the future fund. And then the centre-left governments want to set up all these special interest funds for, you know, medical science, housing, Aboriginals, disaster-

• 19:47Speaker 00

  Affordable housing, we talked about that.

• 19:49Speaker 01

  Droughts, whatever the case may be. But the government can write those cheques at any point in time, but you don't need dedicated funds. And by the way, the 66 billion, 30 is in cash, it's not being used, and it's in cash earning lower rates than the borrowing rate that we pay on our government debt, which makes no sense. So again, simple math, take the 150 bill, pay back 150 billion of debt, reduce 8 billion a year in interest, and then by repaying 150 billion of 2 trillion of debt, or actually, you know, what would be 10% of just the federal debt, you will radically reduce the interest rates on all that debt, because the global bond market will turn around and say, gee whiz.

• 20:27Speaker 00

  Much less risk.

• 20:28Speaker 01

  Yeah, much less risk, they've just disappeared 10% of their national debt, or 12% if you account for federal and state debt, and therefore we don't need to charge them these high interest rates. So that's an absolute fricking no brainer.

• 20:39Speaker 00

  So just look at the, I mean, I love the idea of paying less tax here in Australia, either corporate tax or personal tax. What about the argument that says that-

• 20:51Speaker 00

  Well, first thing they'll say about that is, look, we need the amount of money, we need the amount of money we currently raise, revenue, tax from you in order to at least run a close to breakeven. Or alternatively, we just can't, we haven't got enough money, we haven't got enough, we're not needing enough money to spend it anyway. So what would you say about that? Would you say, okay, well, that's fine, just reduce your costs?

• 21:13Speaker 01

  Well, I can disappear the budget deficit overnight. The NDIS is basically the budget deficit. We're spending, you know, fifty to sixty billion a year on the NDIS and Australia's budget deficit is about sixty billion a year at the headline level. So it's really easy to find the savings, mate. And we have a spending problem. We don't, listen, Australians with the right incentives, with the right motivations, with the right opportunities, we're the most competitive mofos in the world. Everyone in the world knows that we work as hard as anyone else and we have world-class ingenuity and appetite to win. But Australia's have, you know, the lucky country has become, you know, a bunch of losers, basically.

• 21:57Speaker 01

  We're not building world-class businesses anymore because the incentives aren't there because the professional politicians want to rape and pillage from the private sector and tax and take until they can, you know, feather their own or line their own pockets without income and earnings. And it's just got to stop because it's killing the country. It's also, you know, shipping in half a million foreigners every year is fundamentally changing the country. It's not the country that we grew up in. It's, yeah, and the values and aspirations are being, I think, contorted in the name of advancing a political program. And these guys are basically shipping in people to buy votes.

• 22:36Speaker 00

  And do you think that's not too dissimilar to what's happened in lots of part, a lot of parts of Western Europe? The same sort of, and what was Hunter and Biden, Canada?

• 22:44Speaker 01

  Biden did this, Trudeau did in Canada, Biden did in the US, Adern did it in New Zealand, Starmer's done in the UK. It's a purely political program. So, yeah.

• 22:55Speaker 00

  Maybe you can explain that a little bit, though.

• 22:57Speaker 01

  Well, they think there's a high correlation between, you know, shipping in some folks from the Middle East that will be, you know, feel forever indebted to the Labor Government for giving them permanent residency.

• 23:09Speaker 00

  And therefore vote.

• 23:11Speaker 01

  And vote, yeah. So, I mean, Australia is an immigrant country. Thirty percent of us weren't born here, as you know, and that's been our sacred source. But it needs to be managed in a very orderly way where people are brought to this country on their merits, where they're value-accretive to the national mission, and most importantly, where they buy into our vision and they assimilate and align with that vision. They're not trying to destroy that vision.

• 23:36Speaker 00

  Is it pretty simple, from your point of view, probably not generally speaking, but is it pretty simple from Chris Joye's point of view, that really the best countries, the best country to have is one that is economically viable? All the other stuff all fits in at some stage, falls into place at some stage, but absolutely, basically, we've got to get the economics right. We've got to make sure we are running a profitable country.

• 24:01Speaker 01

  Yeah, we need to be prosperous and profitable, and that's got nothing to do with the public sector. It's everything to do with business, small business, medium-sized business, big business. And it's got everything to do with employers and employees. So, you know, one of the ideas I've previously articulated is the notion that for anyone starting a business and for any of their employees, we should give them capital gains tax exemptions up to, say, twenty-five to fifty million per person, such that if you want to build a world-beating business, Australia becomes a destination of choice. I mean, this is just, the stuff that needs to be fixed is so bleedingly obvious, it's not funny. You could, you could end so many, I mean, the interesting thing is, if we had cathartic

• 24:44Speaker 01

  change, the prospects are really promising for this country. So if there was a radical shift in political leadership, which is why I think you're seeing the ascendancy of One Nation. I actually, for the first time ever, Pauline Hanson's chief of staff reached out to me and I actually met with them both during the week. I was really surprised.

• 25:04Speaker 00

  Of, with what?

