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

exceedingly well in our show. I'd like to talk to you about things like Iran, US equities, Australian equities, interest rates, of course, any recession going on here? What's going on in the world? Mate, Well, where do you want to start? Let's talk with Let's start with America. Let's start with Trump America, Iran. What's your prognosis on what's going to happen there and how will it spill back here to Australia.

the existing regime. I think Kameni and his son are both dead, and if his son's not dead, he's well incapacitated. I don't know if they will be raised. Change doesn't really look like they'll necessarily be Ragiam Change. There is this five hundred kilos of sixty percent and rich uranium sitting under the rubble in Isfahan that he needs to resolve, which is why I think he's still negotiating with him,

he doesn't need the straight of hormones open necessarily. I think once they exit, which is a key waterway where roughly twenty percent of the world's oil passes through, the US is actually making out like an absolute bandit. From this. They've massively increased their crude oil exports and their a net energy exporter. But the minute he exits, the Iranians that's their life. They have to open up austrade. So once he's gone, I think that gets resolved and he

doesn't need a cease far agreement. I think the midterm elections are a key binding constraint, which is why we were confident the guts of the campaign would be done in March, and he's not expected to do particularly well, but more generally, has had some interesting results. If you look at illegal border crossings in the US down ninety five percent, so he has shut those borders. He as a consequence, US population growth is the lowest in history,

which is interesting for inflation. He's slash taxes. He's paid for the four trillion of tax cuts in this one big beautiful Bill act with the tariffs, which has been a bit of a genius move. He has coalesced the mother of all cap X booms, about a trillion dollars the US a year via AI and the tech oligarchy, the tech leadership in the US, which used to be disposed to the Democrats, has really galvanized behind him. He is reasserting US I think, geostrategic promise. There's this no

doubt about that. They are now the dominant global hedgemon and having their way with the world, you know, whether you like it or not. And I think he's re asserting US economic exceptionalism because the US is unambiguously by far the biggest beneficiary of all the AI innovation research and development, all the AI spending. I mean, they're just

killing it in AI. So having said that, you know, he's super polarizing, obviously, but we are seeing a secular global swing in the political pendulum to the right, and you've see it everywhere here in Australia with one nation is the UK with the reform Europe in Europe yep, and you know South America and Argentina. So it's fascinating, mate, and what that means for Australia as well, Like if we were to ever get Prime Minister Pauline Hanson which

is an interesting conception. I mean, obviously she'd have to go.

astonishing for me. So US core inflation. The FED has a particular measure called PCEE that they focus on slightly technical but that's been running at three point four percent anualized last six months, and that's way above what number, the two percent target? Yeah, they target two percent. In the last twelve months, it's been running at three percent. So US core inflation not only was a way above target,

but it was accelerating. All those numbers mark pre March, pre this huge order pre now wow yeap that's before the inflation shot wow, accelerating, And so it makes no sense. Our modeling suggests the Fed needs to hike rates by fifty to sixty basis points. Trump's been very successful in Drawburny the Fed to cut rates last year. He has this beef with the current boss of the FAED, J Powell.

He appointed him in his first term. He feels that Power was lobbying for the Democrats, which he was pre election, and so Trump's gone, iye for an eye Mode, wants to take him out, which he's He's definitely had his way with Power, and he's appointed this new guy called Wosh, who's been ostensibly much more dubbish fish means supportive of the notion of interest rate cuts. So markets are thinking, well,

Power's getting replaced by Walsh. This is Trump's proxy Trump's Trump warts cuts, but there's no way they can cut rates in my view, because I've got this huge inflation shock and they are running more than fifty percent above target before the shock. And so what that means for listeners is that it's very difficult to rationalize the US equity evaluations. It makes no sense at all.

bank boss. So Charmers here sacked fille Low as he's entitled to do, and he appointed the governor of a deputy governor and seven of the nine voting Interest.

to hit our target. The targets two and a half percent. We said no, no, no, you're going to be running it through.

percent cash rate. Now remember at the peak of the hiking cycle after the pandemic, we peaked at four point three five percent, so we're going this is absolute capitulation and humiliation. The RBA is the first central bank in the world to have cut rates in the pandemic, hiked cut again, and they had to turn around one hundred eight degrees and say we've got it totally wrong. We're hiking again. First in the world to do that, right, And now interesting series, first in the world, first in

the world. Yeah, yeah, the Japanese were always hiking, so they don't count. But yeah, first in the world. The most embarrassing, you know. But in the Harber's defense, first point is when inflation smacked them in the face, they said, hey, we're going to lift rates. They didn't hesitate, so you know, all power to them. And they may lift rates again in May. They've got a meeting before the budget. But

we're talking about monster short term rate hikes. We're talking about a totality of four to five hikes, a totality of more than one hundred basis points of hikes.