• 25:05Speaker 01

  Well, I was expecting Pauline Hanson to be, you know, the very analytical and interesting mind that she presented, like just even numerically. She was kind of running debt servicing calculations in her head and I just, it was, politicians are interesting when they're in opposition because they're generally always engaged. They all reach out, they all want to act like they're listening. And when they're in government, they, you know, generally put the blinkers up, pivot back into narcissistic megalomaniac mode and they're not interested. And the best politicians are folks who are constantly engaged, constantly listening and able to make really good decisions with imperfect information under duress.

• 25:48Speaker 01

  So I have no idea what Pauline Hanson's like, but I'll tell you this, Chief of Staff's a very smart guy. She's getting very good advisors, like heavy-hitting economic and policy advisors, which was a bit surprising. Like, her chief of staff was formerly the general councillor Scott Morrison, ex-top-notch M and A lawyer, very, very sharp dude. And I was just interested in when I started sort of giving, you know, my economic view of the world of, you know, what's going on and why it's happening and what it means for Australia. You kind of, you can see when people get the glazed eye look and they're just nodding and they don't really understand, whereas she was like fully intellectually engaged. Now, she may have other shortcomings that I'm not, I don't follow what she says at all closely.

• 26:32Speaker 01

  I wasn't even expecting to have a conversation, but we did.

• 26:36Speaker 00

  So if we just get, they are solutions and they all make a lot of sense to me. And I think a lot of people would, would agree with that, but like, we've got to have people with the right amount of intent and preparedness to actually take that forward. And maybe it's Pauline, maybe it's going to be, you know, Tony Abbott and his new crew, you know, Angus Taylor, et cetera, maybe.

• 26:57Speaker 01

  It should be you, mate.

• 26:58Speaker 00

  It could be me one day. It could be you and me one day. And I don't, actually, to be honest with you, if I do it, would you do it with me?

• 27:05Speaker 01

  I don't think so, but it's not for me, mate, but I think you'd be amazing.

• 27:10Speaker 00

  Yeah, that would be, it would be fun.

• 27:11Speaker 01

  I'm, I'm more than happy to offer my views to anyone, including obviously you as my mate, but, but you'd be amazing, mate.

• 27:18Speaker 00

  It would be fun. Do you think my brother should get a run?

• 27:21Speaker 01

  Yeah, your brother would be a beast. Your brother's an absolute weapon.

• 27:23Speaker 00

  Yeah, totally is. So, but if I go back and let's say nothing happens, mate, let's say there's no change and there won't be any change in twenty twenty-eight anyway. As I said recently, I mean, if, if, if you were running a company badly, your shareholders would call an extraordinary general meeting, they'd get rid of you. We only get an opportunity to have an annual general meeting, we're starting all this every three years with the government and we get to vote once. So there's not going to be a change until twenty twenty-eight. What is your prognosis between here and, between here and then, assuming, assuming it's just, it just stays the way it is? Because they're not going to change anything.

• 27:56Speaker 01

  No, it's going to be an absolute disaster. We're going into recession, we're having the mother of all housing corrections, the...

• 28:02Speaker 00

  Well, why is that a problem?

• 28:05Speaker 01

  Well, let me explain what I think will happen and then we'll figure out whether it's a problem because it may not be. But what's going to happen is these politicians who preternaturally can't help themselves but spend money to buy votes aren't going to stop. That's the, you know, reflex of choice. And the crazy amount of spending in Australia is just crushing activity in parts of the economy that should be surviving and thriving that it can't under the weight of government. Regulation is insane. Like, when I come back to Australia, like, I've been through seventy cities in the last eight months, fourteen countries.

• 28:39Speaker 00

  Around the world, yeah.

• 28:40Speaker 01

  Yeah, four continents. And when you get to Australia, what you immediately are struck by is world-class amenities. Amazing country, like, city's best country in the, best in the world. Yeah, aesthetically stunning, but you immediately notice the stifling, suffocating influence of government everywhere. The police, just the very regulated environment, whereas in the US, they're on fire because businesses have now been liberated by massive deregulation. And if you want to get something done and do something radical that requires a little bit of disruptive change and a bit of support from Washington in the present administration, I mean, they're going to green light everything under the sun, perhaps too much so.

• 29:23Speaker 01

  Like, the SEC is running a bit wild right now with this deregulatory zeal. They're going to allow people to raise any type of capital via tokens, as one illustration, which is probably a step too far. So the, the US is not the perfect panacea, but compared to Australia, we're going to see crazy spending, which will continue.

• 29:40Speaker 00

  By government.

• 29:40Speaker 01

  By government, which will continue to drive inflation. We are going to see, you know, ongoing high levels of population growth and migration until this debate ends up crushing that, which will happen.

• 29:52Speaker 00

  That'll grow, that'll grow inflation.

• 29:54Speaker 01

  Yeah, that'll grow inflation. We're going to see the RBA having to reluctantly march rates higher, which will create more and more problems in parts of the economy. Australia's actually getting a lot of capital investment from the AI boom. So that's actually powering a part of the economy. The US economy in Australia looked a little bit like the mining boom pre the GFC. In the mining boom, fifty, fifteen percent of the economy, economy in Australia was going gangbusters. The other eighty-five percent was more or less in recession.

• 30:19Speaker 00

  But the mining boom carries forward.

• 30:21Speaker 01

  The mining boom carried the overall, exactly right, aggregate economy. And the RBA responded to that by lifting rates up to seven point two five percent, even through the early stages of the GFC. Anyway, at some point, what happens is the country understands we've got to pull back on the migration, that happens. So you lose all the demand and the income shocks that that brings with it. The politicians get placed in the community's crosshairs. Because I think what now has happened is there's been a galvanizing moment post-budget where the man on the street said, she was, I was loving making out like a bandit from the NDIS and the MBN and all the handouts and all the welfare, that was all really, really good. But I don't really kind of fancy being ass fucked by this uh cost of living crisis. This inflation is destroying my, you know, real income.

• 31:05Speaker 01

  So I'm really feeling the cost of living one. Two, I'm also getting ass fucked by these, you know, really high rates. Australia actually has um today amongst the highest interest rates in the world. Uh, and then I thought my business was okay, but I've just been whacked with a thirty percent tax on my family trust, which I organized my business around. And I've now been hit by the world's highest effective capital gains tax rate uh on the property that was, you know, potentially uh securing the mortgages I used to fund my small business. And on top of that, um they're whacking me by uh uh with the effective uh and like the ban on negative gearing on our numbers is equivalent to an interest rate increase um of about two hundred to two hundred and seventy basis points like.

• 31:48Speaker 00

  No.

• 31:49Speaker 01

  Yeah, yeah, yeah.

• 31:50Speaker 00

  What?

• 31:50Speaker 01

  Yeah, in terms of the reduction.

• 31:51Speaker 00

  Yeah, yeah, yeah, the net, the net position, yeah.

• 31:54Speaker 01

  Yeah, so, so I've been whacked with massive rate hikes through the ban on negative gearing. I've got another four rate hikes from the R B A. I'm being told by Joy Boy and Boris that you're gonna get another two hikes or the R B A cash, the bond market's saying the R B A cash. Anyway, so everyone's saying it's, I now get it. It's these fucking politicians spending like drunken sailors, just taking from all of us, the community, in order to line their own pockets and build these empires and these institutions. It's an oligarchy. It's, Canberra is an oligarchy, right? The, the, the, these guys have never, as you know, started a business, launched a product or service, hired a single soul, and they just don't get it. They see us as, you know, high value targets, a zero sum game, take from the private sector in order to power the public sector and um.

• 32:37Speaker 00

  But if I take all of that in, in those things you just that uh talked about then, add them all up, we are definitely gonna go into, fall into a hole.

• 32:44Speaker 01

  Yeah, because the public, so effectively, what, once the community acts like the binding constraint. So really, the binding constraint is very high inflation and then very high interest rates. And then the man on the street and the woman on the street saying, hey, enough's enough. This is actually a political problem. I need change. So the politicians pull back on the spending that destroys the demand that that was once powering. And then the immigration gets restrained, which also undermines demand. At the same time, you've got these kind of uh crushingly high rates and uh, you know, these precipitous plunges in uh property prices, amplified at the margin by another dynamic, which is there's been a huge surge in non-bank lending in Australia.

• 33:23Speaker 00

  Massive.

• 33:24Speaker 01

  Part of this, right? You run a normal non-bank lender, Yolobik Road, but there's also been um, you know, these private credit funds that have extended loans to riskier borrowers who couldn't get a loan from a bank.

• 33:35Speaker 00

  Which we're seeing a lot of these fall apart at the moment.

• 33:37Speaker 01

  Fall apart, like I heard this week um that all the borrowers to small scale commercial property, I mean, there's mass liquidations. Uh, we're seeing, as we, I think, already discussed, huge increases in insolvencies. And we're seeing um these private credit funds basically have to pull back on lending because the guys investing with them are pulling their cash. And so you're gonna see what we used to talk about um in past cycles, which was credit rationing, where basically banks stopped lending. We saw this in nineteen ninety one. And the private credit market has become such a big part of the property finance game. That's why you're seeing all these resi developers blow up. Because they can't get finance and there's no sales. So the financier is not gonna give them money because there's no sales. The financiers have got defaults and delinquencies, so the guys backing them are not gonna be supplying cash.

• 34:21Speaker 01

  They're net, net exiting the sector. So you get this negative feedback loop. So Australia gets a recession, but it's probably the recession we had to have because we need a cathartic crisis. We need a significant increase in unemployment. We need to take the twenty five percent of the bureaucracy that should not be working uh on the public purse. They need to become tradies, doctors, nurses, and do something productive for private society.

• 34:43Speaker 00

  But like, in relation to uh the recession we had to have, which is, you know, Keating's famous words in ninety, whenever it was, early nineties, um, in relation to that, when you say we're gonna have recession, but most partners, mate, a lot of people listeners don't really know what that means. I mean, how's it gonna affect me? A lot of people don't say, well, so, well, okay, two negative quarters or five negative quarters, whatever it is in a row of negative growth with GDP. What does it mean for me? Um, maybe we should sort of um explain to them what happened to unemployment during that period.

• 35:13Speaker 01

  Well, this is a really important point. So the economists like to talk about recessions meaning negative GDP growth. But another measure of infla- uh recessions is just simply a significant increase in unemployment. So I think what's gonna happen is our unemployment rate was in the high three percent vicinity. That was, you know, historically close to all time lows. Uh, the R B A's staff told the R B A board that a normal rate of unemployment is five percent. The R B A board and the governor and deputy governor thought they were too smart by half and they rejected the staff.