to fall in Sydney and Melbourne. You saw the minute that they started talking about hike slate last year, Sydney, Melbourne got ko Wushka market rolled over. Brisbane and Perth. House prices are still as strong as ten men, but that's going to cool unambiguously. National house prices are going to fall for sure. At the start of last year everyone was like house buses were falling in and saying, oh, Hausprus are going to be weak. We thought the RBA

would cut two to three times. We didn't agree with what they were doing, but I argued that house pruces would rise five to ten percent. National house bruses rose nine percent, and within that you had like killer growth in Perth twenty plus percent, Brisbane fifteen percent, Sydney and Melbourne weaker. So the RBA, I think has done the right thing. And we can talk about this later, but

just come back to the original question on equities. The essential challenge here is you've got all time stock market evaluations, which is reflected in our super portfolios, and you've got the FAED price for rate cuts which makes no freaking sense. And again our models, which are very accurate, at saying the FED has to raise rates. And what does that mean for Australia in the world, Well, that means a hiking cycle. And what we're starting to see the portense

of mark is a globally synchronized hiking cycle. Now, last year this serious. Yeah, So last year, no one in the world, I think, aside from US, was talking about the risk of a double hiking cycle. I told some of my class, prepare your portfolios for the specter of a second hiking cycle. Everyone thought I was crazy. The US bond market, the most powerful mark in the world, right,

trillions and trillions at all. The bonds was pricing in as zero percent, zero percent chance of a rate hike in the US in twenty twenty six, twenty twenty seven, twenty twenty eight.

more output per our works. So they've just been more efficient.

and satellites in the world. So the US economy and I've traveled a lot many states through the US in the last six months, and the zeitgaist there mate is super positive amongst businesses. If you're a business person in the US. You feel you have the most business friendly government in the history of the US behind you. Well, remove red tape, remove reregulation, whatever you want to get done,

you call Washington. They've got your back to you. An anecdote A guy I know was speaking to the CEO of Welds FAGA, one of the biggest US banks, and he said under Biden, he couldn't get a single meeting. Under Trump, He's had meetings with Trump, and Trump will randomly call them and say, hey, what do you think about this? Trump just wants to do deals. I mean, you know Trump as well as anyone, He just wants

to get shit done right. And the US right now is in massive entrepreneurial innovation mode and the zeitgeist in atmospherics are super positive. I was actually on the way here, I speaking to a dude whose father was one of the most powerful unionists, like union officials in the United States right and literally on the way here, I was spinning this dude and he said, Mate, the unions are booming because there's so much frickin building in the US right now because of all the data centers and that

they're constructing. So we're talking about it at trillion dollars of spending just through AI and also because they're doing a lot of infrastructure investment in the US right now. So the US is doing great, which warrants, which basically meant so strong productivity growth. You've got strong economic growth, you've got strong inflation, which is a huge problem. You've got no illegal immigrants coming in. What that means is

with no population growth, no migration, there's no workers. And so what that's going to do is push up wages. So rates inevitably need to go high in the US in our of you. But the market thinks I'm totally wrong. Market's pricing and cut still because they think Trump is whipped the FED and power and they think that basically his butt boy Wash is going to rock in there

and cut rates. But I think it's zero. I mean, okay, maybe there's a perfunctory cut, but I think right now he's got the perfect cover to say, hey, Trumpy, this is Wash, the new Fed boss. He's going to say, listen, you just set off this mother of or prush shocks. I've got this huge inflation crisis. I can't cut rates. But there's a real dichotomy or cognitive dissonance between market pricing for equities and what's actually happening in the economy.

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

We're going to control inflation. Number two. So you know, somehow we're going to control inflation, and somehow we're going to and we're not going to have to put rates up.

the US. And here's another problem, which we've argued for a year, and that is we believe, contrast to pretty much everybody else, that AI is not going to create deflation. So the traditional meme or narrative is AI is going to eviserate a big part of the workforce. You know,

we're going to have drivers cars. Uber's dead, We're going to have Optimist robots produced by Tesla and rather being interviewed by Mark Boris, I could have an optimist here cost twenty thirty grand, about one percent of Marks costs, and it's free cheaply, and optimists can interview Chris Joy and and you know your business can get rid of Mark and hologramd Mark, Yeah, hologramd Mark. But there's a problem, we think with those you So the first issue is

that we're not seeing any of that happen. What we're actually seeing, rather than kill jobs, AIS creating jobs. So if you look at new business openings in the US, there's another positive the US economy. They are booming and going through the roof, so new business formation. People are establishing as you'd imagine, as they did during the Internet days. They're establishing startups and companies to service the trillion dollars

that's been spent on AI. Every man and their dog wants to do something in al everyone we know is trying to off the AI wave, and so it's actually creating a positive rather than negative employment effect. The second thing is you're not seeing job losses in industries people predicted you see them in for example, everyone said management consultants are completely folds. You know, they're dead as a doorn on. But the consultants have reinvented themselves as AI

experts and their industry is booming. People said that radiography won't be wiped out, but radiography employment demand is growing faster than the broader labor market. So I think we are of the view that rather than being deflationary, actually ais inflationary. Why basically got these big companies like Amazon and Google and Meta and others known as hyperscolars that are spending a trillion dollars on data centers and compute

to basically monetize AI. So you're spending a trillion dollars a year and these dudes are all competing for the same stuff. They're competing for the same chips, the same memory cards, the same people that work in AI. There's stories of young Ossie has been paid one hundred million bucks to go and leave HI research centers. In these firms, they're competing for the same energy that needs to power the data centers data centers, and they're also obviously the same bricks and mortar to produce.