• 35:43Speaker 00

  And an experiment, by the way.

• 35:44Speaker 01

  They ran this experiment with immaculate disinflation and the so-called um narrow path.

• 35:48Speaker 00

  And they got their June twenty one, uh June last year.

• 35:51Speaker 01

  Yeah, that's right.

• 35:52Speaker 00

  For a moment.

• 35:53Speaker 01

  Uh, well, not exactly.

• 35:54Speaker 00

  Two point six and uh whatever, like four point two.

• 35:57Speaker 01

  Quarter of semi-soft inflation.

• 35:59Speaker 00

  Yeah, yeah, yeah.

• 36:00Speaker 01

  But um, but they, R B A board and the R B A governor, deputy governor said, we're not gonna listen to our own analysts. Uh, we think the right level of unemployment's not five percent. We think it could be low fours. And their hypothesis was that they wanted to preserve the fake job gains that had emerged post the pandemic through like the unprecedented amount of public spending. So they said, we really wanna preserve the post pandemic uh employment grants, but those gains were never real. They had to go. Uh, they've now capitulated, they've bent the.

• 36:30Speaker 00

  Oh, really?

• 36:30Speaker 01

  Yeah, they've totally swung a hundred and eighty degrees. So the R B A has said, in fact, Bullock has said, quote unquote, I've retired the narrow path idea, whatever that means. And basically, she's given up and they're now saying unemployment needs to get back to five percent. But really, it's probably.

• 36:44Speaker 00

  But that's a normal.

• 36:45Speaker 01

  That's normal. Now, it's at four point six currently.

• 36:47Speaker 00

  Yeah.

• 36:47Speaker 01

  But it probably needs to go to five to six. And we, as you know, because we're a bit older than most, um haven't had a proper recession since ninety one, where the unemployment rate hit almost eleven percent. Um, and yeah, so I think we'll see, a recession means a big increase in unemployment. A lot of businesses are gonna go bust, a lot of people are gonna lose their, lose their jobs. I think it's gonna be very tough for anyone in the public service. They're gonna need to retrain, reskill, which is not a bad thing. I mean, the public service is chock a block full of super smart folks, but the idea of the lollipop boy or lollipop girl earning, you know, two hundred and fifty grand a year, holding a stop sign at a construction site. I mean, New Zealand can't find workers because all the, the guys and girls want, they want to become Aussie lollipop guys and girls.

• 37:25Speaker 00

  And why wouldn't they?

• 37:26Speaker 01

  Yeah, exactly. Uh, funny story, um in Christchurch, they built a stadium, a new stadium for the Crusaders rugby team. I, I sponsor them and um the architects were Australian and they were shocked. Uh, and they, they, they were in this meeting one day and with the uh Christchurch folk. And they said, well, what's the surprise? And they said, we've never seen workers work in the rain in Australia when it rains. There's no work. Uh, whereas in New Zealand, they put raincoats on. So uh I think that's kind of a little tell in terms of the Australian productivity problem that we have. But yeah, I, I think it's gonna be tough and there'll be adversity and the house is not gonna be worth as much as it was. And your soup is probably not gonna be worth as much as you thought it was gonna be worth. And you're gonna have to work a little longer, maybe won't retire when you thought you were gonna retire.

• 38:10Speaker 01

  Uh, it's gonna be tough, but the choice of people is interesting, mate, because, you know, in the U S, they've got some people right, but they've got some people demonstrably wrong, like this Scott Besen character. You've seen what happened with him in the.

• 38:21Speaker 00

  What happened?

• 38:22Speaker 01

  So basically, this is this dude that Trump put in power as the U S Treasury Secretary, which is like uh head of the Treasury in Australia, but incredibly powerful position. And his next hedge fund manager, he worked for George Soros, the famous uh dude who, who managed to pull the uh British pound out of something called the European exchange rate mechanism in the early nineteen nineties and made a billion pounds on that trade. Anyway, Soros, Soros is a hard, you know.

• 38:46Speaker 00

  Left guy.

• 38:47Speaker 01

  Yeah.

• 38:47Speaker 00

  Yep.

• 38:47Speaker 01

  And this dude, Scott Besen, um who's overly gay, which is great, um worked for uh Soros as a junior burger and then tried to set up his own hedge fund, blew up, shut it down, went back to Soros, worked there for a while, tried to set up his own hedge fund again, blew up, shut it down, and then somehow ends up being Treasury Secretary. And um he came out, and, and this has been pretty astonishing stuff for financial markets. He came out and basically said, I think the U S thirty year interest rate is too high, so I'm gonna try and manipulate it lower. And at the time, the U S thirty year government bond yield was uh five point two five percent. And it had risen by about seventy basis points.

• 39:28Speaker 01

  And the problem in the U S for Trump and Besen is the home loan uh rate in the U S is a thirty year fixed rate. It's not like Australia where we have variable rates. And the U S thirty year mortgage rate had jumped from six to six point seven percent. And Besen said, enough is enough. And this is where, a good example of people in positions of power having total brain explosions. He said, enough is enough, uh I'm gonna bully it lower, I'm gonna take on the bond market. And if there's one market you probably don't wanna take on, it's the bond market. And he gave this famous interview, this is like weeks ago, months ago maybe, but recently, where this guy said, so um. So kind of how's life? He goes, I'm loving it. I've got edge. I've got asymmetric information. He's talking like a trader, but he's a Treasury Secretary.