So we think they're deliberately understanding the size of the capex sperm because they don't want to tip off their rivals because they're competing for the same people, the same resources, the same chips and merry carts. So we think the capex berm is going to be bigger than people think.

We think it's going to be a huge spending shock, positive spinning shock that is basically an income demand and wealth shock, which is a inflation and it's going to create bottlenecks, and that we're not seeing the evisceration of

the workforce that was predicted by many. Now that may play out in the future, but we've had very contrary views on all this stuff, and all roads lead to higher inflation in the US, which is probably not good for the global economy because eventually, if we do get rate hikes, what does that mean, Well, equity valuations are going to have to contend with a much higher cost of capital, which like if I'll give you another example, the Aussie ten year government bond yield, which is the

market's guess of where the RBA cash rate will be for the next ten years. A year or two ago, that was like zero point one five two point three percentage points below the US ten yure. Right now it's zero point seven percentage points or seventy basis points above the US tenure. Austral As pricing and rate hikes, those two to three rate hikes we talked about, our view is that RBA cashroate could go a lot higher. So

we think we've been saying high fours. But there is a possibility the RBA pushes the cash rate to five to six. We can talk about this later. There's a possibility this rate hiking hiking cycle we're having in Australia could be protracted, elongated. It will be multi year and we've seen this in the past. You look at the decade before two thousand and seven and we had this stop start hiking cycle. They paused for six to twelve months and they start again because they couldn't get inflation

under control. So again we need to kind of think about that. But coming back to equities, the US tenure government bony was quite low. It's only four point three percent. Our ten government bonyard was five percent. Now our ten government bonyiard in twenty twenty one was one percent, So it's gone from one to five. Was that important to

Aussie's just a little aside. Between twenty nineteen and today, governments have racked up no less than eight hundred billion dollars of debt to fund the political spending which is completely out of control. Back in two thousand and seven, we were running across all ossie governments a seventeen billion dollar surplus. Today we're running an eighty billion dollar deficit.

So our fisk like the amount of they're spending ninety seven billion a year more than they're making in terms of revenues than they were back in two thousand and seven.

If that was to lift, then equities are cactus. I think you can see equity evaluations easily pulled back by more than ten to twenty percent. So this dichotomy that you know, I leave listeners with is think about what the US inflation problem, if it intensifies, which I believe it will means for the valuations of equities and your super portfolios. And think about what a US hiking cycle means for those portfolios. Because I think it's not priced.

Markets are not thinking about it. So what we're discussing here is kind of quite novel. It's not a popular debate, like, no one's really talking about an aggressive Well, they're ignoring the inflation, and I think it comes back to your original question. They're saying productivity is a panis. So basically they're saying, we're going to create all this deflation because

optimists will rule, the robots will rule. They're going to these massive job losses and it'll all be fine because productivity will go through the roof.

targets too. In Australia the targets two and a half last six months. We've been running at three point nine for core inflation three point nine, two and a half last twelve months, three point four. And the problem in Australia is our inflation is not being driven by all this private sector growth. It's actually the opposite. All of our inflation in Australia has been driven by two things,

really only two things. Government spending, the eight hundred billion dollars of debt, almost thirty thousand dollars per person that wracked up since twenty nineteen. The NDAs is a great example. It is meant to be thirtyen to forteen billion sized by the Productivity Commissioner a year, so thirty to forty billion a year, they're now spending over fifty billion a year.

All that waste is basically like a python squeezing a balloon, and the balloon is kind of getting bigger and bigger, and it's crushing or asphyxiating the private economy and it's creating price pressure. So government spending is so large that eighty billion deficit paranum is so large that it's pushing out the price of everything. It's pushing up at cost of living, it's pushing up inflation, and ultimately it is pushing up interest rates while we're getting rate hikes. But

the other dynamic is immigration. We had record a record number of five hundred thousand people ruving the country in January, so we've got record migration. Well yeah, and if you've done five hundred thousand people half a million people a year on Sydney and Melbourne, we just can't cope because we don't have that much rental accommodation. We don't have

that much capacity to transport this population shock efficiently. And so the Aussie economy has been artificially inflated by immigration and by government spending, not by businesses, not by the private sector. In fact, the private sector is in a per capita income recession has been since twenty twenty three. So what's actually happening Mark is relative to government. The private economy is shrinking. The government part of the economy

is the biggest since World War II. This is actually stealth socialism right because Australias got austraids, have been addicted to the idea that the Dan Andrews of the world will boil them out. And according to the Center for Independent Studies, one in two Australians now drive more than half their income from government and related sectors. So this means we have an economy built on fake growth, an economy with a lot of.