• 40:10Speaker 01

  And the guy, the journalist says, what do you mean by this? And he says, well, I know exactly what the Japanese are going to do. So he tried to intervene as the US Treasury in setting the level of the Japanese exchange rate of currency. And that kind of blew up in his face. And he said, don't you think I know more about what Japanese policymakers will do than the markets? You know, I've got inside information. And then he said, the same applies to the US Treasury market. I am the US Treasurer. And then he said, um, uh, I am the House.

• 40:36Speaker 00

  Who?

• 40:37Speaker 01

  And he, and then he said, and don't bet against the House. So what he tried to do was increase his purchases, purchases of US Treasuries to reduce their yield. And he threatened to double these purchases and they were purchasing about two billion uh over a particular period. And he said, I'm going to increase it to four billion. The day he did it, he increased it to six billion. So he tripled the purchases. And instead of the bond yield going from five point two five percent down, it actually rose, it jumped, it's now up at like five point six, five point seven percent. So it's had exactly the opposite effect and it's been incredibly humiliating for the US Treasury Secretary. Which is disappointing because at the same time, the US economy is booming. There's a lot of good things happening in the US economy. Trump's got a lot of good things right.

• 41:19Speaker 01

  But I think him front running personally through his family office, a lot of the announcements. So all this insider trading around Trump is really unsamely. And similarly, the choice of people that you put into power in the case, um, I gave you, best and yeah, is profoundly important. That's why the country would do well having, I think you, uh, you know, pulling some of these reins, mate, because, um. Yeah, I don't think you'd, you'd let this stuff blow up in your face in the same way.

• 41:43Speaker 00

  Well, I've got, I'd have plenty of good advisors sitting around me to tell me not to. And just on that, let's just talk about midterms. What effect do you think the midterms are going to have globally? And well, for a start, what do you think is going to happen in the midterms? Both are probably not going to be an issue in the Senate. And in an event, um, maybe something in the, in the lower house, um, Congress, what do you think is going to happen?

• 42:05Speaker 01

  I have absolutely no idea what's going to happen in the midterms. All I know.

• 42:09Speaker 00

  What about if? Give me an if.

• 42:10Speaker 01

  So what I, what I know is that the US economy is, um, really benefiting from, uh, the focus on profit maximizing. Research and development, innovation. I mean, the tech sector is on fire, the AI sector is on fire, businesses are on fire.

• 42:26Speaker 00

  AI adoption is on fire.

• 42:27Speaker 01

  Mate, US manufacturing is just absolutely booming. Massive revolution in, in US manufacturing now that they can digitize everything. Three D printing, robotics, they don't have the problem of having a, a high, uh, labor cost base. They compete with anyone, they can compete with anyone in the world. Look at Elon, uh, with monopolies in rocketry, low earth orbital satellites. He obviously kicked off the whole, uh, electric car revolution. He's about to kick off the robotics revolution.

• 42:56Speaker 00

  Change of phones.

• 42:56Speaker 01

  Yeah, it's, it's incredible. If we don't get a second Republican administration, if we don't have a, uh, a Republican succeed Trump, I think that will be diabolical for the US economy. And if we have anyone like Gavin Newsom, uh, the Californian governor, um, uh, prevail in his pursuit of power. I think it'll be cataclysmically problematic. So there's a lot of bifurcation in the US. California and New York are dying. And Texas and Florida are booming. They're both running budget surpluses. Businesses and people are moving to those states. There's a net, um, sort of departure of people from, and businesses from California and New York. So I, I worry about the ramifications of the midterms for Trump's ability, uh, to put in place his program.

• 43:40Speaker 01

  One thing interestingly about Trump, that was a surprise to many. Was when the Fed lifted rates in September, the guy that's running the Fed is called Kevin Walsh. He's Trump's appointee and his predecessor, Powell, Trump had had this monumental clash with and, and Trump more or less dusted him up. And Trump's been relentlessly calling for lower rates. Walsh raised rates, but interestingly, when you raise rates, Trump didn't excoriate him. He actually came out in the day and said, I told him to raise rates because he's got dovish board, they're full of Democrats. And he just has to fall into line. I think Trump is doing a Reagan redux. Reagan in the eighties unleashed Volcker, who was running the Fed, and they got double digit rates that eventually crushed inflation.

• 44:20Speaker 01

  And that was because I'm told by my advisors that in the US, Republican voters are much more sensitive to their cost of living than unemployment. And so you would rather have low inflation and high unemployment than high inflation and low unemployment. And I think that's the calculus that, that Trump may have engaged with. So I think we could see a, a pretty ferocious hiking cycle from the Fed. And here's another little interesting historical anecdote. Second hiking cycles tend to be savage. So we kind of forget that this isn't, you know, the first rodeo. So the Fed went from zero percent to five and a half odd percent, down to three point six percent and it's now hiking again. Here in Australia, we went to zero point one percent in November twenty twenty.