in million people a year. They probably vote for you, but it's not sustainable. And the broader question is, well, the challenge for the IBA, and in your question is really wasn't the RBA calling this out. The reason the IBA isn't calling this out is because they've been whipped

by Charmers. Charmers appointed the governor and deputy government. Charmer's appointed most of the voting members of the insut Act Setting Committee, which is in total to and I would have done the same thing, but the reality is they've been completely muzzled. They are completely unwilling to call out

government spending. Other iterations of the Reserve Bank in the past have been quite forthright in saying that governments need to balance their budgets and pull in the purse trainings and kind of contribute to more prosperity because you can't drive living standards up without an increasing productivity. So this

is the other problem. So it's all related. The governments sector completely asphixiating the overall economy and private activity is crushing productivity because there's no productivity in the government sector. In the public sector, there's been no productivity growth for twenty five years. So Australia actually has gone from one of the most competitive nations in the world up as kids. The whole world in mind, our sports people and our

business leaders. You know the Don Bradman's, the Ruper Murdocks, you know the Shane Warns for their innovation, ingenuity, intensity and at work ethic, and that's more or less disappeared. So our productivity performance is amongst the worst in the world. Whilst the US productivity is soaring, we are worse in Europe, and that's because the government sector is taken over so much of the overall growth pulse, and productivity in the government sector is so poor that it's dragging down our

overall productivity statistics. The productivity in the private sector is not amazing, but it's not nearly as bad as it is in the government sector. And low productivity means you just have to pour more money and people into producing goods and services, which is inflationary. So I think all roads lead to entrenched inflation pressures that are going to be hard to resolve unless we do one of two things.

The solutions are simple. You've got to spend a lot less, so the government has to spend a lot, and you need to pull back on immigration. Now, the interesting thing is the government saying that they want to tax us more. So they want to take more of our savings so they can spend more to resolve a spending problem, which

makes no sense. You can't resolve a pathological spending problem by stealing even more money from taxpayers, right, You've got to resolve your kind of addiction to pork barreling, and.

But also would you suggest that, and can I say, I think when sorry to interrupt it, when main Street connects the dots, which I think, ma'am man out here, Yeah, when mum and dad understand that whilst they're making out like a bandit on the ndias and probably ruling the ndias. The quid pro quo cost of that is a high cost of living, higher inflation and getting whacked by higher interest rates net net against you. Yeah, and then higher taxes. Right.

I think people start to realize actually, this is not sustainable, particularly if the government, as they're already doing, starts to self cannibalize and say, well, actually we've got a massive corruption problem with the NDAs. We need to start pulling it back in And it was interesting that they raised that last week. But the other dynamic in Australia is the swinging the political pendulum to the rights here. I think the casualty of that will be immigration, which we do need to pull back on.

a high taxes. Our interest bill's gone from one percent panum to five percent pranum and the casualty is our cost of living is going through the roof and yeah we're.

from super strong population growth under Biden to none. In Canada, super strong population growth and they've crushed it. And immigration in New Zealand they had super strong population growth and it's fallen dramatically. And I think you'll see the same thing happened in the UK. So I think whether labor judges that, hey, all of this immigration is creating lots of problems, whether it's assimilation issues, are La bondai, whether

it's inflation issues, cost of living issues. I mean, I think blind free, you can see the country just can't cope with half a million foreigners coming here every year live. So I think you'll see policy change whoever prevails either party. Yeah, yeah, but I think you'll see big policy change. And what's profoundly important I think for viewers is we have to imagine in Australia and there's a sequencing to this, but we've got to think forward and imagine in Australia with

no population growth, which we've never seen before. Mark, that hasn't happened really, We've always run.

you're going to see a much much weaker economy. So this is the way I think it plays out. The market's pricing in We're currently at a four point one percent cash rate. We were at three point six markets pricing in a four point seven percent cash rate, so another two to three hikes house prices is already falling. House prices are going to continue to fall. I think they give back the gains that we had last year, so we had nine percent growth, we'd probably pay that

back at the same time. Clearly, charmers are starting to see the writing on the world. I think there's a there's a ground swell of animus around the NDI is staying to brew. I think just in terms of the corruption and routing and the inequity of it all. So I think you're going to see some fiscal console relation, which is fancy terminology for just governments spending a little less, not much less, but a little less at the margin.

from government won't be there. Population growth, I think is going to get crushed one way or another, which we've never seen before, and the RBA is just going to keep hiking. I'll tell why they're going to keep piking is because they've got relentlessly wrong right. Their forecast miss last year was the worst sincerely nineteen nineties. They expected two point six corinflation and printed three point in four.