• 45:04Speaker 01

  Uh, we went, uh, we started lifting rates in May twenty two. At zero point one, we went all the way to four point three five in November twenty three. Sat there till, uh, February twenty five, then they cut three times. They triggered a house price boom and got Labour elected. Uh, and now they're reversing out those cuts and trying to get rampant inflation under control. But now these central banks are chastened. The message for listeners is they're going to go back to being what we call hard money men. And hard money men are laser like focused on crushing inflation with high interest rates. More or less bugging the consequences and the collateral damage unfortunately will be mainstream. But what people need to understand is they're not to blame. It's a hundred percent the, uh, responsibility of the professional politicians.

• 45:47Speaker 00

  Or Friedman said that many times. Consumers never create inflation, governments do. It's like, we don't, I mean, we, we consumers, we don't. If, if, uh, we were doing the same analysis in Australia between a choice between unemployment and cost of living, do you think there's any research on that that you've heard about? Similar to what you're talking about in the US?

• 46:09Speaker 01

  Well, I think, yeah, it's a really interesting question. I think that, um, people today are, are really, uh, wilting under the weight of the high cost of living. Uh, and the high interest rates, which are responding to the high cost of living. Yeah, at the same time, unemployment is still very low at four point six percent. So I'm not sure.

• 46:25Speaker 00

  People back themselves to get a job.

• 46:26Speaker 01

  Yeah, well, I think for, you know, ninety percent of people out there, unemployment is not an issue. It's really at the margins. We're not talking about huge increases in unemployment, but we do need. The RBA is basically saying, I need to get into the demand destruction business. This Goldilocks bullshit of being able to crush inflation without really lifting interest rates sufficiently high. Without having an impact on unemployment and without sending the economy to recession has been repudiated. And they're now in the demand destruction game, which basically means, uh, kill growth, raise unemployment to create a bit of capacity. Uh, and encourage capital. And basically you need to move money and people away from bad businesses to good businesses.

• 47:06Speaker 01

  So let's take Fermus. I have no idea of Fermus, but hypothetically imagine that they might be a business that, uh, is massively overinflated in value and has way too much capital and high value talent tied up in it. If that business for whatever reason doesn't have a reason to exist, uh, we would want those people and that money to move to other more productive firms that have much more viable growth prospects. And that, that's basically the mission. The issue is the, the elephant in the room is Canberra. Because Canberra is really the, the key agent that is, um, burning through all this cash, this sixty billion a year. And Canberra is, Canberra's been the single biggest driver of employment and growth since the pandemic.

• 47:52Speaker 01

  And truly Canberra, that needs to be shut down, but the professional politicians have a huge conflict of interest. They don't want to pay their mates less. They don't want to pay themselves less. They don't want to threaten their retirement incomes. They don't want to, um, uh, you know, wind down their hobby horses, the MBN, the NDIS. Cause it's all, you know, jobs for the mates. They're all on these boards and committees and they're all earning hundreds of.

• 48:12Speaker 00

  Or when they want to retire, when they want to leave Canberra, they get a job.

• 48:16Speaker 01

  Greg Conbay is running the Future Fund.

• 48:17Speaker 00

  Yeah.

• 48:18Speaker 01

  Happy days.

• 48:19Speaker 00

  Just, just, uh, if I could quickly ask you about, about something in relation.

• 48:23Speaker 01

  As Cassella did, you know, both sides of politics.

• 48:25Speaker 00

  Yeah, but it happens. Yeah, you're not, you're not sort of jumping all over Labour in, in particular. It happens across the board and Cassella became the chairman of the Future Fund, or managing director, whatever it was at the Future Fund for a long, long time. But just on the unemployment thing. Do you think that the Reserve Bank Governor and everybody else who makes the decisions will be prepared to go against the so-called thesis that was introduced in 2024 by the Treasurer as a result of the so-called independent inquiry into the Reserve Bank or review of the Reserve Bank, whereby he's now given unemployment or full employment equal sort of gears to as he has given to inflation? Because that's a big thing. Will they, and he's gone and appointed a new board?

• 49:10Speaker 01

  Yeah, I mean, this is really Chalmers doing, and that's the other thing.

• 49:12Speaker 00

  I'd say this is Chalmers doing.

• 49:14Speaker 01

  Yeah, the soft RBA and the fact that rates weren't raised as high as they should have been. I think we've spoken about this before, but they stopped at 4.35% in November 23 and over 24. I argued publicly, you've made a mistake, you need to go to five. Our modelling, which was, we were using the RBA's modelling, the RBA's internal staff modelling, all suggested you should be at five. They said, no, no, no, no, we're too smart by half. We know better. Two boys wrong. The staff are wrong. We're going to keep it at 4.35. We're going to thread the needle. We're going to have this so-called narrow path they talked about, where everything would be in a price of perfection. And then she came out in late, in December 2024 and said, of course, I won't cut rates until I have six solid months of soft inflation data. But she cut it after only three months because that was in February 2025 by that time.