They've been humiliated repeatedly for big misses. This is slightly technical, but in late twenty twenty one they dropped their interest rate target called the yield curb target, which was fixing the interest rate yield on the twenty twenty four government

bond at zero point one percent. They gave up, and it was the first time a central bank had been pushed out of a so called peg since George Soros, the famous hedge fund manager, bullied the British pound sterling out of the European exchange rate mechanism the early ninety nineties. So that was a disaster of the RBA, like a global humiliation. And then they've got all their inflation forecasts wrong. As the first central bank of the world to cut Hi cut and the hiker again, we've got a second

hiking cycle. So they're in full data depending mode. Because their legacies and livelihoods are one hundred percent and the cross this. I don't think they give a rat to ask any more about charmers. They're just laser like focus. They're not going to criticize charmers for all this spending. And the states, by the way, because it's not just charmers, it's for us a state government problem. In fact, probably more of a state government problem than a federal government problem,

and so they're going to keep hiking. And I don't think a four point seven percent cash rate or four point six percent cash rate, whatever the number ends up being, is going to deal with the inflation problem. So I think it'll be stop start, and I think the cash rate, my own view is it bleeds into the fibes and then at the same time, now you get the population growth slowing, you get the government spending slowing, and then you get a recession. So I think where we land.

And this is also your question on I equities. The flying the ointment for equities is not just higher interest rates. It's an iy recession and possibly the first decent recession we've had since ninety ninety one.

was the recession we had to have. He was the king of inner one liners, but he actually meant it. That was the truth. And it's nearly like in order to control inflation today here we probably have to have a recession. You're right, mate, because we've got a part of our economy it loves interest rates going up. You know, one thirty economy over sixty own their own home, have no doubt, have big super because Keating introduced it, feeling pretty comfortable. It just raids go up. There's how good

it is, darling. But it's going on holiday to Bali. But one thing those people are very aware of, very cognisant of, is a recession. They get nervous about that shit. Everything's going up and price going up and the economy is in trouble. We read they read the newspaper one way to get into their psyche because all this is psychological. The whole reserve bank game is how do I get inside your head to make you feel like you to

stop spending money. And if there's a whole group of people who I don't effectcause on the reserve bank, one way I can do it if I am in reserve bank is put us into recession.

probably the ninety one recession. Unfortunately, unemployment rose dramatically. I was the unemployments at four point three percent, exactly the same as the US. It's historically low, very super low, and it's been much lower than the RBA expect. But here's the rub. The RBA, and being politically compromised by their government of the day, has overridden So they've overridden the staff analysis of what the natural rate of unemployment is?

And they've been open saying, well, the reason we stopped at only four point three five despite the fact that the RBA's own model said rates needed to go to

five right. The Martin model of the macro economy which we run, which is the RBA's model, said they should have hiked much higher, and they stopped because they wanted to run an experiment with the idea that the natural rate of joblessness or the natural rate of unemployment in Australian economy had fallen dramatically, which means you could run the economy a lot hotter, you could have all this government's been, you could have all this immigration, there'd be

no inflation problem. Right, And they thought that actually the natural rate might be high threes, all low four. They said this repeatedly, and the staff were like, no, no, no, no, you know the eight hundred analysts the IRBI are like, no, no, no, no, it's mid to high force. The current numbers four point nine, and.

The staff is still at four point nine. But let's get back to the kind of meaty toppy, which is recession and unemployment. Basically the quality of consequence of all this, folks, is the RBA to get inflation under control has to lift unemployment, right, it has to go from four point three to basically five, just to get it back to normal. Now,

normally you overshoot with these things. So in New Zealand, where they're much tougher, and they went to five and a half and they did have a recession, the unemployment rate went from threes to five point four. Right, So I think you're going to see unemployment in Australia increase quite meaningfully in order to create the extra room in the economy for all the government spending and all the immigration.

Now another choices. Of course, you can crush population growth and that will be deflationary, and you can crush government spending, which will also be deflacering. But whether the politicians have the metal to do that open question. But all roads lead to one way or another a recession.

make it round. Do you get concerned then in terms of house prices, because that would indicate to me there's going to be a lot of people in default in terms of mortgages because most of the people who are employed who will no longer be employed, quite a big percentage of those are mortgage holders, which means houses will go on the MIC because we haven't seen distress selling

in Australia for a long long time. I have been through periods whether it is just stress selling in Australia, but we certainly haven't seen it for the last proven sentences the GFC, to be honest, like it's been pretty good. That could sort of give us just stress selling. I'm not saying that people who have to sell the house all of a sudden we create a mark where prices

get deflated. But what happens is real estate agents get a little less you know, hawkish or less bullish, and they start to say to their vendors, look, you might not get the two point one. You might have to sort of sell from one point eight. Every they start to condition the market, and vendors get conditioned, and vendors you know, like unless they're and or purchases get conditioned too, by the way, So everyone starts to pay less and

expect less because right now, We've got a problem. I said to you early, I think the problem is right now in Australia is that we have a lot of vendors who are there's a price expectation, so there's a mismatch in the market. Well, there's not a willing by a willing sell it. Vendors are saying, look, I've got a mortgage, but you know I took it out in

twenty twenty. I took it at a low rates or I had a mortgage prior to that, and during the twenty twenty period, I just kept paying off my old rate and I've reduced my know, my scheduled repayments quite low. Plus the problem has gone up by seven or eighty percent since then. You know, I've got plenty of equity. I still got a job. I'm in the four I'm not in the four point three percent of unemployed. You know, I've been well walked after. Therefore I don't need to sell.

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

This is before the RBA rate cuts. Sydney and Melbourne prices were falling, and there were a lot of stories about in more affluent suburbs owners who had had you know, two, three, four five loans against their property, often funded by private credit, getting into strife. And we were seeing, for example, in the East and subs of Sydney. I remember on Victoria Road one house sold for like ten twenty million, more than EXPE originally expected because the guy had five or

six lines against it from private debt. We're also seeing in late twenty four record insolvencies, so just in terms of the absolute number of insolventes, all time high, and we were definitely seeing a big increase and you would have seen it in your book in mortgage defaults. So in late twenty four, all of that was bailed out by the RBA rate cuts. The RBA cut rates three times. What happened, House prices boom nine to ten percent, Bang,

commercial property valuation started to turn. The private credit guys, you know, we're given a stay of execution and all these borrowers in distress, we're basically given accommodation. Now we're standing down the barrel of a very different situation whereby not only is the IBA taking those rate cuts away so it's reversing them out embarrassingly, but it's adding probably another one or two on top of the first three hikes. So you got four to five hikes. That means you're

going to have a return of all that distress. And so I think you're right. You're going to have high defaults, high delinquencies, You're going to have much higher insolvencies. And in contrast to twenty twenty four and twenty three, we had record population growth and also governments still spending like crazy. I think this time around and you can see less government spending and reduce population growth again, which implies even

higher to false delinquencies and insolvencies. So I think we're going to see the worst default cycle and the worst insolvency cycle since either the GFC or since nine ninety one, could it be a perfect storm? Was that could this be a perfect storm? Relations Yeah, the key is, you know the idea that we won't have population growth. It's hugely important to Australia to ship in half million people a year to boost spending, boost demand, keep the economy

trucking along. And obviously then you know this addiction to governments spending money to try and buy votes. The Dan Andrews playbook, which he pioneered with, by the way, the impromato of the RBA during the pandemic, because the RBA in the pandemic said to all these state and federal governments in the in the politicians defense, the RBA feel low came out and said, hey, spend as much as you possibly can. We need you to inject cash into

the economy to support us during a plague. Right, but once you let that giney out of the bottle, you've never been able to get back in. You know, we wrack up AI and ey billion dollars a debt and we now have this huge inflation problem. So I think I think my prediction is it's going to be difficult at the inflation under control, particularly in the stow with there is no productivity growth, I think you see much higher unemployment. So i'd see unemployment going to the fibes.

I think you can see an RBA cash rate into the high force and possibly fivees. I think it could be a multi year hiking cycle and a multi year malaise. And I think it's going to animate a very vigorous political debate because now everyone wants to blame somebody, right, the man on the street, the farmer saying why am I getting smashed by this inflation? Why am I getting smashed by these interest throates because I'm working my tits off, right, Like who is to blame?

and it's really told territory. I think for one nation, I think I haven't followed the whole one nation shift recently at all closely, but I think one nation are really focusing on the NDIS as people should do, because you know it's choc a block full of extreme corruption.

saying you've got a Pokey's problem. We're going to give you a bit more cash to make you feel feel better. Well, he's going to sell it, because he's a genius of selling these things. He'll say. It's an intergenerational unfairness issue.

You know, people who are young people are being affected by these older people who are you know, wroughting the negative gearing and getting a couple of gains tax discounts on the profits that they make, and that you young people are being denied the opportunity to buy real estate. That's why real estate is so expensive. Bull shit, Just spend less mote.

necessarily increasing. But when all those things shift, I think the cross swing back to the essential source of the problem. So when people again my contention is when mum and dad link immigration and the NDIS and government spending and higher taxes and high cost of living, high inflation, high rates. When they link all that together, I think we'll get policy change. Whoever wins the election.

these really idellic aspirations for making positive change. Then you realize that by the time an idea gets completely tortured and corrupted by the political process, there's really balancing probabilities. Most of the political change is actually suboptimal and destructive and often corrupted right, and really very negative, And so you become much more jaundice jaded and skeptical people like us, so like, well, actually, businesses kind of know what they're doing.

And if you set the conditions for businesses to flourish and thrive and survive, and you give us great incentives to build world class product because this is what austraining is that we need to build world beating products in a world where we're competing now against not just other global businesses, but now against global AI. Right, so we need to be globally competitive, and that's what the policy should focus should beyond in sending folks to innovate and

build world class companies. And if you do that, I think you know, the rest sorts yourself out. It's kind of like as an investor, if you've got strong returns, well, everything sorts it out. And with an economy, if we've got strong intensity, competitive zeal, work ethic and we're building the world's best businesses, we have strong growth, we have strong productivity. We're going to be able to run a

high growth economy without having high inflation. We're going to be generating a lot of tax revenue which will help pay back the debt and everyone's happy. But we're not doing that at all. We're actually as you were saying, erecting barriers and disincentives to all those things, like why would you build a world class business in Australia when

you can go to Florida or many other countries. You can move to Aarba dhaby, you can move to lots of different destinations Singapore, yeah, Hong Kong, wherever the case may be. But there's many other alternative locations in the world which provide much better platforms to build world class businesses. And I'm actually seeing it. There's definitely a bit of a brain drain right now. You know, the top entrepreneurs

are looking around the world. Where do I need to be based to compete against the AIS?