• 49:58Speaker 01

  And it was perfectly timed to lend some support to the federal election in May 2025. So yeah, you're right. Chalmers basically sacked the Governor and Deputy Governor, appointed his own personal proxies, has appointed most of the voters on the Interest Rate Committee, and de facto has exercised huge influence over that organisation. I've said it before, I've got no problems with that. Most people in his position would do exactly the same thing. But we have had a whipped RBA as a consequence. It's pretty naturally dovish. I'll tell you something that's absolutely ridiculous. Like you've got this massive rampant inflation. Six-month annualised inflation in Australia is 3.9%. They target two and a half. 12 months, it's 3.6. I think the three-month annualised rate is 4.7.

• 50:43Speaker 01

  Basically, we have the highest, amongst the highest rate of inflation in the developed world. So you've got a big problem and you just cut rates three times and you got it horribly wrong. And the RBA has consistently made poor decisions and the rest of us think that. So if anything, you want to be as hawkish as heck, get out there, scare the bejesus out of everyone. Say, okay, we're going to raise rates, we're going to get onto the, you know, the warpath and we're going to get this inflation back to target. The first time she hiked, she basically said it was going to be one and done and completely undermined all the messaging. Times passed when a central bank hiked, they engaged in a lot of moral persuasion and jawboning, where the message was, this is going to be a long campaign. Unless you capitulate and unless we can depress these consumer price pressures, it's going to be a pain in misery for everyone.

• 51:25Speaker 01

  And every single, every single time she's lifted rates, there's been this mixed messaging, which is, I think, her kowtowing to Canberra and kowtowing to any.

• 51:33Speaker 00

  Or not wanting to upset them. Not wanting to get political.

• 51:37Speaker 01

  Yeah.

• 51:37Speaker 00

  Because she'd be trying.

• 51:38Speaker 01

  But she's, but by not being independent, she is being political.

• 51:41Speaker 00

  Yeah, I guess, as I say, you can't sit on the fence. You have to be strident about this sort of stuff. Like I'm the independent Reserve Bank Governor and I've got to do my job. And my job is to fix inflation.

• 51:52Speaker 01

  Yeah.

• 51:52Speaker 00

  And, but, but where I was, where I was sort of getting to is I thought what it was an attempt by the Treasurer to make sure that she never undermined unemployment. And in fact, she was always mindful of trying to do this experiment. It's not like.

• 52:06Speaker 01

  You're exactly right. He changed the RBA's mandate to put much greater weight on full employment.

• 52:11Speaker 00

  Which no one knows what it even means, but anyway.

• 52:13Speaker 01

  Which basically means keeping unemployment really low.

• 52:15Speaker 00

  Yeah, yeah.

• 52:16Speaker 01

  And that then forced the RBA to run this experiment of cheap money and artificially low unemployment, which gave us artificially high inflation.

• 52:23Speaker 00

  So I don't blame her. I think she's just done what she's, because he said, here's your mandate. He'd go for it. Like unemployment was important before, but now it's, it's up there equal with inflation. And then he put his own board members there. She has no casting vote. So she's got to go along with the group. But what's interesting, the last Reserve Bank Board decision was unanimous, which is quite interesting. Maybe they're starting to get a bit nervous. What do you think is going to happen in November?

• 52:48Speaker 01

  I think in November.

• 52:50Speaker 00

  The November meeting?

• 52:51Speaker 01

  Yeah, I think in November they hike. I think they hike a little bit more this year. I'm not sure if they have two hikes in them. I think they're going to be scared shitless about the house price action. Like Aussie house prices falling at a 16% annual rate is not something we've ever seen before. And the RBA historically, historically has been very sensitive to house price movements.

• 53:09Speaker 00

  But they're not supposed to be.

• 53:10Speaker 01

  They're not supposed to be, and they say they're not influenced by that. And to their credit, in this cycle, they have been indifferent to house price changes. But I think at some point, they're going to be concerned it acts like a binding constraint and there'll be a wealth effect, a negative wealth effect. And there's just no doubt that people are shitting themselves right now. The penny's starting to drop and you're seeing these rate hikes propagate through the economy, through liquidations, through insolvencies, through, you know, private credit blowing up, through precipitous house price falls, through the consumer sentiment data. So I think you're going to get at least one hike. I fear, mate, though, that they're going to hike once or twice, sit back and because of the public spending and population growth and because of the poor productivity, you still have high inflation.

• 53:55Speaker 01

  Mate, the sobering canary in the coal mine is fricking New Zealand. So the New Zealanders, they're tough as mustard, right? And their central bank, after the pandemic, lifted rates to five and a half percent. They put the fricking economy in recession, a real recession, two quarters of negative GDP growth. The jobless rate lifted from high 3% territory all the way to 5.6%. So they had the real mother effing deal. And guess what? Inflation today is still above the RBNZ's target.

• 54:26Speaker 00

  Wow.

• 54:26Speaker 01

  Now, they cut rates from five and a half percent down to two and a quarter. So they had these big rate cuts, thinking it was all one and done. And they, you know, put the genie, the inflation genie back in the bottle. But now they're staring down the barrel of core inflation that's at two and a half percent. They target two, which is a reasonably big miss for a central bank. Now, remember, we target two and a half percent and right now we're running at four. But this is the scary thing. In the UK, they had a similar situation. They lifted rates much higher than us. Unemployment has risen in the UK much higher than in Australia. There's actually a decent amount of spare capacity, but they too can't hit their inflation target. So the scary thing to consider is we may see a stop-start hiking cycle like we did before the GFC that runs for years and years and years.

• 55:10Speaker 01

  And that just slowly kills off parts of the economy until people have enough and really vote government out and get radical change. One of the smartest economists in the world that I speak to is a guy called Murray Scott, who is the richest gentleman in New Zealand's advisor. And he said something scary to me and he's got, I think, more or less everything geopolitically and economically since the pandemic relentlessly right. And he said, Chris, I think the Fed's going to have to go to 7%.

• 55:39Speaker 00

  Whoa.

• 55:39Speaker 01

  And it's going to have to lift rates in line with what we call nominal GDP. And that's nominal GDP is real GDP plus inflation. Now, real GDP in the US is about three and a half. Inflation was, until they started fiddling with the numbers in the last week, because they lowered all the inflation numbers in the US by fiddling with them. Inflation was three and a half. So he was sort of saying seven. The, the Fed cash rate at the, in the tech boom in the late 90s, which we talked about, did go to six and a half. So currently we're expecting the Fed to kind of go to 4.75 to five. I think there's a risk they go above five, back to five and a half. But if Murray's right, you know, they're moving into the sixes and sevens.

• 56:22Speaker 01

  And what that means is global recession. US economy goes in recession and we're going to recession. And it's, it's really, really ugly. From a portfolio perspective, can I say, the only place you get protected is cash and cash-like assets. You need to be super liquid. You need to be floating rate, which means variable rate, variable rate, cash-like assets like floating rate bonds, their interest rate moves up with the RBA cash rate. It benefits from rate hikes. So floating rate assets, maximum liquidity. You want to avoid illiquid assets like the plague.

• 56:54Speaker 01

  And you'll want to avoid cyclical risk or default or insolvency risk like the plague. So that's what I do from a portfolio perspective. Obviously, that's not personal advice to you.

• 57:03Speaker 00

  No, no, I know. I understand it. But like, and by the way, I think the point you're trying to make here is we're going to be in for a big dip. Who knows what asset class is going to be good value to buy? Or who knows what asset class is the one you shouldn't be holding? No one's going to know that. But you should be in a position where you're not going to be affected and you have the ability to dip in and dip out as opportunity rises. And the only way you do this is cash-based assets.

• 57:27Speaker 01

  Yeah, I think so. And high-grade cash-like assets that are floating rate that are liquid.

• 57:32Speaker 00

  Liquid being you can get your money back reasonably quickly.

• 57:35Speaker 01

  And, and think about equities. Like we know their P multiples are on a cyclically adjusted basis at like 200-year highs. We know what happened the last cycle in the tech boom.

• 57:45Speaker 00

  Yep.

• 57:46Speaker 01

  And equities fell 50 and 80. We know what's happening to house prices right now. I will see, talk about commercial property in a second. So Aussie house prices are in line for record falls by Christmas. Sydney prices will be off by 17%. So why wouldn't Aussie equities, you know, potentially suffer a similar fate? And I'll give you another number that's interesting. I was with a, I guess, a billion-dollar family office recently and they own office property. And I said, what rate of return do you get on your A-grade office property? And they said about six and a half percent. And I said, how do you feel about that, given you can get five and a half percent on a AAA-rated Aussie government bond? And they said, yeah, it's a pretty skinny margin.

• 58:29Speaker 01

  Well, when you look at the RBA's research on what extra return should A-grade office property give you over risk-free AAA-rated government bonds, historically, it's been about three to 5%. So an A-grade office, it has normally paid you three to 5% above the.

• 58:45Speaker 00

  The lowest risk.

• 58:46Speaker 01

  Yeah, the risk-free rate, the 10-year government bond you're. Now, that would mean at five and a half percent, you need to get eight and a half percent return from A-grade office property. To go from six and a half to eight and a half, the price of the property has to fall by potentially as much as 20% plus.

• 59:01Speaker 00

  Either you get your tenants to pay more rent, one or the other. The first, second one's not going to happen.

• 59:05Speaker 01

  Yeah, that's right. So, you know, it looks grim for commercial property as well, mate. Really, really grim.

• 59:10Speaker 00

  Yeah, I don't like.

• 59:11Speaker 01

  Let me tell you one other final thing that's fucking interesting. Everyone says we have a housing shortage. You zero migration and you have no population growth, like they have in the US, like they had in.

• 59:22Speaker 00

  It's solved overnight.

• 59:23Speaker 01

  You have no housing shortage, buddy.

• 59:25Speaker 00

  It's solved overnight.

• 59:26Speaker 01

  The whole housing shortage is all predicated on these projections for super-strong population growth. And it vaporises the housing shortage, right? So all these resi-sporkers, they're constantly talking about the, the structural housing shortage. You know, I, as you know, I advised, promised it John Howden back in 2003. And it's a funny thing to think about, like forever and a day, we've heard about these housing shortages. But if you have a stay of execution, like you just cut your population migration growth down to nothing, like the US have done, you don't have a problem.

• 1:00:00Speaker 00

  Well, maybe Paul is looking good in that regard.

• 1:00:03Speaker 00

  Chris Choi, as usual, mate. Brilliant. Thanks very much. Awesome.