but let's go with different moment. Do you think that this government has any possibility, this Labor Party government, and we're talking about st it's a federal too, by the way, has any possibility of rewriting us, in other words, putting us back on the right path.

everything is kind of I think resolved. Inflation disappears, interest rates will be much lower, growth will be much higher, We'll be able to run a high growth economy with much lower unemployment because productivity will be much stronger. So it's actually not complex. It's actually almost surprising, astonishingly so how complex the process is to get to those sorts of solutions. But you do see it around the world, and we talked about this once before. It's fascinating what's

playing out in the US. You got an intellectual civil war between California and New York, which are basically looking like failed state. It's running huge budget deficits juxtaposed against Florida and Texas, which are booming. And you've got massive popular shifts out of California into these business friendly states which are running budget surpluses, which have got very high growth,

load taxes. Not only load taxes, they're slashing taxes even further, I think in floroughly looking and getting rid of land tax altogether. And the playbook is pretty simple.

the services. The classic was this New York mayor who decided to make an example of this billionaire in New York who was undertaking a six billion dollar project employing two and a half thousand New Yorkers, and he vilified him, and this guy Ken Griffin said, or at least one of his underlings the sea, We're going to basically think about shelving the project and moving to Florida because we just can't cope with this dude sort of personalizing and

vilifying entrepreneurial success in this way, which you think New York could be a standard bearer for a place to build world class businesses, But now tax rates in New York prohibitively punitive, sort of fifty to sixty percent total tax rates. Similarly, you know you've got a comparable tax burden,

if not harder, in California. So I think that any country that doesn't put itself in a position to encourage the development of world class businesses is going to have a very very grim future in this intensely competitive AI driven environment.

up almost a trillion dollars whether of extra debt. So now that we've passed through all those processes, people are freaking out, understandably, and there's no easy answers now, Mate, we've created all these problems. The problems need to be resolved, and unfortunately that means basically taking these very good people that work in government related sectors. We need to take those jobs away from them, and we need to find them jobs and even better opportunities in the private sector

working with world class businesses. I did hear one unbelievably interesting idea from somebody in this space, and I don't know what you think about this. This person said to me, what about creating an alternative tax system? I said, you've got to set up a playing field where we can attract the best and brightest in the world and foster internal talent to be world class, to smash the rest of the world in that global competition. And he said, we can't kind of debate the current tax system because

you'll never win that debate. But what happens if we actually create an alternative tax system. For example, what happens if we said that everyone who starts a business and is self employed has a top marginal tax rate of hypothetically twenty five percent. And I thought that was genius, Like, rather than trying to fix the existing problems, just create a new system.

away by the government. If there's an alternative route where if you go out on your own, you're back yourself and you decide to create a new product and service that can compete globally, and you can establish that firm. Employ people, create jobs, generate a new stream of income and new sources of growth and innovation. Because you're encouraged

to do it. Because you're encouraged to it, then you might make that leap because I think a lot of people would like if you could kind of move from a forty five to fifty percent tax rate world to one in which you're paying less than or potentially less and close to half that, then I think that's pretty

exciting and enticing. And I thought it was a genius idea that rather than trying to re engineer this antiluvering and existing system which is going to be death by a thousand cuts, just create a parallel system.

film industry going here in Austray many years ago. Governments, state governments used to contribute to that. There was a contribution by the government to you starting up a new business. It's sort of like beyond investment some other thing. You know, maybe or maybe the money you put into the thing is all goes to your investments, so you'll get that as a rite off straight away or your everything. Every dollar you spend you've got to get I mean, I'm in a game where we try and encourage people to

leave banks that come work with my yellow big rowd business. Right, that's the argument we get from them every single time. Yes, I want to do that. I'd like to leave the bank. I'd like to be in control of my own destiny. I know that I can do mortgages. I know I can make money, but right now I'm getting paid one hundred and fifty grand and are plus a fifty thousand dollars bonus or more. I've got a mortgage, I've got a family. It's going to take me six to eight

months to start there, build revenue. How do I exist in that period? And that's that's a bit of a that's a that's a tough one. And we find them, we get we know, we know they want to come to us. And it's not just us, but all of us that we know they want to change it. We know they want autonomy. We know that they know that they can earn more money working in it as a broker, for example, than they can work in for the bank. They like the hours, like the ability to stop at

three o'clock and go back at six o'clock. They can go home and do things with their kids and all that sort of stuff. But that six to twelve months call it period where they're not earning any money, that's the difficult part. And you know, in our case, we lend them the money, we fund them, and they can pay us back out of the commissions. But generally speaking, and I'd say this would have cut across all all industries.

Most people have mortgage. These aspirational people, they're aspiracial people. They've got they've already got a mortgage, they've got two, three kids or a kid, and they're not in a sort of the fortunate position of you know, super stars like yourself. I mean they're not, you know, they can't. They don't have anything saved up. Everything's in the house. So I think I think it would work if the government could somehow create the incident, create the incident in the initial stages.

it's going to be multi year. It could be very elongated, it could be much longer than what I've just described. But in the central case, let's assume they go to close to five percent in terms of the RBA cash rate from three point six, possibly drift higher. You can see house prices for commercial property prices for much higher defaults, delinquencies, insolvencies.

If government spending is constrained at the margin, and crucially, and this is really really important, there's a radical reduction in immigration, which I think there needs to be, then you're very likely going to have a recession and unemployment will increase. So I would say over the next couple of years, if we don't get a big reduction in immigration and we don't get a big or material shift in political spending, then the problem is you can have

this ongoing bat one. I don't know if we've or I've expressed this clearly, but really what you have now is a battle between the central bank and the politicians. So politicians want population growth, in immigration and political spinning. The central bank wants lower inflation. The two things are butting heads and it's seat of intractable. So somebody has to give. The central bank ain't going to give because it's data dependence. The races is going to continue climbing high.

Now the central bank will get a bit year bitch, because this central bank is a bit whipped by charmers, like they hiked in February and instead of saying, hey, we're sitting up for a hiking cycle, and you were talking about central bank's conditioning expectation expectations. Normally there's this thing known as moral suasion, where they will signal and say, hey, we've hiked rates in February, but guess what, there's another three or forecoming, so you better pull your horns in.

And they can, through their words, affect behavior. They can convince people to be more prudent, to spend less, recklessly, reduce activity, reduce inflationary pressures. And if they had any balls and they actually said to charmers and the government, you're to blame for a big part of this problem, and you need to pull in your purse strings, I mean you'd see an immediate political I think immediate political way. No,

but they won't. But if they did, and they could have, and they haven't, And what this means is mate that the whole process is stretched out. So instead, what happened was Bullock got up there the government of the RBA and said we're hiking and we might be one and done. Absolutely preposterous. They immediately hiked the next month that they met. And so the suboptimal central bank behaviors because they're politically compromised, means this whole thing could get stretched out. And if

Chalmers doesn't change, it's going to get stretched out. And if we don't get a big reduction of immigration or get stretched out, so it could be three to five year plus process, depending on whether we see those changes. Well. But by the way, is anyone that you're talking to talking about recession right now? Or okay? Interesting? I mean it's like no one's walking about ate hugs and.

high rates and a recession. Because the very what people need to understand is the RBA has to lift unemployment to that circle five percent levels at four point three right now, which would basically satisfy the test for a recession. It has to get unemployment up just to get back to the maths of being able to run an economy

without inflation. Because they viewers and listeners might not understand this, but in the RBA's mathematical models, unless you get unemployment back to its natural rate, you will get unsustainable strong inflation, and again in unemployments so low because the political spending

and immigration. So it seems really obvious to me that the idea that we can just thread the needle and push rates up and not reduce house prices and not increase unemployment and get inflation back to target absolutely preposterous.

are China and India. That's great, you know, and actually immigrants are long term very powerful for productivity, but in the short term it creates a huge demand shock and if you have too much immigration, the economy can really struggle to cope and you get price pressures, which is exactly what's happening.

the car industry, like the biggest in the currentistry. And they tell me that the number of cars is selling is ridiculous because everybody comes to the country news a carp Yeah.

brings with it challenges. And one of those challenges is a massive you know but basically amongst the world's highest inflation rates and highest cost of living rates, and now we're actually seeing one of the highest interest rates in the developed world because the ABA is hiking ahead of everyone else because you know, they've got bigger problems than everyone else.

Whereas if you go to the UK, where they don't love Trump, but they would nonetheless consider him a formidable sort of policy and intellectual adversary for what they may believe in, and they take him very seriously, whereas in Australia there tends to be a reflex to consider he's just this cartoonish characature, which is not like the guy has completely single handedly re engineered defense policy in Europe, foreign policy in Europe, policy in the Middle East, the

the organizational and political administrations in the Middle East. He's re engineering all of the the balance of power and the leadership regimes in South America, the Caribbean. So this guy's had a profound impact on our world. He's probably been the most influential political leader since World War Two, possibly, And so I would say things I noticed are just that disconnect between the rest of the world and us. We're in a bit of a time walk where you know, in a bit of a bubble.

this before. You know, we're basically on a track, on a path to becoming asias at Betha where we just sell our physical amenities, you know, our beaches, our budgies, our bikinis, and our natural resource endowments. And so we both know that when you get lucky, you tend to get complacent and you tend to suffer from hubris. And we've all kind of suffered from it at various points in time because we all get lucky by birth, whatever the case may be. And so yeah, Australia's lost its mojo.

There's just absolutely no doubt about it. And it's sad because we were like the world's most competitive country at one point, the world's one of the world's richest countries, and we were world beaters. Like you know, my recollection grandup as a kid was Ossie's in every domain where the you know, it was the cricket, the rugby, the Olympics, Rupert Murdoch. We were just winners. Yeah we're not. We're losers right now.